Fiduciary Duties of Directors

FIDUCIARY DUTIES OF DIRECTORS

Fiduciary Duty: "A duty to act for someone else's benefit, while subordinating one's personal interest to that of the other person. It is the highest standard of duty implied by law (e.g., trustee, guardian)." -Black's Law Dictionary

Upon their election, directors become fiduciaries with two primary fiduciary duties: (i) duty of care, and (ii) duty of loyalty.

DUTY OF CARE (Due Diligence). Directors must be diligent and careful in performing the duties they have undertaken. Burt v. Irvine Company. Directors must:

1. Attend and participate in meetings so they can be informed about the association's business.

2. Make reasonable inquiry before making a decision. Board may rely on professionals (attorneys, CPAs, consultants) unless director suspects misrepresentation by the person offering the advice.

DUTY OF LOYALTY (No Self-Dealing). Directors must act in the best interests of the association even if at the expense of their own interests. Violation could result in (i) liability for all profits received, (ii) all damages caused by the breach, and (iii) punitive damages. Conflicts of interest do not necessarily create liability.

Ethics Policy. Boards should consider adopting a written ethics policy to guide directors and govern their behavior.

Business Judgment. Directors are protected from personal liability by the business judgment rule provided they meet the criteria laid out by the rule.

Updated by ADAMS KESSLER 8/30/2008