1. Statutorily Imposed Duties. Oregon Statutes provide that a member of the board of directors shall discharge his or her duties in good faith, with the care an ordinarily prudent person in the like position would exercise under similar circumstances and in a manner he or she reasonably believes to be in the best interests of the corporation. How well directors perform their functions is measured largely by fiduciary law; specifically by what is commonly known of as a director’s “duty of care.” In performing their functions, directors may be subjected to personal liability for a breach of the duty of care. A director may be found to have breached the duty of care if the director fails to act: (i) in good faith; or (ii) in honest belief that an action taken was in the best interest of the company.
2. Meaning of Good Faith Requirement. The “good faith” standard has been generally understood to require that directors: (i) not have a conflict of interest; (ii) act honestly; and (iii) not approve (or condone) illegal activity. The “best interests” requirement specifies that an action by a director must be related to the furthering of the corporation’s interests. The “informed basis” requirement imposes on directors a duty of oversight, inquiry, and diligence, meaning that directors must exercise the care that prudent persons would exercise in the management of their own affairs. Generally, a member of a board of directors will not incur personal liability for making a wrong judgment; he or she may incur liability for making a careless, wrong judgment. Regular involvement of legal counsel and/or the company’s accountants will provide additional protection from personal liability for the members of the board of directors of a corporation.
3. Duty of Loyalty. A director’s loyalty to a corporation is most tested when the director is on both sides of a transaction (where the director has both a personal or financial interest in the transaction and is a member of the board of directors). Such “self-dealing,” or “conflict of interest” transactions are tolerated only after full disclosure by the affected director to the board of directors as a group and approval of the transaction by the board following full disclosure, and then only if the transaction is “fair” to the corporation. Self dealing transactions are permissible under these circumstances because business opportunities are frequently made possible through such transactions. An example would be a loan from a board member to the corporation to enable it to purchase inventory and gain a business contract it would otherwise be unable to obtain.
4. Corporate Opportunities and Unfair Competition. The duty of corporate directors and managers to loyally put the interests of the corporation ahead of their own personal interests applies not only to their dealings with the corporation, but also to outside business dealings that affect the corporation. Harm to shareholder expectations is just as real when a member of the board of directors takes away a profitable business opportunity from the corporation or sets up a competing business as when he or she engages in unfair self dealing. Flatly stated, a corporate director or manager may not usurp corporate opportunities for his own benefit or compete with the corporation in any manner unless the corporation consents.