Duties of a Board of Directors

Nov 23, 2023

There are three primary duties for a board of directors. IANAL (“I’m Not A Lawyer”), but a reasonable summary for entrepreneurs.

  1. Duty of Care. Board members are required to act with a level of care that a reasonable, prudent person would exercise in similar circumstances. Practically, this means regularly attending meetings and being informed enough to make decisions.
  2. Duty of Loyalty. Board members must put the interests of the corporation above their own personal or professional interests. They have to avoid conflicts of interest.
  3. Duty of Obedience. Board members must ensure that the corporation adheres to laws and regulations. Practically, this is regulatory compliance with things like GDPR or security practices.

Board members should (but are not required to) have directors’ and officers’ insurance (“D&O”), which protects them from shareholder lawsuits. In some cases, the company’s liability can be passed on to the board. Most companies have this. Tesla is an interesting exception. Instead of traditional D&O insurance, it pays Elon Musk $3 million a year to indemnify the board for up to $100 million in insurance. Is this a conflict of interest? Don’t know.