What Has Happened to the Responsibilities of Directors of Utah Corporations?
| Jurisdiction | Utah,United States |
| Citation | Vol. 6 No. 7 Pg. 7 |
| Pages | 7 |
| Publication year | 1993 |
August, 1993
Peter W. Billings, Sr., J.
The rash of failures of federally-insured depository institutions (banks and savings and loan associations) has resulted in losses to the federal government and, consequently, has placed a financial burden on federal taxpayers, measured in many billions of dollars. These failures have created concern in Congress, the media, and the general public as to who has been at fault and from whom recovery of the losses may be obtained. High on the list have been officers and directors of the failed institutions, from Charles Keating to prominent political figures, including the son of President Bush.
In Utah, since 1984, the Commissioner of Financial Institutions has closed 12 Utah chartered banks. Five Utah-based savings and loan associations, both state and federally chartered, have also been closed. In addition, Utah has had the problem of the industrial loan corporations, beginning with Murray First Thrift, whose deposit protection by the Industrial Loan Guaranty Corporation proved to be worthless.
What the future may hold for Utah is, of course, a matter of conjecture. The viability of Utah-based depository institutions will depend not only on the state of the economy and the quality of their loans and investments, but also on an institution's ability to meet higher capital adequacy standards and maintain appropriate reserves for loan losses. The quality of management and the standard of care exercised by boards of directors, as well as the effectiveness of the supervisory agencies, will be critical factors.
This article deals with the standard of care Utah law places on directors of all Utah business corporations, including financial institutions that hold and invest the deposits of the public, as well as the investments of their shareholders. It focuses on developments in 1992-93 and the changes made in Utah law from the long-standing basic principle that "directors were not intended to be mere figureheads without duty or responsibility."[1]
1992 proved to be a significant year in the area of the responsibility of corporate directors. Perhaps the most significant aspect was the outside directors of such major corporations as General Motors, IBM, Sears, Westinghouse, American Express, and Kodak (all part of the Dow-Jones industrial corporation average) began doing what the principles of corporate governance require them to do — make management shape up from the lethargy that had brought these giants close to disaster. What should be "good for GM" should be good for other corporations.
Whether that exercise of their responsibilities came from pressure from stockholders — pension plans and mutual investment funds hold large blocks of stock in these corporations and thus have more clout than individual stockholders — or from fear of liability generated by suits against directors of insolvent depository institutions by the FDIC, or from pricks of their own conscience, is not known. But the result has been for the benefit of these corporations, their shareholders, and the American economy.
The principles of corporate governance that have generated these significant developments in the management of corporate America are also principles of law, developed over the years by each state for corporations chartered under its laws. The need for uniformity in those principles has been long recognized and, by coincidence, also in 1992, the American Law Institute approved the results of its research and approved its Principles of Corporate Governance for implementation throughout the country, in the same manner as its Restatements of the Law on torts, contracts, and other legal principles have been adopted and followed by courts throughout the United States. The ALI Principles of Corporate Governance have sought to define the accommodations between often competing values "on the one hand, freedom of enterprise; on the other, accountability under the law" as stated in its foreword.
Recognizing that directors are "necessarily fallible, " the ALI Principles have established a standard of care that is normally applied after the fact when the circumstances are reviewed before a court. Section 4.01(a) of the ALI Principles provides:
(a) A director or officer has a duty to the corporation to perform the director's or officer's functions in good faith, in a manner that he or she reasonably believes to be in the best interests of the corporation, and with the care that an ordinarily prudent person would reasonably be expected to exercise in a like position and under similar circumstances.
These principles also provide that the duty includes the obligation to make or cause to be made an "inquiry" when the circumstances would alert a reasonable director to the need therefore and affords to a director the protection from liability for a "business judgment" made in good faith and based on information the director reasonably believes to be appropriate under the circumstances.
In short, a director has a duty to do more...
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