Directors are the governing body of a corporation who are usually elected by the shareholders. They are responsible for controlling and managing the corporation’s business affairs. As the corporation grows, directors continue to manage the corporation’s affairs but delegate a large portion of the management of the corporation to corporate officers. Directors usually receive a salary for their work on the corporate board.
The articles of incorporation or the corporate bylaws determine how many directors will serve on the board of directors and for how long the directors’ will serve. Directors hold meetings at regular intervals as defined in the corporate bylaws and may also call special board meetings when needed. At board meetings, directors discuss issues affecting the corporation and make decisions about the corporation’s business. Before the board can make a decision affecting the corporation, however, there must be a quorum or certain minimum number of directors present at the meeting. The precise number constituting a quorum should be determined by the bylaws or by statute.
Directors also have a fiduciary duty to act in the best interests of the corporation. These fiduciary duties require the directors to act with care and loyalty toward the corporation and within the confines of the law. A director who breaches this fiduciary duty may be sued by the shareholders and held personally liable for damages to the corporation. Courts will find a breach of the fiduciary duty when a director engages in self-dealing or negligence. Self-dealing occurs when the director makes a decision on behalf of the corporation that simultaneously benefits the director’s personal interests.
Directors are not in breach of their fiduciary duty merely because a decision they make on behalf of the corporation impacts the corporation negatively. Directors who base their decisions on reasonable information and who act rationally in making their decisions are not be held personally liable even if those decisions turn out to be poor ones. This legal emphasis on protecting a director’s decision-making process is known as the business judgment rule.