Standards Governing Actions of Corporate Officers
Standards of Care
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What standards govern the actions of corporate managers?
Like the corporate directors, officers of the corporation owe fiduciary duties to the corporation. Officers must demonstrate loyalty and care in carrying out their responsibilities. The standard of care that an officer must observe in carrying out her duties varies considerably given the wide array of officer responsibilities; but, the officer must generally be informed and not act negligently. Similarly to corporate directors, officers are protected in their actions by the business judgment rule. Further, most corporation purchase insurance to indemnify officers and directors for any personal liability for actions taken on behalf of the corporation.
Note: Recall from the previous discussion of the business judgment rule, the primary limitation is that the insurance does not indemnify against breaches of the duty of loyalty.
Next Article: State and Federal Corporate Governance Laws Back to: CORPORATE GOVERNANCE
Discussion: How do you feel about the standard of care owed by officers to the corporation? Should the business judgment rule protect officers in their decisions and actions in the same manner that it protects directors in their decisions? Why or why not?
Practice Question: Amy is CEO of ABC Corp. She decides to hire her cousin as the corporate COO. Her cousin has little experience in the position. When operations begin to lag, the board forces her hand in firing her cousin. The terms of his employment entitle him to 3 years worth of compensation if fired for any reason. The board is angry that Amy did little to vet her cousin prior to hiring him and that his compensation package was poorly negotiated. What standards will apply in determining whether her conduct breaches a duty owed to the corporation.