What it means
The principle is simple to state: if you are in a position where your choices could affect other people, you must take the care that a sensible person in your role would take. The standard is not perfection.
It is reasonable skill, attention and diligence given the circumstances, and it rises with the level of responsibility and expertise that a person holds. For company directors, duty of care means making informed decisions, asking questions, reading the financial information they are given and keeping an eye on risks.
A board that approves a major acquisition without reading the due diligence report, for example, may struggle to show it acted carefully. Courts in many countries are reluctant to second-guess honest business judgements, but they expect a proper process to have been followed.
Employers owe a duty of care to their staff, which covers safe working conditions, reasonable workloads and protection from harassment. Professionals such as accountants, auditors and financial advisers owe a duty of care to their clients, and in some cases to third parties who rely on their work.
A negligent audit opinion or poor investment advice can therefore give rise to claims for compensation. From a finance perspective, duty of care shapes internal controls, insurance and record keeping.
Boards document their deliberations, use independent experts when they lack knowledge and buy directors and officers liability insurance (cover that pays legal costs and some claims against directors). These steps do not remove the duty, but they help demonstrate that it was taken seriously.
Duty of care sits alongside, but is separate from, the duty of loyalty, which requires acting in good faith and avoiding conflicts of interest. The details differ between countries and between types of organisation, so the safest approach is to understand the standard that applies in your own jurisdiction and ask a lawyer when the stakes are high.
For managers who are not directors, the practical lesson is to avoid cutting corners on safety, accuracy and honesty in their own area. Signing off a report you have not reviewed, or ignoring a warning from a colleague, is the kind of lapse that later looks careless.
Writing down what you checked and why gives you a clear answer if anyone asks.
In practice
Real-world examples.
Example
A board of a mid-sized manufacturer is asked to approve a $40,000,000 acquisition. The directors request the full due diligence report, question the chief financial officer about the key risks and obtain an independent valuation before voting, which gives them a strong record that they exercised care.
Example
A financial adviser recommends a high-risk investment to a retired client who has said she cannot afford to lose her savings. If the investment fails, the client may argue that the adviser breached the duty of care by ignoring her stated needs and risk tolerance. A careful adviser would have recorded her goals, explained the downside and suggested a safer mix of assets.
Example
A warehouse operator is told that a forklift has a faulty brake. The manager takes it out of service the same day, which shows that the company met its duty of care to its employees. It also records the fault and the repair in its maintenance log, so it can prove what it did and when.
Case study
Seen in the real world.
Clearwater Pensions Trust is a fictional scheme whose trustees invested 30% of its $90,000,000 fund in a single property developer after a short presentation. They did not request independent advice or examine the developer's accounts. When the developer failed, the fund lost $24,000,000.
Members asked whether the trustees had acted with reasonable care. The minutes showed that the meeting lasted 30 minutes, no questions were recorded and no alternatives were considered. The trustees concluded that they could not show a careful process.
This illustrative story led the trust to change its procedures. It now requires independent advice for any investment above 5% of the fund, records the reasons for every major decision and reviews the portfolio each quarter. The trustees learned that care is judged by the quality of the process as well as by the result.
Watch out
Common mistakes.
- Assuming a bad outcome automatically means a breach, when the law generally looks at whether the decision was made carefully and on good information.
- Relying on what other people say without checking, such as signing off accounts or contracts that the director has not read or understood.
- Believing that insurance removes the duty, when it only helps with the cost if a claim is made.
Questions
People also ask.
Who owes a duty of care?
Company directors, employers, professional advisers, auditors, trustees and many others in positions of responsibility, depending on the law of the country.
Is a duty of care the same as a fiduciary duty?
They overlap, but duty of care is about competence and diligence, while fiduciary duty focuses on loyalty and putting another party's interests first.
How can a board show it met the standard?
It can keep detailed minutes, obtain expert advice, ask probing questions and review risks regularly.
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