Directors’ Ignorance of Corporate Affairs

To carry out fully their duties and responsibilities to shareholders and the corporation, directors must be reasonably familiar with the workings of the corporation and have a general knowledge of how the corporation conducts its business. Directors are not expected to have superior knowledge about all business and financial aspects of the corporation, but they are assumed to have competent knowledge of the duties they have taken on when named to the board. A director is generally authorized under most state corporation codes and corporate bylaws to rely on information and reports of certain outside experts and qualified officers and employees when called upon to decide corporate matters of which the director has limited or no knowledge. Part of the duty of care requires the director to be diligent about protecting the corporation’s interest through the best means available.

A director may be held personally liable if he is ignorant of corporate matters due to neglect or if he fails to stay informed about corporate affairs. Gross inattention to corporate matters can make a director vulnerable to personal claims even if he or she abstains from a corporate transaction. If a director could have discovered that the transaction or activity was inimical to the corporation’s welfare in the exercise of reasonable care, the director may find himself defending against a claim of negligence or gross negligence. The Delaware Court of Chancery has indicated in a line of cases that directors may not be protected by the business judgment rule if they failed to act because they were ignorant of the operative facts. The standard by which the directors’ conduct has been measured is ordinary negligence.

In the wake of so many corporate scandals, directors who historically have been placed on boards to lend only their names or personal cachet must also beware. A “figurehead” director is not relieved of the duties and responsibilities of corporate directorship. Absenteeism, like ignorance, is not a viable defense to a claim of fiduciary breach.

Inexperience may also expose a director to personal liability. As stated above, directors do not have to be experts in every corporate matter. However, they are expected to obtain the information and knowledge necessary to act in the best interests of the corporation. The failure to act reasonably under the circumstances by obtaining the necessary information before making a business decision can be as much of a dereliction of duty as having the actual knowledge about a corporate matter and failing to act upon it.

Copyright 2012 LexisNexis, a division of Reed Elsevier Inc.