Understanding the duties owed by directors, officers

When it comes to the structure of the modern corporation, it is essentially three-tiered, consisting of directors, officers and, of course, shareholders. As to the roles fulfilled by each of these players, the directors are responsible for creating a governing policy and appointing the officers, the officers are responsible for running the actual business and overseeing its daily operations, and the shareholders are responsible for electing the directors.

While it may sometimes seem to the average shareholder as if the directors they are responsible for electing and, by extension, the officers these directors appoint to high-ranking positions are somehow immune from legal liability, this is far from the reality. Indeed, no matter how high in the sky their office may be or large the salary they draw, these parties owe the shareholders certain fiduciary duties and can be held accountable for violating these duties.

In the eyes of the law, the fiduciary duties owed by corporate officers and directors are broken up into two distinct components: the duty of care and the duty of loyalty.

Duty of care

Under the Model Business Corporation Act -- which has been adopted by the majority of the states, including Florida -- directors and officers alike are required to execute their duties in good faith, with the care that an ordinarily prudent person would exercise in similar circumstances, and in a manner that he or she always believes to be in the best interests of the corporation.  

What this essentially means is that they must take care to adequately inform themselves before making any business-related decision, relying on everything from data, reports, opinions, statements or other information presented or prepared by officers, employees, legal counsel, public accountants or other individuals they reasonably believe to be reliable and/or competent.  

It's important to understand, however, that under a legal concept known as the "business judgment rule," directors and officers can't be held liable if they fulfilled their duties as outlined above and made what later turned out to be a poor business decision.

We'll continue this discussion in our next post, examining the duty of loyalty.

If you are a shareholder who would like to learn more about your options for holding a director or officer liable for corporate malfeasance, consider speaking with a skilled legal professional who can provide answers and pursue solutions.

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