With Valentine’s Day just around the corner, we think it’s high time to further explore “caring” in the corporate context. And while we’ve frequently addressed the broad concept of fiduciary duties that Iowa law and Iowa courts impose upon corporate directors (here, here, and here), we have yet to dive further under the fiduciary duty umbrella and explore the fiduciary duty of care.
Duty of Care Characteristics – What is the Duty?
The duty of care is a somewhat abstract legal concept. Consequently, rather than a clear and simple explanation, courts and legal commentators use several characteristics to explain a director’s “duty of care.” A director’s duty of care is frequently broken-down and explained in reference to a director’s obligation to manage the corporation in good faith and requiring a director to: (1) become informed (read more here); (2) devote attention to; (3) and to form a “reasonable belief” about certain matters. Considering that a director’s role includes providing direction and oversight to officers, employees, and other agents of the corporation who carry out day-to-day management functions, it is easy to see why directors must abide by these important characteristics.
A Standard or “Baseline” From Which a Director’s Level of Care is Measured
The question frequently arises as to how much “care” a director must exercise to satisfy this duty. In other words, how informed must a director become on a matter, or how much attention must a director devote to an issue in order to satisfy the duty? Thankfully, just as Iowa law creates the duty of care, it also provides a “baseline” or “standard” from which to evaluate whether a director exercised sufficient care. The baseline is described as: “the [level of] care that a person in a like position would reasonably believe appropriate under similar circumstance.” Iowa Code Section 490.830. An admittedly vague standard, but one that allows Iowa’s courts to apply the standard to all cases after taking into consideration the unique facts and circumstances of each case. It must be noted that in certain circumstances a director’s duties are more specifically defined. For example, with respect to the issuance of shares (Iowa Code 490.621), distributions (Iowa Code 490.640), dismissal of derivative proceedings (Iowa Code 490.744), indemnification (Iowa Code 490.855), and interested-transaction authorization (Iowa Code 490.862), among others, Iowa law provides further clarification as to how a director must carry out his/her duties.
Due to the board’s general role of passively monitoring and overseeing operations, legal commentators also opine that the duty of care requires directors to take action ensuring that not only is a functioning corporate management team in place, but also that information systems exist that enable the board to monitor the performance of that team. Further, it is also understood that directors must take action to protect the corporation’s interest if there are credible signs that corporate management is not performing its job.
Given that a corporation’s affairs are under the direction of and subject to the board’s oversight, a duty of care analysis typically involves a court evaluating the entire board or committee’s conduct to determine whether harm occurred. Should a director’s conduct fall short of the duty of care, such deficient performance may likely be overcome by acceptable conduct on the part of other directors. Put another way, one bad apple does not always spoil the bushel. To learn more about the duty of care imposed upon corporate directors in Iowa, you should consider contacting an attorney licensed to practice in the appropriate jurisdiction(s) and area of law.
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