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Reliance on Committee Reports

Corporation codes in all states allow the corporate board of directors to appoint committees comprised of directors and to delegate board powers to the committees. Appointment powers are usually addressed in the corporation’s articles of incorporation or bylaws, which specify the formalities for appointing a committee. Each state’s corporation code must be consulted to determine if certain powers are nondelegable.

The duty of care requires directors to act prudently and diligently when making business decisions that will affect the corporation. When a director does not have the specialized knowledge or expertise that is required to make an information business decision, the director may rely on the advice of others under certain circumstances. The revised Model Business Corporation Act, adopted in some version by the majority of states, permits a director to rely on the advice of a committee of which the director is not a member if he or she reasonably believes the committee merits confidence relative to the subject matter and its importance.

The delegation of responsibilities to a committee does not negate a nonmember director’s duty of care. Blind reliance upon the information, reports, or advice generated by a committee can preclude the business judgment rule defense. A nonmember director must continue to exercise prudence by keeping tabs of the committee’s activities, reviewing the content of reports and recommendations, and questioning the information contained in those reports and recommendations. If the information does not make sense or contains omissions, it is the director’s duty to obtain clarification. A director does not act in good faith by relying on a report that is unreasonable, incomprehensible, or illogical.

Copyright 2012 LexisNexis, a division of Reed Elsevier Inc.

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