What Does Duty of Care Mean in Business and Financial Services?

What Is Duty of Care?

Duty of care refers to a fiduciary responsibility held by company directors to a certain standard. This duty, both ethical and legal, requires them to make decisions in good faith and prudently. They must exercise utmost care in making business decisions to fulfill their duty.

Key Takeaways

• Duty of care is a fiduciary responsibility held by company directors to a certain standard.
• The duty requires them to make decisions in good faith and prudently.
• The duty of care also applies to other roles within the financial industry, including accountants, auditors, and manufacturers.
• Failure to uphold the duty of care may result in legal action by shareholders or clients.
• Along with duty of care, the other main fiduciary duty is duty of loyalty; it seeks to prevent directors from acting against the best interests of the corporation.

Understanding Duty of Care

Duty of care is often an implicit responsibility of company directors, but it may also be part of a written contract. This duty requires them to make financially, ethically, and legally sound decisions, taking all available information into account. Directors must act judiciously to promote the company’s best interests.

Duty of care can be summed up as the requirement that directors be present, informed, and engaged. They should use independent judgment, consult experts for advice, and refer to meeting minutes. Directors must stay abreast of legal developments, good governance, and best practices. They should also schedule and prepare to discuss budget issues, executive compensation, legal compliance, and strategic direction.

Duty of Care vs. Duty of Loyalty

Along with duty of care, the other main fiduciary duty is duty of loyalty. Duty of loyalty prevents directors from acting against the best interests of the corporation or reaping personal benefits. It requires directors to put the company’s interests before their own. Directors must also avoid conflicts of interest and self-dealing. Failure to uphold duty of care or duty of loyalty may result in restitution and fines.

Duty of care also applies to other roles within the financial industry. Accountants, auditors, and manufacturers are responsible for their clients’ best interests and product safety.

In reality, duty of care is not a high standard. Many people owe a duty to avoid negligent behavior, whether it’s driving a car, doing lawn work, manufacturing products, or providing medical care.

Special Considerations

Failure to uphold duty of care may result in legal action by shareholders or clients for negligence. Courts focus on assessing whether directors fulfilled their duty in the best interest of the corporation, conducted due diligence, and acted in good faith. Courts also consider whether corporate assets or resources were wasted.

While a court may rule a company exercised bad business judgment, directors are generally protected by the business judgment rule. Shareholders have limited options to hold directors accountable.

Example of Duty of Care

Assume a public company, PubCo, acquires rival firm ABC Holdings. The market reacts negatively to the acquisition announcement, suggesting PubCo paid too much. Later, PubCo reveals that ABC’s management engaged in accounting fraud. PubCo’s shares drop, leading to a class-action lawsuit against its directors.

Most cases settle out of court. In a trial, the court would assess if PubCo’s directors conducted due diligence and acted in good faith. Failure to detect the accounting fraud may not breach the duty of care. However, if directors were aware and proceeded with the acquisition, it could be seen as a breach of duty.

Duty of Care FAQs

What Is an Example of a CPA’s Duty of Care to a Client?

CPAs must act objectively and independently. They must review client lists for conflicts of interest, sign independence agreements, establish quality control policies, and assess client relationships. CPAs are expected to provide professional services through continuing education, seeking consultation when needed, and adequate planning and supervision.

A CPA owes a duty of care to minimize the chance of an IRS audit when preparing a customer’s tax returns.

What Is Duty of Care in Healthcare?

Healthcare providers must maintain a duty of care when working with patients. Failure to meet the appropriate level of care can lead to allegations of negligence. Negligence is defined as a failure to take reasonable care to prevent loss or injury to others.

What Is Duty of Care in the Workplace?

In the workplace, duty of care means ensuring employee safety. This includes protecting employees during international travel, creating a safe work environment during a pandemic, or preparing for the hurricane season.

How Do You Establish Duty of Care in Tort Law?

In tort law, duty of care is a legal obligation that requires adherence to a standard of reasonable care. Breaching this duty may subject an individual to liability.

What Is Duty of Care in a Personal Injury Case?

In a personal injury case, the law establishes that the person or company causing injury had an obligation to act in a way that would foreseeably cause harm. Duty of care levels can range from intentional injury to product liability.