Under California law, all corporations must have a board of directors (“Board”). A Board has the ultimate authority and responsibility to direct the management of the business and affairs of the company. Generally, the Board has responsibility to authorize the issuance of stock, major loan agreements, capital structure, hire (and terminate) senior executives, approve compensation arrangements, including the issuance of stock options, and authorize the company to enter into other significant agreements. The Board will also be asked to provide advice and approve strategic and operating plans, adopt company budgets and oversee the company’s audit and financial statement functions. Most importantly though, the board’s most critical function is to help management navigate the myriad critical business decisions that will determine the ultimate success or failure of the company.
While Board exercises all the powers of the corporation, and conducts all of the corporation’s activities and affairs, it may delegate its management powers to committees or other persons so long as it maintains ultimate oversight authority.
In exercising the functions of the Board, directors should keep in mind their two primary fiduciary duties to the corporation: the duty of care and the duty of loyalty. Under the duty of care, a director must generally act in a rational and informed manner. Whether a director has met his or her duty of care is an objective inquiry as to whether he or she has acted with “such care, including reasonable inquiry, as an ordinarily prudent person in a like position would use under similar circumstances.”
The duty of loyalty requires that a director act in a manner that the director believes to be in the best interests of the corporation and all its members, rather than his or her own interests, and to administer his or her corporate powers for the corporation’s and its shareholders’ benefit. When a board member has a material financial interest in a corporate transaction, it is considered a “self-dealing” transaction and is generally prohibited unless approved or validated by disinterested directors following a statutorily-mandated process and procedure.
Directors can be personally liable for breach of their fiduciary duties of care and loyalty to the corporation. They can further be liable for certain tortious conduct, including negligent acts that result in personal injury, certain employment-related claims, and in other areas.