Duty Of Care
What is the duty of care?
The duty of care is the ethical and legal responsibility of a company's executive leadership to act and make decisions in line with the reasonable standard of care. It requires executives to make decisions reasonably, in good faith, and while taking the utmost care to fulfill their fiduciary duties. To ensure they comply, executives must be involved in all legal, financial, and personnel developments.
Is the duty of care a fiduciary responsibility?
Yes, the duty of care is a fiduciary responsibility. It can be either a written document or an informal social contract that requires the executives of an organization to make decisions that are financially, ethically, and legally sound, and in the best interests of the company.
Who is subject to the duty of care?
All of the directors and executives of a startup or company are subject to the duty of care. The board of directors and any other key personnel who have a hand in or oversee the day-to-day operations of any aspect of the business are also subject to the duty of care.
What are the key components of the duty of care?
The key components of the duty of care vary from state to state. How the states interpret the duty of care and measure compliance also vary. As such, consider consulting legal counsel for a full list of applicable duties and responsibilities if you are a director or executive of a startup.
Despite the differences from state to state, they have a few common components:
- Directors must act in a reasonably prudent manner when making decisions
- Directors must conduct an adequate degree of ordinary care, or “due diligence” when making decisions
- Directors must not waste corporate assets or resources by purposefully overpaying for goods, property, or labor
- Directors must take reasonable action to prevent future harm or injury
What can happen to someone who breaches the duty of care?
Breaching the duty of care may result in civil or legal action from government agencies, shareholders, customers, and current or former employees. That said, it can be incredibly difficult to prove a breach of the duty of care, because courts tend to defer to the judgment of executives, and do not rule on whether the business decisions were sound or not. If convicted, defendants may be subject to financial penalties, or jail time.
What is an example of the duty of care in action?
As mentioned above, the directors of an organization are responsible for reasonably making decisions, in good faith, and while taking the utmost care. An example of when startup executives are subject to the duty of care is fundraising.
Suppose you’re a founder raising a $50M Series B round. You have several interested VCs, including one led by your former classmate, Alex. While the offers range in scope, terms, and valuation method, it is clear that the offer from Alex’s firm is the worst. It has the lowest outlined valuation, it's structured as a post-money deal, and it's filled with contractual provisions such as the most favored nations clause, pro rata rights, and anti-dilution protection.
Due to your prior relationship with Alex, you are considering letting her lead the round. If you take her offer, it could be argued that you have breached the duty of care, because you are not acting reasonably or taking the utmost care.
But now let’s say you have two similar offers, one with slightly better terms and a team you dislike, and another offer with slightly worse terms but a team you’d enjoy working with. In this case, a breach is not clear, as you could argue for/against each scenario.
What are the duty of care obligations as an employer?
Employers, like the directors that run them, are subject to the duty of care. They must take "reasonable steps” to prevent any “foreseeable danger" for their employees. What exactly does that entail? Here are a few common actions employers may take:
- Providing safety warnings on the equipment
- Providing safety equipment for employees
- Providing adequate training for employees
- Providing a safe working environment for the employees
- Creating a system for identifying, reporting, and managing incidents and accidents
How does the duty of care vary by industry?
- Healthcare: In the healthcare industry, healthcare workers must prioritize the safety and wellness of their patients. This entails providing them with care and services that are up to par with the standards of the field.
- Education: Educators and other school personnel have a duty to take care of the students. They must take reasonable steps to prevent foreseeable injuries and accidents that may happen to the students on the school premises.
- Manufacturing: Manufacturers must ensure that the products they produce are safe for users. This includes abiding by safety standards and providing adequate warnings for users.
Duty of care vs the duty of loyalty
Whereas the duty of care refers to the responsibility of directors to make decisions that are financially, ethically, and legally sound, the duty of loyalty requires directors to put the interests of the corporation over their interests. It also imposes the responsibility to avoid possible conflicts of interest, thereby precluding a director from self-dealing or taking advantage of a corporate opportunity for personal gain. If a company director violates their duty of loyalty or their duty of care obligations, they may be subject to legal or financial penalties.