The landscape of business continues to evolve and become more complex. Regulations, litigation and duties corporations and their management owe the public are all increasing the risk of serving as a director or officer. This changing risk is especially troublesome since directors and officers put their personal assets at risk for decisions (or lack of) that they make on behalf of an organization.
Companies and their actions are increasingly targets for criticism. Bernie Sanders used this as a key platform in his campaign. Executive pay, employment issues, regulations, financial oversight and international risks are just a sampling of the areas of pitfalls where many companies and their directors have fallen prey.
Even serving on a nonprofit board can be fraught with risk. Many are asking is it really worth putting my assets at risk?
A corporate director has duties which include:
- To act in good faith to promote the success of the company
- To be aware of and follow company by-laws, agreements and resolutions
- To exercise independent judgement
- To carry out duties with reasonable skill and care
- To avoid conflicts of interest
- To comply with all statutory and regulatory obligations
- To make sure appropriate records, minutes and documents are kept
- To act in the best interest of the company and its employees, shareholders and customers for all financial dealings
If that’s not enough, there have been two recent events that changed landscape of this ever-changing risk.
On Sept. 9, 2015, the Department of Justice issued new guidance instructing prosecutors and civil attorneys to place more focus on individuals potentially involved in corporate wrongdoing. The Yates Memo requires corporations to provide all relevant facts relating to individuals responsible for misconduct in order “to be eligible for any cooperation credit.” The Memo also directs civil attorneys to focus on bringing actions against individuals. Note the focus on individuals.
The second issue involves the continuing discussions, regarding duties corporations and their management owe the public, at the 2016 National Business Law Scholars Conference. Some of the issues discussed related to this topic involve whether insurance should be limited in certain situations. The intent is that those making decisions (or their lack of making decisions) will assume personal responsibility and suffer the consequences of their actions.
If you’re asked to serve on a board of directors, there are several things you should consider:
- What type of orientation is provided to directors? Are corporate governance documents (by-laws, minutes, board policies) provided and reviewed? Is there a strategic plan and budget? These documents indicate whether an organization is proficient in providing their directors proper training and sufficient information.
- What type of documents are you, as a potential director, being asked to review and/or sign? Is there a conflict of interest statement? Does the organization have a written document stating that it will indemnify (make whole) their directors if they are sued while acting in their official capacity? These documents will help determine if proper conflicts are being recorded and how an organization intends to respond to legal action brought against their board.
- What type of insurance protection does the organization provide? Does the organization provide an overview of this protection to the board? Board members should be especially interested in executive liability and crime coverages. Does the organization have Directors and Officers, Employment Practices and Fiduciary liability policies? Crime coverages are also important to financially protect the organization.
Becoming a director of any organization is a significant responsibility. Whether it’s a civic, nonprofit or for-profit entity, the duties and risks can be reduced by proper procedures, documentation and risk management. Understanding these best practices will enable a potential director to determine the risk of accepting a board position.
Richard Ollis is CEO of Ollis/Akers/Arney, an employee owned business and insurance advisory firm.