Corporate Governance: Director and Officer Personal Liability
A career as an officer, director, or shareholder of a corporation brings great opportunity to be a lauded visionary, strategic thinker, and the leader of a profitable venture, with accompanying compensation.
Duty OwedThis position comes with great responsibility and the risk of personal liability is real even when proper liability insurance is in place. While there is no bright-line rule regarding the personal liability of corporate directors, officers, and shareholders, there are a number of situations in which these individuals can be held liable for misconduct. California law grants directors and officers of a corporation principal authority over the organization's ordinary business affairs. In addition, state law identifies specific duties that are owed to the shareholders as well as the enterprise itself.
Under the duty of loyalty, for example, officers and directors are obligated to always act in the best interest of the corporation and its shareholders. A breach of this duty occurs when an officer or director has a conflict and fails to disclose material information from the organization. Officers and directors also owe a duty of care to the organization, meaning they must act in good faith and with fair dealing in the best interest of the corporation and its shareholders using a level of care that would be used by an ordinarily prudent person similarly situated.
While it is true that the doctrine of the "business judgment rule" exists as a corporate weapon to shield officers and directors, it is not a failsafe insulation from personal liability. California courts have consistently held that intentional misconduct will result in personal liability. In the same manner, if a corporate officer or director authorizes, directs, or substantially participates in wrongful conduct, personal liability will attach even if the actions were undertaken by the corporation resulting in joint liability. Likewise, when an officer or director engages in fraud, personal liability results.
Preventing Personal LiabilityLiability for a corporate officer or director is much less likely to be found by a California court if the harm is caused by negligence rather than intentional conduct. It is often the exception and not the rule when a corporate officer or director purposely engages in damaging conduct. Nonetheless, below are a few steps officers and directors can take in order to help prevent personal exposure:
1) Include a provision in the corporation's bylaws that mandates officers are indemnified against all losses caused by their negligent conduct;
2) Be sure the organization seeks out and obtains sufficient and appropriate liability insurance coverage;
3) Create and maintain extensive checks and balances within the corporate in an effort to minimize mistakes;
4) Use the checks and balances to prevent intentional conduct that may place the organization and its officers and directors under attack in a lawsuit;
5) Tighten corporate governance, specifically so officers have complete information regarding the ongoing activities of subordinates;
6) Fully investigate and discuss all decisions in order to lessen mistakes and minimize the risk of triggering litigation.