Answered by David Solomon
Officers and directors of corporations owe fiduciary duties of loyalty and care to their shareholders. Under the duty of loyalty, directors are required to act in the best interest of the corporation and the stockholders by acting honestly and in good faith. Under the duty of care, directors must make a good faith effort to be informed and exercise judgment when making decisions on behalf of the corporation.
When evaluating claims for breach of fiduciary duties, Delaware courts, for example, will generally presume that, “in making a business decision, the directors of a corporation acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the corporation." This is commonly known as the “business judgment rule.”
In evaluating fiduciary duty obligations of directors in similar situations, courts have found that directors should execute their duty of oversight by adopting a reporting and monitoring system sufficient to ensure the board remains remain informed about the fundamental business issues arising as a result of the public health emergency. In a public health emergency this might include: (i) what systems the board implements, aside from mandatory regulations, in order to stay informed and ensure that the corporation is operating safely in light of the circumstances, and (ii) whether the board has made a good faith effort to monitor the system implemented. Thus, to protect themselves under the business judgment rule in exercising its oversight and risk management functions during the COVID-19 pandemic, directors should take steps to become informed and ensure that proper reporting protocols and information-sharing channels are in place.
Since the officers of the corporation manage the day-to-day responsibility for handling the corporation’s response to the pandemic, the board’s role should be to monitor management activity, to assess whether management is taking appropriate action and providing additional guidance and direction to the extent that the board determines is prudent. However, directors need to carefully balance performance of their oversight responsibilities with not unnecessarily burdening management teams that are already fully engaged during the COVID-19 pandemic. So, instead of having regularly scheduled board meetings, it may be more effective to cancel full- or multiple-day board and committee meetings and instead schedule more frequent, shorter meetings. The goal should be to ensure that the board is receiving regular reports on, and devoting appropriate time and attention to, the most critical challenges and risks facing the corporation, including those posed by COVID-19, and that the board’s efforts are appropriately documented.
Some best-practice recommendations to consider to assist you in to complying with your fiduciary duties include:
In addition, as a board member of a corporation during the pandemic, you should be thinking about the following questions:
COVID-19 has created ever-changing obligations on managers, officers, and boards of directors. There is no playbook for this but there are best practices, and practical considerations, you can follow to best carry out your fiduciary duties.