The Faces of Enron
The (Fiduciary) Duties of
The topic of the Hearings was The Role
of the Board of Directors. The Senators have a staff to help
them with questions such as what are the legal duties
of the board? We cover that question briefly here.
2.2 The duties of a board
- reviewing the companys overall
- selecting and compensating the companys
- evaluating the companys outside
- overseeing the companys financial
- monitoring overall company performance
Report clarifies the fiduciary responsibility of boards.
Directors operate under state laws which impose fiduciary
duties on them to act in good faith, with reasonable care,
and in the best interest of the corporation and its shareholders.
Courts generally discuss three types of fiduciary obligations.
As one court put it: Three
broad duties stem from the fiduciary status of corporate directors:
namely, the duties of obedience, loyalty, and due care. The
duty of obedience requires a director to avoid committing
... acts beyond the scope of the powers of a corporation as
defined by its charter or the laws of the state of incorporation.
... The duty of loyalty dictates that a director must act
in good faith and must not allow his personal interest to
prevail over the interests of the corporation. ... [T]he duty
of care requires a director to be diligent and prudent in
managing the corporations affairs.
In most states, directors also
operate under a legal doctrine called the business judgment
rule, which generally provides directors with broad
discretion, absent evidence of fraud, gross negligence or
other misconduct, to make good faith business decisions.
Among the most important of Board
duties is the responsibility the Board shares with the companys
management and auditors to ensure that the financial statements
provided by the company to its shareholders and the investing
public fairly present the financial condition of the company.
This responsibility requires more than ensuring the companys
technical compliance with generally accepted accounting principles.
How can the board be responsible for: the duty for
meaningful reporting through financial statements?
Arent the accountants
How can the board be expected
to understand a variety of complicated financial dealings
that served to confuse?
What was the significance of
red flags? Were the directors breaking the law?
Was it fair to expect the board to have noted the red flag
events and acted in some way?
Flags will be discussed after this printed version of
Senator Levins opening statement.)
version of the opening statement
discussion in the Staff Report, p. 5