Director & Officer Rights, Duties, & Liability

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From the course by University of Illinois at Urbana-Champaign

Corporate & Commercial Law II: Business Forms, Financing & Governmental Regulation

3 ratings

University of Illinois at Urbana-Champaign

Corporate & Commercial Law II: Business Forms, Financing & Governmental Regulation

3 ratings

This course is the second course in a two-part series on corporate and commercial law. In this part, we focus on three main topics: business organizations, business financing, and governmental regulation. In the first module, we discuss the characteristics of a number of the most common forms of business entities, such as corporations and LLCs. Module two is devoted to debtor-creditor relationships, including bank financing, debt financing, secured transactions, and bankruptcy. We wrap up the course with two modules that focus on the most important aspects of governmental regulation, including the process by which administrative agencies make rules, and the regulation of anti-competitive behavior and securities transactions.

From the lesson

Module 1: Business Organizations

In this module, you will learn about the most common forms of business organizations. Beginning with sole proprietorships and moving on through various forms of partnerships, corporations, and limited liability companies, we will discuss how each type of business entity is formed and how it operates. By the end of this module, you will be able to differentiate between the most important types of business organizations and understand which form is most appropriate for achieving certain business goals.

Director & Officer Rights, Duties, & Liability5:23

Meet the Instructors

Professor Michael R Fricke
Teaching Assistant Professor
Department of Business Administration

In this listen we wrap up our discussion of

corporations by focusing on directors and officers.

What are their rights, what are their duties,

and what is their liability?

Okay. We are almost done with corporations.

We've had a lot of discussion about corporations,

shareholders, classifications of corporations,

how to form a corporation.

Here in our last lesson on corporations we're going to discuss directors and officers.

What are their rights, their duties, their liability?

So, let's start with directors.

Now, director's job is to set the strategy for the company,

and appoint the officers.

They don't actually do the day to day management of the corporation.

That's the officers job.

Actually, many directors aren't even employees,

or full time engaged with the organization.

Many corporations have what we call,

both inside, and outside directors.

An inside director, somebody who is also an employee of the corporation.

So, oftentimes the CEO will be an employee and an officer,

but also a director.

That's called an inside director.

A lot of corporations also have outside directors.

So, just someone else from the business world,

or from politics, or from academia.

There are folks here in the College of

Business at the University of Illinois who serve

on the board of directors for corporations.

Those would be an outside director because they're not an employee of the organization.

Now, as a general rule,

directors of a corporation are not liable for the decisions they make,

even if those decisions caused the corporation to lose money,

or similar bad consequences as long as they make reasonable decisions.

Directors are protected by this thing called the business judgment rule.

If a reasonable person could have made

a decision that the directors made using good faith,

and reasonable care of the corporation,

then the director would be liable even if that decision turns out to be really,

really wrong, and they lose tons of money.

Now, directors are liable if they breach their duties to the corporation,

or if they mislead shareholders.

So, sometimes you'll see a conference call that a corporation is on.

They have a duty to provide accurate,

not misleading information to their shareholders.

You can be held liable for that,

or for breaching their duties.

Now, speaking of duties let's talk about what the director duties are.

As a general rule the duties of directors to their corporation

are about the same as the duties of partners in a partnership.

So, we talked about the duty of loyalty,

the duty of care, the duty of obedience back when we talked about partnerships.

Same duties for directors, loyalty,

you can't engage in self dealing,

you can't usurp corporate opportunities to benefit yourself.

Directors are not allowed to enrich themselves

personally at the expense of their corporation.

Duty of care: They have this obligation to use

reasonable care in carrying out your duties as a director of a corporation.

And then obedience.

If the shareholders vote on something,

it's your job to obey that.

If something's in the bylaws of your corporation and you're a director,

it's your job to obey that you have the duty of obedience.

Now, on the flip side directors have some rights.

One right the directors have that's much different from the rights of

partners and partnerships is that they have the right of compensation.

Directors don't do this job out of the goodness of their own hearts.

They are entitled to be paid.

Being a corporate director can be a lot of work,

and because they're not necessarily also owners,

the really only mechanism for a director to

be reimbursed for the time and

effort they put into being a director is through compensation.

So, directors have the right to get paid for their work.

They also the right to be indemnified by the corporation.

This is a weird thing about shareholder litigation,

if a director is actually sued by a shareholder for mismanagement,

the corporation itself will probably indemnify that director and be the one paying for

the defense in the case which can lead to weird consequences.

And then the last right that a director has is the right to inspection or participation.

Directors have the right to understand what's going on in their business,

inspect the books and records,

know what's going on.

Nom they don't manage the day to day affairs,

but they have the right to know what's going on.

Now finally, shifting away from directors to officers,

there's not a whole lot to say about officer rights duties and liability,

because they're mostly the same as

directors especially when it comes to duties and liabilities,

the officers are pretty much the same as directors.

Same duties loyalty, care,

obedience, that kind of stuff.

Their liability is essentially the same as directors.

And when it comes to rights,

since officers are just employees of an organization,

they don't really have many statutory rights.

Any rights of an officer are generally just those given to them in

their employment agreement which is the contract between the company and the officer.

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