Chapter 4: How Can Corporate Directors Better Protect Themselves?: Lessons From Litigation in the United States

The board of directors plays a role of critical importance in the context of the market-based American corporate governance model (Rehman, 2004). Whereas the daily operation of the company is generally delegated to the management, the board is expected to safeguard shareholders’ interests by directing and overseeing the corporation’s business.¹ Board duties are, therefore, twofold and typically include both a managerial role (reviewing the corporation’s overall business strategy, selecting and compensating senior executives) and a monitoring role (evaluating the corporations’ outside auditors, overseeing the corporation’s financial statements and overall performance) (Romano, 1993, p. 163). In performing these duties, directors act as fiduciaries to the corporation and to shareholders (Pinto & Branson, 1999). State corporate laws require that they act in good faith, with reasonable care, and in the best interest of the corporation,² and although the formulation of this fiduciary duty may vary from state to state, it is generally construed as implying a duty of care, a duty of loyalty, and a duty to communicate honestly.