Cross-Border Comparison of Directors’ Fiduciary Duties
Directors around the world are expected to carry out their duties in accordance with applicable local standards of care and fiduciary responsibility; however, the specifics are not uniform and each jurisdiction has its own set of laws, norms and customs. With respect to directors of companies in the United States, the Corporate Director’s Guidebook (Fifth Edition) succinctly describes the baseline standard for director conduct as requiring that directors discharge their duties in good faith and in a manner that they reasonably believe to be in the best interests of the corporation. Directors owe a duty of care and a duty of loyalty to the corporation in discharging their obligations. As such, it is important that a prospective director consider whether or not he or she has the requisite experience to understand and participate in the deliberations of the board, as well as the time that is required in order for him or her to properly monitor and review the activities of the corporation. In addition, a prospective director who may become involved in business dealings with the corporation which may give rise to a conflict of interest must be prepared to fully disclose the nature of his or her interest and submit the transaction to a vote of the board of directors or, in some cases, the shareholders of the corporation.
While the duty of care and the duty of loyalty are the most well-known and widely discussed and analyzed legal obligations of US directors, the Corporate Director’s Guidebook (Fifth Edition) lists the following additional obligations that should be carefully understood by directors:
- Directors have a “duty of disclosure” which includes an obligation to take reasonable steps to ensure that shareholders are furnished with all relevant material information known to the directors when they present shareholders with a voting or investment decision. In addition, in the course of deliberation regarding decisions relating to the corporation director have duty to communicate relevant information to their fellow directors and management.
- Directors have a “duty of confidentiality” that requires that they refrain from public disclosure of all matters involving the corporation. The board should establish, and individual directors should abide by the terms of, confidentiality, insider trading and disclosure policies.
- Directors have a duty to establish and monitor programs for identifying financial, industry and other business risks and for managing such risks to protect the assets and reputation of the corporation.
- Directors have a duty to establish and monitor programs for ensuring that the corporation and its managers and employees comply with all legal requirements in the various jurisdictions in which corporation is conducting business activities.
- Director of public companies have a duty to establish and follow appropriate procedures for ensuring that the corporation’s disclosure documents (e.g., annual reports, quarterly reports, current reports, proxy statements, prospectuses, and earnings releases) fairly present material information about the corporation and its business, financial condition, results, and prospects.
- Directors have a duty to ensure that the activities of the corporation comply with relevant laws and regulations pertaining to employee safety, health and environmental protection and product safety. While this duty overlaps with the duties mentioned above relating to compliance programs the areas of concern are particular important because of their potential impact on the health and morale of employees and general business reputation of the company.
- Directors have a duty to monitor the activities of officers and employees of the corporation with respect to participation in governmental processes, particularly efforts to influence legislative activities and/or the content and tone of regulations and activities designed to either encourage or prevent governmental action. Lobbying activities, including political contributions, can directly impact the reputation of the corporation and when carried out must be done in a manner that complies with applicable laws and regulations.
- Directors have a duty to anticipate the unexpected and develop crisis management programs that can be quickly implemented upon the occurrence of a crisis event with respect to the corporation and its operations such as a natural disaster, terrorist activities, civil unrest or a significant adverse corporate development (e.g., a massive product recall or a infringement lawsuit by a third party threatening the validity of the corporation’s key patent rights).
- Directors have a duty to act fairly and with the utmost integrity in overseeing deliberations regarding significant corporate events such as change-in-control transactions (e.g., proposed sale of the corporation) and election contests.
- Directors have special duties of care during times when the corporation is experiencing financial distress and must be mindful of their expanded obligations beyond shareholders to include creditors and to do their best to ensure that the corporation is able to fulfill its legal obligations to all interested stakeholders.
Many of the duties described above are based on the federal securities laws and are particularly applicable to directors of public companies.
Outside of the US, the path for the development of the concept of directors having fiduciary duties has varied from jurisdiction to jurisdiction and the concept is still quite new in many countries. The rationale for fiduciary duties is best understood from the experience in the US and the United Kingdom, both common law countries, where corporations arose as a means for separating ownership and management and it became clear that some legal framework was needed for the shareholders, as the owners of the corporation, to enforce standards of conduct upon the managers of the corporation. The answer was to view the directors and officers of the corporation as trustees and as trustees these persons had a common law duty to act in the best interests of the shareholders, who were the beneficiaries of the corporation. Eventually civil law jurisdictions, such as Germany, integrated concepts similar to fiduciary duty into their statutes and courts in those countries have developed those concepts through case law. Emerging markets such as China often began by focusing on director conduct (e.g., having “high morals”, avoiding corruption and being “hardworking”) but eventually moved toward standards that emphasized protecting the lawful rights and interests of the corporation, its shareholders and others.
Today most countries around the world, regardless of their stage of economic development or their bias toward common or civil law, have laid out basic principles of fiduciary-type duties for directors and suggested skills, practices and processes that are likely necessary in order for director to effectively discharge their duties. However, each jurisdiction is different and all of the following questions should be considered before selecting a foreign corporate entity for use as a subsidiary or the home for an international joint venture with a local partner:
- What is the legal role of the board (or boards) of directors? Does the board collectively have responsibilities that are distinct from those of the directors individually?
- Can the directors and/or the board (or boards) delegate any of their duties and if so, which ones and to whom, and are there any conditions attached to this delegation in terms of retaining overall responsibility for the action (or inaction) by the delegate?
- What are the legal standards governing the conduct of directors in the performance of their fiduciary duties and do those standards incorporate a care/prudence element or equivalent (civil law) concepts?
- Do these standards include good faith, ‘honesty of purpose’ elements and/or strictures against self-dealing or self-enrichment at a cost to the corporation and/or prohibitions on utilizing corporate opportunities for directors?
- Is there jurisprudence that avoids “second-guessing” director conduct with the benefit of hindsight designed to limit judicial (or regulatory intervention that might chill legitimate business activity (e.g. the business judgment rule)? In other words, are decisions of the directors protected, provided that they have exercised their fiduciary duty and duty of care?
- Are there any initiatives to codify (and/or simplify) the duties of a director? Is there any jurisprudence on how the courts have interpreted these codes or statutory provisions and, if so, have these led to contemporary governance best practice ideas being imported into court decisions?
- Who can bring an enforcement action for a breach of duties by a director? Does the law entertain the concept of a derivative suit (an action brought by shareholders on behalf of the company) or is some form of private action available?
- Can directors be held liable personally for a breach of their duties and, if so, can the company indemnify them and may the company, in turn, obtain insurance and are there limits imposed by statute or otherwise on the indemnity or insurance coverage (e.g. in cases of misrepresentation or fraud)?
The questions above are based on H. Gregory, C. Hansell and L. Hazell, “Comparative Analysis of Fiduciary Duty Papers”, International Developments Subcommittee of the Corporate Governance Committee of the American Bar Association Section of Business Law (2007), and a fuller discussion of cross-border comparison of directors’ fiduciary duties can be found in the article at § 33:252 of Business Transactions Solution on WESTLAW.