The Faces of Enron

The (Fiduciary) Duties of the Board

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.

Table 2.2 The duties of a board
Source: Powers Report

  • reviewing the company’s overall business strategy

  • selecting and compensating the company’s senior executives

  • evaluating the company’s outside auditor

  • overseeing the company’s financial statements

  • monitoring overall company performance

The Staff 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 corporation’s 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 company’s 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 company’s technical compliance with generally accepted accounting principles.

How can the board be responsible for: “the duty for meaningful reporting through financial statements”?

Aren’t the accountants responsible?

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?

(Red Flags will be discussed after this printed version of Senator Levin’s opening statement.)

Repeat video

Printed version of the opening statement

This discussion in the Staff Report, p. 5