Fiduciary Duties

Corporate directors are fiduciaries with duties of care and loyalty to the corporation. Directors who fulfill these duties are less likely to be sued successfully for decisions that have poor outcomes, thanks to a legal doctrine known as the business judgment rule.

Standards for fulfilling fiduciary duties vary according to circumstances, including economic state (solvent or insolvent) and concentration of ownership (controlling vs. noncontrolling). This memo covers the fiduciary duties of loyalty and care; the business judgment rule; special situations (controlled entities and distressed entities); and guidance and resources for fiduciary performance.

The focus on the board’s compensation committee has never been sharper. The components of compensation plans and the link between compensation and company performance are under intense scrutiny from shareholders, employees, policymakers, the media, and other stakeholders. The Report of the NACD Blue Ribbon Commission on the Compensation Committee revisits NACD’s 2003 Report of the NACD Blue Ribbon Commission on Executive Compensation to highlight the new environment in which compensation committees—and, more broadly, boards—are now operating. It recommends that the compensation committee and board work together to establish an executive compensation philosophy that supports the company in creating long-term, sustainable value.

The report includes ten specific recommendations for compensation committees to consider when evaluating their compensation philosophies. It also provides practical tools, such as sample compensation committee charters, a compensation committee assessment, and guidance on executive employment contracts.