Every director of an emerging growth company knows that he or she owes a fiduciary duty to the company’s stockholders to maximize the value of the company’s equity. But what – practically speaking – does that mean?
To answer that question, I have provided some practical guidelines that directors can use when exercising the board’s power and responsibility to approve major corporate actions (such as issuing securities, entering into a merger, or selling substantially all of the company’s assets), and requiring the company’s officers to obtain board approval for material events (such as acquisitions, licensing agreements, or financing relationships) through the board’s supervisory powers.
First, the duty of loyalty requires directors to act in good faith, act in the best interests of the company and its stockholders, and refrain from receiving improper personal benefits as a result of their relationship with the company.
In a transaction in which a director has an interest, all directors should fully disclose the facts surrounding all contracts and transactions in which they have a direct or indirect interest. Disinterested directors should affirmatively determine that the contract or transaction is in the best interests of the company, and separately consider and vote on the approval of the contract or transaction. Directors should also act independently and, therefore, not defer blindly to management.
Second, the duty of care requires directors to act prudently in light of all reasonably available information in overseeing the company’s business and making decisions on its behalf. Directors should familiarize themselves with the company and its industry by taking the following actions:
- reviewing the company’s material financial and operational reports
- reading the company’s press and other media releases
- understanding key financial and operational indicators of performance
- learning the critical accounting policies used and understanding the judgments made in applying them.
Directors should then actively participate in all board meetings. Specifically, directors should
- ask questions of management and advisors
- understand both the matter under consideration and its impact on the company, its stockholders, and its other constituencies
- question officers, experts, and committees on whom they rely, and understand the basis for their opinion or recommendation.
Finally, accurate and complete records should be maintained, such as records of all materials made available to directors, and minutes of all meetings should summarize all discussions, including the business reasons for any actions taken.
Last (and probably least), the duty of good faith requires a director to act at all times with honesty of purpose and in the best interest and welfare of the company. This means that directors must act as more than a sounding board or rubber stamp for management. They must have business motives for their actions and evidence that demonstrates those motives. And they should take ownership and active control over corporate policy to show that the company’s actions are motivated by the best interests of the company.