Loyalty, one supposes, is the essential quality for a company director. The courts do not seem to mind overmuch if he, or she for that matter, is not very bright. Shareholders can, and do, complain if he puts his hand into the corporate till, or, as Lord Bowen put it, if he takes a sop from a possible wolf (Archer’s case [1892] 1 Ch. 314). They cannot complain if he is guilty of poor business judgment. Their remedy is to remove him from office, a remedy that may not be very satisfactory if the corporation has been led into bankruptcy. However, a director is liable for negligence in the conduct of corporate affairs, and many directors have found to their chagrin that what they regard as poor business judgment is negligence to others. The key is diligence: a director must not be content to rely on what he is told, even by trusted senior employees. He must look into everything himself, and he will be protected if he adheres to the standard of the reasonable man.

A Kansas case in 1972 illustrates how a customer of a corporation was able to recover damages from a director for negligence in carrying out a company contract. The corporation entered into contracts to build houses for four customers. Water seeped into the basements of the four houses because of inadequate drainage, and the purchasers sued the corporation for breach of contract and of implied warranty of habitability, and also successfully sued the president of the corporation for his negligence in supervising the construction. The general principle is, as we would expect, that a director is not responsible for the company’s torts and breaches of contract merely because of his position as director. However, the court indicated the limits of this general rule: