Does your Corporate Board “Pass Muster”?

Mahatma Gandhi once said: “Be the change you want to see in the world.”  How does that relate to your role as a director of a corporation?.  Let’s take a look.

The Massachusetts Business Corporation Act, Section 8.30(a) defines the standard a director must comply with.  It states, in pertinent part, that a director must, generally speaking, act (i) in good faith, (ii) with the care that a person in a like position would reasonably believe appropriate under similar circumstances; and (iii) in a manner the director reasonably believes to be in the best interest of the corporation.  So how does a director comply with this standard?  The comment section to Section 8.3 provides advice by stating: “The process by which a director informs himself will vary but the duty of care requires every director to take steps to become informed about the background facts and circumstances before taking action on the matter at hand.   [However], a director may rely on information, opinions, reports, and statements prepared or presented by others as set forth in Section 8.30(b).”  So who are these “others”?

Section 8.30(b) lists the individuals and groups (the “others”) that a director may rely on.  Generally speaking, they are (i) corporate officers or employees whom the director reasonably believes to be reliable and competent with respect to the information, opinions, reports or statements presented, (ii) professional advisors as to matters within their professional competence, and (iii) a committee of the board, where the director is not a member, if the director reasonably believes the committee merits confidence.  But there’s a catch.  It goes on to state that “a director so relying must be without knowledge concerning the matter in question that would cause his reliance to be unwarranted”. In addition, “. . . in order to rely on a report, statement, opinion, or other matter, the director must have read the report or statement in question, or have taken other steps to become familiar with its contents.”  In summation, the director must, first, become familiar with the information presented and then, second, ask himself the time-honored question, “does this information pass muster”?  If not, then YOU need to BE more involved with CHANGING it.