The Duties They Are A' Changing: The role of board members is being reassessed.

• Author: Raymond, Doug
• Position: LEGAL BRIEF

The last few years have brought boards of directors to the threshold of dramatic change for the first time in decades, and boards need to consider how they will respond to the new environment. The rules governing corporate boards did not change much for most of the last 35 years, but potentially significant changes are now on the horizon.

Directors have fiduciary duties, meaning that they must act in the best interest of the beneficiaries of that obligation. In the words of associate Supreme Court Justice Benjamin N. Cardozo, one of the great jurists of the early 20th century, the obligation of a fiduciary is "something stricter than the morals of the marketplace. Not honesty alone, but the punctilio of an honor most sensitive, is then the standard of behavior."

For directors, this obligation is divided into a duty of loyalty and a duty of care. The duty of loyalty requires that the director be singularly focused on the interests of the corporation --not on the director's own personal agenda --while the duty of care mandates that the director pay careful attention to their work and be actively engaged in decisions that affect the corporation. The implications of these fiduciary duties have been explicated and refined over thousands of lawsuits and reams of commentary and articles in learned journals, particularly in addressing situations that are fundamental to the corporation. Examples of such situations include a change in control or insolvency, or substantial conflicts of interest, such as self-dealing transactions or where a director is aligned with a third party that is seeking to effect a fundamental transaction.

Until recently, less attention has been paid to the required object of the directors' attention. The corporation law of many states, including Pennsylvania, provides that these fiduciary duties are to be exercised to benefit the corporation, but this is not a particularly enlightening standard. A corporation is an abstract and intangible creation of state law and cannot itself be hurt or helped. And it is overly simplistic to presume that increasing revenues or profits is always in the best interests of the corporation. For example, consider a project being reviewed by the board that will increase earnings substantially, but will also require the corporation to take on a significant amount of new debt, cause a 10% reduction in employee headcount and potentially create environmental problems in the community. Under these...