Educating corporate officers on their fiduciary duties and obligations

Alan S. Gutterman, Founder & Executive Director, Business Counselor Institute

There is extensive caselaw and detailed statutory provisions pertaining to the fiduciary duties of members of the board of directors and directors of public companies, as well as directors of private companies that have received substantial amounts of funding from venture capitalists and institutional investors, and regularly attend in-person and online educational institutes and programs that focus on specific legal and ethical issues that they are likely to encounter during their work on the board and its various committees. In contrast, relatively little attention has been paid to the fiduciary duties of those persons who are charged with carrying out the directives of the board and managing the business on a day-to-day basis: the officers of the corporation.

Caselaw regarding the duties and obligations of corporate officers is meager, and there is no consensus on the applicability of well-known guidelines that are frequently cited when assessing director behavior, such as the "business judgment rule." Moreover, attorneys purporting to specialize in corporate governance often concentrate their counseling on board members and spend relatively little time working with officers and providing them with guidelines that can be used for them to understand the potential legal ramifications of their conduct and the duties that might be imposed upon them outside of any specific employment-related agreement they might have with the corporation.

Recently scholars and governance commentators have come forward to offer several good reasons for taking specific steps to educate officers regarding their fiduciary obligations to the corporations that they serve. First, it can be expected that the conduct of officers will be subject to increasing scrutiny in a manner similar to the attention that has been focused on directors and thus it is in the interests of both the corporation and its individual officers for officers to understand the legal standards associated with their performance before a lawsuit is filed. Second, it has been argued that formalized efforts to inform officers of their duties and obligations, and the resources available to them to discharge their duties in a proper and lawful manner, will increase the likelihood that officers will act properly, engage in positive conduct, and refrain from actions that further their own interests at the expense of the corporation and its shareholders. Third, investing time and effort in educating officers provides a platform for explaining legal principles and concepts (e.g., duties of loyalty and care) that would otherwise remain vague and uncertain to officers.

Experienced attorneys can and should provide officers with examples of how familiar legal principles work in practice and help officers determine when they should stop and seek the guidance of their superiors and counsel. Education fosters a sense of personal responsibility among officers and recognition that they, rather than the corporation’s lawyers, must ultimately be comfortable that their actions are consistent with their fiduciary duties to the corporation. Another byproduct of attorney involvement in the education process is that it builds a bridge between the officer and the attorney, making the officer more comfortable in approaching the attorney for advice, and it allows the attorney to proactively work with officers to spot and manage potential problems in a way that reduces the risk and potential liabilities for both the officer and the corporation.

Johnson was one of the first to offer guidance on counseling officers regarding their unique corporate governance responsibilities and did so by combining and integrating guidelines and processes from both the Model Business Corporations Act (MBCA) and the Restatement of Agency, a prudent approach given that it should be assumed that officers will be held to the standards of both the MBCA and the Restatement. The following guidelines should be laid out for officers in an orientation before they assume their duties and should be codified in some way in a formal code of conduct:

• An officer of a corporation is a fiduciary of the corporation and, as such, has a fiduciary duty to act loyally for the corporation’s benefit in all matters connected with the officer’s relationship with the corporation.
• Officers must act reasonably and in a manner that they reasonably believe to be in the best interests of the corporation and must refrain from conduct that is likely to damage the corporation or from placing their own interests or those of a third party above the well-being of the corporation.
• Officers have the authority and shall perform the functions set forth in the bylaws or, to the extent consistent with the bylaws, the functions prescribed by the board of directors or by direction of an officer authorized by the board of directors to prescribe the functions of other officers.
• An officer has a duty to take action only within the scope of the officer’s actual authority and has a duty to comply with all lawful instructions received from the board of directors or an officer authorized by the board of directors to prescribe the functions of other officers concerning the officer’s actions on behalf of the corporation.
• Officers have the duty to act in good faith and with the care that a person in a like position would reasonably exercise under similar circumstances.
• In performing his or her duties, an officer who does not have knowledge that makes reliance unwarranted is entitled to rely on either the performance of properly delegated responsibilities by one or more employees of the corporation whom the officer reasonably believes to be reliable and competent in performing the responsibilities delegated; or information, opinions, reports or statements, including financial statements and other financial data, prepared or presented by one or more employees of the corporation whom the officer reasonably believes to be reliable and competent in the matters presented or by legal counsel, public accountants, or other persons retained by the corporation as to matters involving skills or expertise the officer reasonably believes are matters within the particular person’s professional or expert competence or as to which the particular person merits confidence.
• Officers have an obligation to inform the superior officer to whom, or the board of directors or the committee thereof to which, the officer reports of information about the affairs of the corporation known to the officer, within the scope of the officer’s functions, and known to the officer to be material to such superior officer, board or committee.
• An officer has a duty not to acquire a material benefit from a third party (e.g., gifts or business opportunities) in connection with transactions conducted or other actions taken on behalf of the corporation or otherwise through the officer’s use of his or her position, even in situations where the officer believes that there will be no harm to the corporation.
• Throughout the duration of his or her relationship with the corporation, an officer has a duty to refrain from competing with the corporation and from taking action on behalf of or otherwise assisting the corporation’s competitors; however, during that time, an officer may take action, not otherwise wrongful, to prepare for competition following termination of his or her relationship with the corporation.
• An officer has a duty not to use property of the corporation for the officer’s own purposes or those of a third party; and not to use or communicate confidential information of the corporation for the officer’s own purposes or those of a third party.

An officer should be aware of, and strictly adhere to, the procedures available for obtaining the corporation’s consent to conduct by the officer that would otherwise constitute a breach of the officer’s duties to the corporation including the officer’s obligations to act in good faith and make disclosures of all material facts that the officer knows, has reason to know, or should know would reasonably affect the corporation’s in granting or withholding its consent.

For further information, see L. Johnson, "Having the Fiduciary Duty Talk: Model Advice for Corporate Officers (and Other Senior Agents)," Business Lawyer, 63 (2007), 147 (includes "model fiduciary advice" for corporate officers which the author recommends should be given before officers take up their duties) and the article in Business Transactions Solution on Westlaw at § 33:253.

Learn more about this subject August 30 with the West LegalEdCenter program “Educating Corporate Officers on Their Fiduciary Duties and Obligations”

About the author

Alan Gutterman is a regular contributor to Corporate Counsel Connect. He is the Founding Director of the Business Counselor Institute and the International Center for Growth-Oriented Sustainable Entrepreneurship. His publications on governance counseling and other matters are available on Westlaw at the "Business Counselor" page.

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