When it comes to making decisions inside a corporation, no matter how big or small, officers and directors are the ones who carry the weight of the world on their shoulders. If an officer or director makes a bad business decision, the law does not render the person liable unless that decision ends up violating a specific duty imposed on them.
But while this may seem like a bit of much-needed relief for those in these positions, the law governing corporations has expanded liability in multiple cases. This is applicable when a director or officer makes a decision that ends up causing the company major financial harm, acts in their interests, or commits a wrongful act or crime.
No matter the situation, it’s important for companies and the officers and directors who operate within to add on Directors & Officers insurance to protect everyone involved, as well as the company, in the middle of a major financial and legal mess.
Beyond writing out the roles and responsibilities of those who make the decisions for a company, corporations should invest in financial and legal protection. Having D&O coverage will help to provide peace of mind as well as the finances needed to operate safely.
This kind of coverage is specifically designed for companies so they are protected when allegations are made against anyone in the organization.
Civil and Criminal Issues
In the past couple of decades, corporations have seen their exposures rise and their wrongdoing monitored more aggressively. Consider companies like Enron that suffered major fallouts following acts of fraud on the part of corporate officers and other executives. Employees at Enron lost most of their retirement investments due to the collapse and other companies followed suit.
Officers and directors at major companies can face civil and criminal lawsuits because of wrongdoing like this. But even if allegations are found to be false, being connected to major issues like this can negatively affect investor and consumer confidence in a company.
Even when acting in good faith, board members and directors are subject to personal liability which may affect their financial status because of their decisions in the business. It’s important that an organization, in this case, and board of directors understand the risks and liabilities involved.
Risks and Responsibilities
To prevent personal liability of board members and officers, companies should assess the risks involved with having these roles. A company should first develop a risk management committee to identify all risks and develop solutions to mitigate harm. Also, companies need to ensure that the officers and directors understand their responsibilities including decision-making and fiduciary duties.