By Thomas Chandler, a partner in Hawley Troxell Ennis & Hawley, LLP, in Boise, Idaho. His practice includes counseling both individual directors and boards of directors regarding their legal and business responsibilities, and he is a frequent speaker on corporate governance topics. Chandler is also a veteran community bank director, now retired, and has spoken on community bank directorship in the ABA Community Bank Directors Telephone Briefing Series coordinated with ABA Bank Directors Briefing newsletter. This is a companion article to Chandler’s www.ababj.com review of Corporate Governance: Principles and Practices, by Walter A. Effross To read the review, click here


Set forth below are a list of actions that will cause a breach of the duties of care or loyalty. This list is not exhaustive. Business is dynamic, and a court will withdraw its deference and override the presumption based on the facts and circumstances.

The director’s duty of loyalty can be violated if the director failed in one or more of the following circumstances:
• The director did not act in good faith. The concept of good faith is essentially undefined in governance law. A common statement is that a director did not act in good faith if the director did not intend to advance the corporation’s interest.

• The director did not have a reasonable belief that the director’s actions would advance the corporation’s interest. There must be some reasonable basis, in the director’s own mind, that the action benefits the corporation.

• The director did not make an objective or independent decision. The director cannot have a material personal family, financial, or business relationship with another person that has an interest in the director’s decision. These types of relationships are deemed to influence the director to favor the other person and not the corporation.

• The director received an improper financial benefit from the decision. The director cannot have a material personal, family, financial, or business interest in the decision itself. In other words, self-dealing is not permitted. However, a director can benefit from the decision—a director who owns shares of common stock can benefit from a decision that increases the share value. The focus is on a benefit that causes the director to favor his own interest and not favor the corporation’s interest.

• The director did not deal fairly with the corporation. The director cannot use information obtained while a director to harm the corporation by, for example, co-opting a business transaction that would have benefited the corporation.

The director’s duty of care can be violated if the director failed in one or more of the following circumstances:

• The director failed to become informed to the extent the director reasonably believed appropriate under the circumstances. A director must be informed; however, the scope of information required to make a decision is for the director to decide.

• The director failed to continuously stay informed about the business of the corporation. Ignorance of the nature of the corporation’s business is not a defense.

• The director materially failed to oversee and direct management over a period of time. Directors have two tasks: make decisions and oversee management. The oversight function is performed over a period of time, and requires sustained attention. Sustained inattention, therefore, is a circumstance that breaches the duty of care.


This is a companion article to Chandler’s www.ababj.com review of Corporate Governance: Principles and Practices, by Walter A. Effross To read the review, click here

[This article was posted on January 7, 2011, on the website of ABA Banking Journal, www.ababj.com, and is copyright 2011 by the American Bankers Association.] 

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