Duty of Care

The obligation of board members to make informed, reasoned decisions by reviewing relevant information before voting and exercising the level of care that an ordinarily prudent person would use in similar circumstances. Duty of care is one of the three core components of a board member's fiduciary duty. In practice, it means board members should read board packets and financial reports before meetings, understand the terms of contracts before approving them, ask questions when something is unclear, attend meetings regularly, seek expert advice (legal, financial, engineering) when dealing with matters outside their expertise, and follow up on concerns rather than simply deferring to management. Under California Corporations Code Section 7231, a director performs their duty in good faith, in a manner they reasonably believe to be in the best interests of the corporation, and with the care of an ordinarily prudent person in a like position. This standard does not require perfection — a board member who exercises reasonable diligence satisfies the duty of care even if the decision turns out poorly. The business judgment rule protects directors who meet this standard from personal liability for honest mistakes. However, a board member who consistently fails to attend meetings, signs contracts without reading them, or ignores red flags in financial reports may be found to have breached their duty of care, potentially exposing them to liability and removing the protection of the business judgment rule.