Duty of Care

A director must attend, read the papers, ask questions and take advice where needed. A fair standard has two parts: an objective minimum expected of any director and a higher bar for people with special skills, such as an accountant on the audit committee. Courts in many countries are slow to second-guess sincere business decisions made on good information, a principle sometimes called the business judgment rule in the US. The duty is breached by a lack of attention, such as ignoring warning signs, not by a decision that merely turned out badly. It applies equally to non-executive directors. Written minutes, expert advice and a record of challenge are the best evidence a board acted with care. Shareholders and creditors rely on this duty when they want to challenge careless oversight.

A hospital trust's board approves a large new scanning service after a ten-minute presentation, without reading the risk report that warned about weak demand forecasts. The service loses heavily. In the review, directors cannot show they asked questions or sought advice. The regulator questions whether they met their duty of care, and the board changes how it handles new projects.