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A director's call of duty

Matt McKinney is an attorney at BrownWinick Attorneys at Law.

You may serve as a director on the board for a for-profit business, a nonprofit charity, or even a homeowners’ association, and whether you know it or not, Iowa law likely imposes upon you one the highest duties under the law: a Fiduciary Duty. While a fiduciary obligation is certainly not the most exciting topic in the business or legal world, it often tops the list as one of the most important. So what does this often-referenced but frequently misunderstood duty require of you and your fellow directors? To paraphrase the wise Supreme Court Justice Felix Frankfurter, one’s status as a fiduciary only begins the inquiry.

To fully answer the important inquiry, this post could go on ad nauseam cataloging fiduciary requirements imposed upon directors, but rather than lulling you to sleep with a dissertation, we’ll simply touch on a few high points.  A logical starting point is where Iowa’s legislature left off when it codified the concept of fiduciary duties in the Iowa Code. Pursuant to black-letter Iowa law (Iowa Code Section 490.830), each board member must abide by the following requirements when acting on behalf of the entity they serve: (1) they must act in good faith; and (2) in a manner the director reasonably believes to be in the best interests of the corporation. Additionally, when becoming informed in connection with the director's decision-making function or devoting attention to the director's oversight function, the director must discharge  his/her duties with “the care that a person in a like position would reasonably believe appropriate under similar circumstances.”  Id

The words above, while straightforward and upon first blush appear very clear, result in countless lawsuits against directors for allegedly breaching their fiduciary duty.  

Given the large volume of lawsuits on the matter, it’s not surprising that Iowa’s courts frequently interpret and apply the requirements above. In so doing, our courts have provided further direction as to fiduciary duty requirements in Iowa. For instance, in one often-cited case, Iowa’s Supreme Court boiled down the concept to two main duties, “consisting both of a duty of care and a duty of loyalty.” Cookies Food Products, Inc., by Rowedder v. Lakes Warehouse Distrib., Inc., 430 N.W.2d 447, 451 (Iowa 1988) (emphasis added). Iowa’s high court continued, opining “[t]he duty of care requires each director to ‘perform the duties of a director ... in good faith, in a manner such director reasonably believes to be in the best interests of the corporation, and with such care as an ordinarily prudent person in a like position would use under similar circumstances.” Id. (internal citations omitted). 

With respect to the duty of loyalty, Iowa’s court stated “[t]hat duty derives from the prohibition against self-dealing that inheres in the fiduciary relationship …  As a fiduciary, one may not secure for oneself a business opportunity that “in fairness belongs to the corporation.”  Id. (internal citations omitted). Failure to abide by these legal duties (e.g. failing to act in good faith, failing to become properly informed before making decisions, failing to exercise proper oversight, engaging in self-dealing) may not only result in damages to your organization, but may also result in personal liability (read, you are sued individually). 

In short, as a director in an organization (for-profit and non-profit alike) it is imperative to understand the duties that Iowa law imposes upon you. The foregoing is but just a glimpse into some of the requirements imposed upon directors in Iowa. For a more detailed explanation about fiduciary duties, consider checking out the following links:

Link:  Care, or Beware!  Iowa's Fiduciary Duty of Care

Link:  The Who, What, When, Where, and Why of Fiduciary Duties in Small Businesses and Corporations.



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