What fiduciary duties do directors have?
Takeaway: Directors have two primary fiduciary duties—the Duty of Care and the Duty of Loyalty—requiring them to act diligently, in good faith, and in the best interests of the corporation and all stockholders, rather than in their own self-interest.
The board of directors holds ultimate authority to manage the corporation, but this authority exists in trust for the benefit of the stockholders. This legal and ethical responsibility is called a fiduciary duty—the highest standard of care in business law. A director who breaches this duty can be held personally liable in a shareholder lawsuit.
For founders serving as directors, every board decision should be evaluated through the lens of these two core obligations.
1. The Duty of Care
The Duty of Care requires directors to act with the level of care that a reasonably prudent person would exercise in similar circumstances. It means being diligent, informed, and actively engaged in corporate oversight.
Key elements:
Be informed: Review board materials in advance, understand the issues, and ask clarifying questions. Simply rubber-stamping management’s recommendations without understanding them is a breach of duty.
The Business Judgment Rule: Courts generally defer to directors’ decisions—even those that turn out poorly—if made on an informed basis, in good faith, and with an honest belief they serve the company’s best interests. Keeping detailed board minutes that document the decision-making process is essential to preserve this protection.
2. The Duty of Loyalty
The Duty of Loyalty requires directors to put the corporation’s and stockholders’ interests ahead of their own.
Key elements:
No self-dealing: A director should not participate on both sides of a transaction with the company unless the conflict is fully disclosed and approved by a majority of disinterested directors.
No usurping corporate opportunities: Opportunities that come to a director through their role must first be offered to the corporation before pursuing them personally.
To Whom the Duty Is Owed
Directors owe fiduciary duties to the corporation and to all stockholders collectively—not to any individual founder, investor, or class of stock. This principle becomes critical in situations where stockholder interests diverge, such as down rounds or company sales. In those cases, the board must act, in its good faith business judgment, in the best interests of the company and its stockholders as a whole.
Disclaimer: This post is for general informational purposes only and does not constitute legal, tax, or financial advice. Reading or relying on this content does not create an attorney–client relationship. Every startup’s situation is unique, and you should consult qualified legal or tax professionals before making decisions that may affect your business.