Director Financial Literacy: Defining a Baseline Competence for Board Oversight and Legal Accountability

ABSTRACT Research Question/Issue What does it mean for a board director to be financially literate? Despite widespread agreement that financial competence is vital for corporate oversight, governance researchers have mostly focused on financial expertise at the board level. This approach to monitoring overlooks the potential contributions of directors who have the basic financial capability necessary to fulfill their individual legal duties. Research Findings/Insights This study employs a three‐round Delphi study of 35 expert panelists drawn from a pool of directors, governance educators, and accounting professionals. The findings establish a baseline definition and concept inventory for director financial literacy (DFL) that distinguishes financial literacy from financial expertise and identifies 24 core concepts that directors must understand to fulfill their duties of care and diligence. Results indicate that this baseline allows a director to form an independent view of the firm's finances, thereby enhancing boardroom participation and supporting collective oversight. Theoretical/Academic Implications The study reconciles governance scholarship with legal accountability by highlighting how financial literacy is an individual‐level competence that offers insight into agency theory's problem of adverse selection. It contributes to multilevel theorizing in corporate governance research by aligning group‐based monitoring constructs with the legal requirement that each director must form an independent view. The framework establishes a foundation for measuring director competence and addressing the levels‐of‐analysis challenge endemic to governance research. Practitioner/Policy Implications DFL is necessary—but not always sufficient—for directors to fulfill their legal duties. This study provides a foundational framework to guide regulatory benchmarking, director training, and board recruitment.