If you have just created your corporation, or are still in the process, one of the first steps is to appoint the members of the corporation’s board of directors. (For more information about forming a corporation and the necessary steps, click here). Usually, the directors are either named in the corporation’s articles of incorporation or bylaws or selected by incorporator, the person who made the original step to incorporate the company. After the board has been organized, the directors then appoint the officers of the corporation.
Structuring your business as a corporation generally creates specific roles for the board of directors, the corporation’s officers, as well as, fiduciary duties in both the board of directors and appointed officers that are owed to the corporation and its stockholders.
What Are the Roles and Obligations of the Board of Directors and the Directors Themselves?
The board of directors’ role is to manage the corporation’s business affairs and to make any major business decisions. The board usually determines corporate policies with respect to products, wages, services, and labor relations and proposes corporate matters like mergers, dissolution or asset sales.
The board also decides if new corporate shares should be issued or if other financing and capital changes should be made. As mentioned above, the board also appoints the corporation’s officers.
The directors act as fiduciaries for the corporation, meaning that they are obligated to act in the best interest of the corporation to benefit the shareholders. As a result of this relationship, the directors act as agents for the shareholders.
The core fiduciary duties of the directors are duty of care and duty of loyalty to the corporation and shareholders. The duty of care requires that the directors be fully informed and act with care when making decisions for the corporation.
The duty of loyalty requires that the directors make decisions and act in the best interest of the corporation. Courts also often refer to additional fiduciary duties of the directors including duty of good faith and duty of disclosure.
The duty of good faith is similar to the duty of care in that it necessitates that the directors act with honesty and good faith when doing business dealings. The duty of disclosure requires candor in business discussions from the directors.
Overall, the board of directors is responsible for shaping the strategy and direction of the corporation while performing their management role with candor, good faith, and loyalty to the corporation and its shareholders.
What Are the Roles and Obligations of Corporate Officers?
Officers, once appointed by the board of directors, are responsible for the day-to-day activities of the corporation. The typical officers’ roles are president, one or more vice presidents, secretary, and treasurer. An officer can also be a CEO or CFO, depending on the corporation structure. Unless otherwise stated in the corporation’s bylaws or articles, one person can hold more than one officer position.
Ordinarily, the president makes the corporate policy and operations decisions and the vice president can assume the responsibilities of the president as needed. The vice president also often runs a section of the corporation’s business operations.
Usually, the secretary’s main role is to keep the records of the corporation’s various meetings and manage the corporation’s stock record book. Finally, the treasurer handles the corporation’s money and is accountable for the corporation’s taxes and other financial documentation. If included in the corporation’s bylaws or articles of incorporation, additional roles or titles can be added or removed from the typical officer positions.
While there is less discussion about the fiduciary duties of a corporation’s officers, it has been generally accepted that officers have the same fiduciary duties as a corporation’s board of directors. Therefore, officers are held to the same business standard as directors and have an obligation to act with good faith, candor, loyalty, and disclosure on behalf of the corporation’s shareholders.
What Are the Directors and Officers Liable for With Regards to the Corporation?
The main liability for officers and directors is that they could be personally sued as a result of their service to the corporation. For example, a company officer or director could be sued by an employee for an alleged wrongful termination.
Other behavior of officers and directors that could result in lawsuits include, breach of any fiduciary duties, misuse of company funds, fraud, failure to comply with workplace laws, theft of intellectual property, lack of corporate governance, and misrepresentation of company assets.
In order to mitigate this risk to directors and officers, most corporations have (or should have) Director and Officer Insurance (“D&O Insurance”). This insurance, which often also includes the company, covers settlements, legal fees, and other costs.
Regardless of your corporation’s status as a public, private, or non-profit entity, it is strongly recommended that you obtain D&O insurance if you have a board of directors or other kind of advisory board. Obtaining D&O insurance is important because it is unlikely that your company, no matter its size, can support the cost of litigation if your directors or officers are personally sued.
Things to Consider When Deciding Whether You Should Insure Your Officers and Directors Against Potential Claims or Lawsuits
As mentioned above, it is highly recommended that your company obtain D&O insurance if you have a board of directors or officers involved in the management and day-to-day activities of your company. Further, when considering whether your company needs to obtain D&O insurance, it is suggested to keep the following considerations in mind.
New executives - If your company or business is relatively new and is being managed by inexperienced individuals who have never served in an executive position before, D&O insurance can be very important to protect your directors and officers from lawsuits caused by small (or large) mistakes.
New executives, including officers and directors, are more likely to make business missteps such as impracticable promises to investors, overlooking employment or other regulatory statutes, or HR errors. All of those mistakes could result in a personal lawsuit against a director or an officer that could impose large costs upon your new company.
Different Kinds of D&O Insurance –
When obtaining D&O insurance, it is also crucial to understand the differences between the types of insurance coverage.
Side A Coverage –
Side A coverage only insures the individuals, not the company, and protects the individual director or officers when the company cannot or is not allowed to because of corporate bylaws or other statutory restrictions.
Side B Coverage –
Side B coverage benefits the company as it applies when a corporation does not indemnify directors and officers. This coverage provides for reimbursement of the corporation.
Side C Coverage –
Side C coverage insures the company for any liability arising out of certain kinds of claims filed against the company, regardless of whether the claims are filed against directors or officers. However, for publicly traded companies, Side C Coverage only applies to securities claims.
Employment Incentive –
When your company is hiring or appointing new employees for the officer or board of director roles, D&O insurance could be a very important incentive, especially for experienced employees who may expect your company to have the necessary insurance already in place to shield them from possible employment liability.
Cost of D&O Insurance -
While the cost of D&O insurance will vary greatly depending on your corporation’s business details, including anticipated revenue, number of officers, directors, and employees, and the risk level of your industry, cost of D&O insurance is a large consideration for most businesses, particularly new or growing businesses. It is important for companies to consult both financial and legal assistance to ensure that your company is both properly insured and that you can afford the cost of the insurance needed for your company.
Legal Counsel and Advice –
Determining whether D&O insurance is right for your company can be a complicated, yet crucial, decision for your business. By getting legal advice regarding your insurance decision, as well as other business choices pertaining to your board of directors and officers, you can ensure that your company is set up in a manner that enables efficiency and risk avoidance.
This article is made available by Carpenter Wellington (www.carpenterwellington.com) to provide a general understanding of the topic set forth therein. In no way should this article be construed as specific legal advice, nor does the receipt of this article create no attorney client relationship in on itself, between you (the reader) and Carpenter Wellington. This article, in whole or in part, should not be used as a substitute for competent legal advice from a licensed professional attorney in your jurisdiction.