Generally, members of the board of directors of a corporation are protected from liability for the actions of the corporation and its employees, but that protection is not absolute and is being eroded by recent court rulings. In the corporation hierarchy, the shareholders (owners) elect the directors who are responsible for broad corporate policies and hire the officers (president, CEO, etc.) who are responsible for operating the business and hiring the employees. In small corporations, persons often hold multiple positions. To attract and protect your directors, particularly those who are just board members (independent directors), whether compensated or not, the corporation should:
- Adopt and incorporate all statutory protections and indemnifications for directors.
- Enact corporate bylaws (the corporate constitution) that provide and maximize protections and indemnities for directors.
- Purchase director and officer liability insurance.
- Provide complete and accurate information to all board members.
- Create board committees with experienced board members for particular matters.
- Require disclosures of potential improper influences and questionable relationships.
- Disclose potential and actual financial and other conflicts of interest to board members.
- Disclose sufficient information to allow them to exercise reasonable business judgment.
- Allow board members to abstain from deciding matters that are risky or those that they are not adequately informed.
- Document important information, decisions, and involvement.
- Enable board members to hire, involve and rely on independent professional advisors.
- Remind directors that they owe fiduciary duties to the corporation, shareholders, and others.
- Provide a mechanism for board members to question management’s actions, recommendations, and decisions, and to document them.
Should you have any questions regarding potential liability as a member of a corporation’s board of directors or any issues arise, please contact us for advice and counsel.