Corporate Directors' Duty of Care: The American Law Institute's Project on Corporate Governance

Tamar Frankel, Boston University School of Law


... All agree, however, that the Project was prompted by a movement to internalize control over the managements of large American corporations through independent, trustworthy boards of directors to which courts will defer; a movement towards increased corporate self-governance. ... Manning concluded with a proposal that would permit each director to set for himself the standard of care that he would follow, provided that the director sets the standard for himself in "good faith." ... As to the risk to which directors are exposed by virtue of the duty of care, there are a number of answers. ... Directors' risk is also reduced by the influence that board practices have on the judicial standard of the duty of care. ... The duty of care, however, helps ensure that directors are attentive to prevent the kind of risk that does not benefit the corporation. ... Moreover, the duty of care is aimed at ensuring that corporate directors will be aware of what the risks are. ... Directors' faith in the corporate executive does not mean blind faith. ... If outside directors are free of the duty of care in the manner in which they function, then the courts should not defer to their approval of executives' self-dealing transactions or executives' compensation. ... The ALI's proposal limits the directors' money liability to $ 100,000. ... Clear drafting will minimize the directors' risk of higher liability. ...