Duty of Care
One of three fiduciary responsibility held by the board of directors.
How dirty diapers and boards are similar. Are boards stinky? Well, they can be if you don’t understand the most important duty by the board of directors!
When I brought my 1st son home from the hospital, I was like a deer in headlights. As I looked down at this innocent and beautiful person, I realized was responsible for his care 24/7 7 days a week: feeding him, bathing him, being his entertainer and yes, changing those stinky diapers. I was responsible for his total well-being. Well, me and and his mom.
Just like taking care of your child. One of the three Legal Responsibilities of the Board of Directors is the Duty of Care. So, what is the duty of care? Let’s take a look.
Duty of Care is the fiduciary responsibility held by directors requiring them to act with the highest standard of care in all dealings for the organization. Directors need to make decisions based on sound “business judgment” made in good faith and absent of showing any fraud, illegal conduct, and must be within their authority. This level of competence is expected from every board member.
Here are 5 ways you can exercise the duty of care:
Be informed. It’s your duty to learn about the organization, its vision, mission, and all of its initiatives and programs. Prior to making any business decision, ensure you have all material information reasonably available. Board members might not always be right, but they must always be careful, thoughtful, and thorough with their decision-making. I speak way more in-depth about this in another video How Board Members Should Think in the Boardroom.
Be available. Directors need to participate in all board activities and be well-informed, prepared, and attentive A failure to attend may be considered a failure to carry out one’s fiduciary responsibilities. Non-attendance may, or may not be protected against the board of directors’ wrongful action charges.
Know the numbers. Directors must be familiar with the financial status of the organization (duty to be informed). Providing financial stewardship is also a critical responsibility that falls under duty of care.
Be faithful. The duty requires directors to make decisions in good faith and in a reasonably prudent manner.
Be independent. Directors must use good and independent judgment, from time to time consult experts for their advice and trusted information, and refer to meeting minutes. A lack of independent judgment sits at the heart of most corporate failures, you only have to look at Enron to understand the implications of directors not exercising independent judgment.
Information flow – ensure the organization can create and offer reports that keep the Board of Directors informed in a timely and accurate manner. Did we seek out information? Did we ask questions and deliberate? Did I participate in discussions/deliberations?
Yes, you are reliant on others for information. Examples include internal reports and financial statements, audits, and committee reports.
Duty of care can, therefore, be summed up as the requirement that directors be present, informed, and engaged and they made decisions that are financially, ethically, and legally sound.
Related: Board Terminology
Board Portals Improve the Duty of Care
That is why a board portal like Board Director is so important. Rather than rely on email, our board management system makes it easier for the management team to upload, share, and securely store the vitally important “duty of care” Documents.
They must also stay abreast of legal developments, good governance, and best practices that affect their companies. Directors should also schedule and be prepared to discuss and review things such as budget issues, executive compensation, legal compliance, and strategic direction
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