Being a corporate director today comes with significant responsibilities. Your decisions impact not only the company but also shareholders, employees, and the community. Understanding these duties is essential for effective governance and managing risks.
Fiduciary Duties Explained
Directors have three main fiduciary duties to uphold.
Duty of Care
You must act with the same level of care that a reasonable person would use in similar situations. This means gathering relevant information before making decisions. Review financial statements and market analyses. Actively participate in board meetings to stay informed about operations and challenges. The Revised Corporation Code (Republic Act No. 11232) emphasizes that you must exercise due care, skill, and diligence like any ordinary prudent person would. The "business judgment rule" protects you from liability if you act in good faith and believe you are doing what’s best for the corporation.
Duty of Loyalty
This duty requires you to put the interests of the corporation above your own personal interests. Avoid conflicts of interest by disclosing any potential conflicts and stepping back from decisions where you have a personal stake. Keep sensitive information confidential; using it for personal gain is unacceptable.
Duty of Obedience
You need to ensure your actions align with the corporation’s mission and comply with applicable laws. This includes following all relevant regulations, such as labor laws and financial reporting requirements. Ignoring this duty can lead to serious legal issues for both you and the company.
The laws governing directors can vary by jurisdiction but are generally outlined in statutes like the Revised Corporation Code. This law sets strict standards regarding your duties and outlines potential liabilities for breaches.
Case Studies: Lessons from Real-World Examples
Several high-profile cases illustrate why understanding these duties is important:
Enron Corporation: The collapse of Enron revealed severe breaches of fiduciary duties by its board members, leading to massive financial losses (Healy & Palepu, 2003).
Wells Fargo: In 2016, Wells Fargo faced backlash due to unauthorized accounts opened by employees, with the board criticized for inadequate oversight (Corkery & Cowley, 2016).
These examples serve as cautionary tales about what can happen if responsibilities are neglected.
Understanding these core responsibilities is essential for effective governance and long-term success. By adhering to your fiduciary duties—duty of care, duty of loyalty, and duty of obedience—you can protect yourself and your company from legal risks while fostering accountability.
References:
Corkery, M., & Cowley, S. (2016). Wells Fargo fined $185 million for fraudulently opening accounts. The New York Times. Retrieved from https://www.nytimes.com/2016/09/09/business/dealbook/wells-fargo-fraud.html
Healy, P. M., & Palepu, K. G. (2003). The fall of Enron. Journal of Economic Perspectives, 17(2), 3-26. doi:10.1257/089533003765888403
Philippine Congress. (2019). Revised Corporation Code (Republic Act No. 11232). Retrieved January 17, 2025, from https://www.officialgazette.gov.ph/2019/02/20/republic-act-no-11232/
