Officer and Director Liability
| Author | Jeffrey Wilson |
| Pages | 167-171 |
Page 167
Decisions made by officers and directors of corporations typically have not subjected these individuals to personal liability. Even if an officer or director makes what turns out to be a bad business decision, the law does not render the person liable unless that decision violates a specific duty imposed on the officer or director.
On the other hand, the law governing corporations has expanded liability in many instances. This is especially applicable when a director or officer makes a decision that causes financial harm to a corporation, acts in their own interests in making decisions to the detriment of the corporation, or commits a wrongful act or crime.
High-profile cases involving wrongdoing by corporate executives in the early 2000s intensified the exposure on how decisions made by those executives can impact a large number of people. For example, Enron Corporation, an energy company based in Houston, Texas, suffered a major collapse in 2001 that led to the largest bankruptcy in U.S. history. Acts of fraud on the part of corporate officers and others caused many of the problems. Employees of the company lost most of their retirement investments as a result of the company's collapse. Other companies, such as WorldCom, Tyco International, and Global Crossing, suffered similar fates.
Both officers and directors of those corporations faced civil and criminal liability. Members of boards of directors for Enron and WorldCom agreed to pay millions of dollars out of their own pockets as part of settlement agreements. The U.S. Securities and Exchange Commission brought charges against top company officers, seeking to recover large fines in addition to criminal convictions. These incidents also led to major changes in federal securities laws regarding the potential liability for officers and directors.
Officer and directors share in the responsibility of governing a corporation. Shareholders in the corpo-
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ration elect a board of directors to be in charge of the business. The board of directors is primarily responsible for making decisions, but not for carrying out those decisions. The task of carrying out the decisions made by the board falls on the officers, such as the chief executive officer and the chief financial officer.
State law prescribes the basic powers of officers and directors. Many states have adopted provisions of the American Bar Association's Model Business Corporation Act (MBCA) or Delaware's corporation laws. Other states have adopted their own unique laws. In general, if a state law does not provide a requirement pertaining to officers or directors, then the corporation's articles of incorporation and/or bylaws usually establish these requirements.
The MBCA and the Delaware corporation statute allow a corporation's bylaws or board of directors to specify which officers the corporation must have. In many jurisdictions, though, state law requires each corporation to have certain officers, such as a president, secretary, and treasurer. Smaller corporations generally have only a few officers, such as a president who serves as the executive officer and a treasurer who serves as the financial officer. Larger corporations have many more officers and subordinates.
In some instances, a state's corporation statute may dictate the functions of corporate officers. Some states allow the corporation's articles of incorporation or bylaws to dictate the officers' functions. The MBCA provides, "Each officer has the authority and shall perform the functions set forth in the bylaws or, to the extent consistent with the bylaws, the functions prescribed by the board of directors or by direction of an officer authorized by the board of directors to prescribe the functions of other officers."
The issue of the authority that is delegated to an officer usually pertains to whether the officer has bound the corporation to another party. If the officer had express authority or implied authority to enter into a transaction on behalf of a corporation, then the officer's actions could lead to liability on the part of the corporation. Typically, however, an officer of a corporation, even if the officer is the president of the corporation, has less power than the board of directors.
The vast majority of states and the MBCA require corporations to have one or more directors, as specified in the corporation's articles of incorporation or bylaws. This number may be increased or decreased as needed by amending the articles or bylaws. In many states, the board of directors itself may increase or decrease its size. Most modern statutes allow...
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