Understanding the core fiduciary duties of board service is essential for board directors. We examine the duty of care, what it means, and how it looks.
Serving on a board of directors can be an incredibly fulfilling and career-defining experience. Whether you’re helping to lead a large for-profit corporation, small business, nonprofit, or some other type of organization, board service enables you to contribute your time and expertise to a larger cause.
As a board member, you have the opportunity to collaborate with talented individuals and make critical decisions in service of the organization and its mission. But those privileges come with immense responsibilities.
While specific board director responsibilities vary depending on the organization, there are 3 core fiduciary duties associated with all board service:
- Duty of obedience
- Duty of care
- Duty of loyalty
Understanding and executing on these duties proves essential. Not only will it help you succeed in your role, it can help you and your board steer clear of potential liability troubles. The duty of obedience requires boards to abide by all applicable laws and regulations, including their own bylaws. It lays the foundation for the more nuanced responsibilities associated with the duty of loyalty and duty of care.
Read on to learn the differences between duty of loyalty vs. duty of care, as well as practical applications and tips for achieving both.
What is Duty of Care?
A key word comes to mind in answering the question: What is duty of care? That word is “prudence.” The fiduciary duty of care requires directors to demonstrate a duty of due care through prudent management of organizational assets.
Board directors must use discretion when making decisions on behalf of the organization or nonprofit. This typically includes ensuring all decisions fall within their authority to make, as defined in the board’s governing documents. Directors also must adequately:
- Review relevant information
- Investigate available options
- Solicit expert advice as appropriate
- Conduct proper due diligence
Duty of care requires the director to act in good faith and make informed decisions in service of the organization.
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Duty of Care vs. Duty of Loyalty
While duty of care is a fiduciary responsibility that requires board executives to adhere to a code of ethics, duty of loyalty requires directors to maintain a constant focus on serving the best interests of the organization they serve.
With duty of loyalty, all decisions made and actions taken by directors — whether inside or outside directors — in their official capacity should aim to benefit the organization and further its mission. As the name states, they should be loyal, avoid acting in their own self-interests, and disclose any conflicts of interest that might call their motives into question.
Some of the key differences between duty of care and duty of loyalty include:
- Duty of loyalty involves disclosing or avoiding any conflicts of interest, while duty of care requires each party to practice due diligence before acting.
- A breach of duty of care may attract lawsuits from shareholders and other stakeholders. In contrast, with duty of loyalty, the guilty or liable party would be ordered to pay restitution or fines to compensate for not acting in good faith.
Understanding Bad Faith Insurance
Bad faith insurance is a legal term to describe when an insurance company fails to reasonably pay for claims or defend a policyholder against a claim.
For instance, if a policyholder sues for damages sustained due to their injury, the defendant’s liability insurance company may try to avoid paying those damages by claiming that their policy does not cover the third party.
This is an example of bad faith insurance because even though the person was covered while they were injured, their liability carrier refused to pay out the claim.
Additionally, failure on the part of the insurance company to pay claims after the risk occurs is also a breach of both duties of loyalty and duty of care.
Example of Duty of Care
Questions of whether boards and board directors are true to their fiduciary duties of care and loyalty are increasingly common as leaders find themselves under the microscope in today’s global economy. Let’s consider how duty of care applies to the real world.
For instance, if a corporate board consistently hires the same contractor for company-related construction projects without vetting other vendors, the board may be accused of violating its corporate duty of care to shareholders by showing favoritism. Without accepting bids from other contractors, the board could end up paying unnecessary costs and ultimately violate its fiduciary duty.
Improve Board Governance with OnBoard
The fiduciary responsibility of duty of care forms a moral framework to guide board directors as they navigate the many complicated tasks and responsibilities associated with board governance.
Utilizing a safe, secure, and reliable board management solution helps directors better manage the information and resources required to be effective leaders.
OnBoard’s platform works the way you do, addressing real-world needs and alleviating complexities to ensure board meetings run smarter and achieve more for your organization.
Key OnBoard features allow you to:
- Establish mission-critical security and compliance
- Streamline actionable insights to coordinate board tasks and provide richer intelligence so you can act confidently
- Simplify meeting administration with easy agenda creation and distribution of board materials
- Conduct board meetings and vote on initiatives virtually
Are you ready to take your board to the next level with OnBoard software? Contact us today for more information or to request a free trial.
And to help your next board meeting run optimally, download our free Board Meeting Agenda Template.
Frequently Asked Questions
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About The Author
- Josh Palmer serves as OnBoard's Head of Content. An experienced content creator, his previous roles have spanned numerous industries including B2C and B2B home improvement, healthcare, and software-as-a-service (SaaS). An Indianapolis native and graduate of Indiana University, Palmer currently resides in Fishers, Ind.
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