Director Responsibility #8 – Reliance on Other People

From my 2-page overview of director responsibilities:

8. Rely on other people including information provided by other people only if (1) you believe those people are reliable and competent in the areas that they are addressing, (2) your reliance is in good faith, after reasonable inquiry as warranted by the circumstances, and (3) you do not have knowledge that would cause reliance to be unwarranted.

This is a requirement of a director for the business judgment rule defense to be available. A director has to significantly reply on other people for the director to perform his or her function – reliance on outside auditors, on internal auditors, on other directors, on executive officers, etc. As a director goes about performing his or her function, the director will want to evaluate whether it is appropriate to rely on other people. That’s not a negative statement – if there is a question of or uncertainty about reliance, work to improve and justify the reliance.

Dave Tate, CPA, Esq.