Care and loyalty in practice
Directors are generally expected to make informed decisions in good faith and to put the corporation's interests ahead of their own. Courts usually do not second-guess an informed business decision made without a conflict of interest, even when it turns out badly, and this deference is often called the business judgment rule. The protection weakens when a director has a personal stake in the transaction, and conflicted deals are often reviewed far more closely unless they were approved by disinterested directors or shareholders after full disclosure. Corporate law depends on the state of incorporation, and many companies operating in New York are incorporated in Delaware, so the governing rules may not be New York's.
Oversight and the board record
Beyond individual decisions, directors are expected to make a good-faith effort to see that the company has systems for learning about serious legal and compliance risks. Minutes, board materials, and the questions directors asked can later become the main evidence of whether the board did its job. Many charters limit directors' personal liability for some lapses in care, and indemnification and insurance often cover defense costs, but these protections usually do not reach disloyalty or bad faith. Directors of nonprofit organizations in New York face their own rules on related-party transactions and conflicts of interest.
Tax obligations and personal exposure
One area that surprises directors is unpaid payroll taxes. Taxes withheld from employees' wages are held in trust for the government, and people with authority over which bills get paid, which can include directors or officers, may be held personally responsible if those taxes are willfully not paid, a standard that can be met by knowingly paying other creditors first. Board members should know how payroll tax deposits are monitored, especially when cash is tight. If a pending decision concerns you, bring the board materials, the charter and bylaws, and any D&O insurance policy. We look at which state's law governs, whether you have a conflict, and what the record should reflect before the vote.
