The recent spate of corporate governance scandals has focused the attention of the business and investment world on the failure of boards of directors to fulfill their oversight and fiduciary obligations to the corporation and its shareholders. This is only natural, since the board is primarily responsible for the guidance of the corporation, and since most high-profile CEO miscreants were also directors of the corporations they looted. However, the CEO and president are not the only officers of the corporation who must adhere to certain standards of conduct and loyalty to the corporation.
Before discussing the duties of the officers, one should understand who is an “officer” of the corporation. The test of whether one is considered an officer is not based on the employee’s title, but rather on the nature of his or her duties. Generally, the designation of an officer should be conferred upon those employees who have been entrusted with executive and administrative functions and have discretion with respect to corporate matters. Thus, a Vice President of Sales may not be an “officer.”
In general, an officer has the same fiduciary duties as a director of a corporation. Among these duties are: (1) the duty of loyalty; and (2) the duty to exercise the same care as a reasonably prudent person in like position and circumstances, and in a manner which the officer reasonably believes to be in the best interests of the corporation.
Foremost among the duties officers owe the corporation is the duty of loyalty, which is often described as “fidelity, honesty, good faith, and fair dealing.” As to this standard, there appears to be no distinction between the duty of an officer and that of a director. Both will be held to the highest standards in their relationships with the corporation, meaning neither may take for his or her own advantage an opportunity that should have been presented to the corporation, use the position of trust to further one’s own interests, or use trade secrets and inside information for one’s own advantage.
Officers also owe a duty of care to the corporation. Under some circumstances, however, the standard of the duty of care to which an officer may be bound may be greater than that of a director. In some cases, courts have held there is a greater fiduciary duty for an officer-director than an “outside” director. For example, the chief financial officer may have daily access to far more detailed information, and for that reason he or she may be judged by a higher standard of care than a director in the exercise of his or her duties. Thus, the standard by which an officer may be judged in his or her dealings with the corporation should be commensurate with the level of his or her job responsibilities.
A third duty, the duty to inform the board, may apply solely to non-director officers. While the board has primary responsibility for corporate governance, the board can function only if it is provided accurate information by the corporation’s officers. For example, the Delaware Supreme Court has held the officers of the corporation, as agents of the company, are obligated to disclose information relevant to those responsibilities entrusted to the officer. This obligation may include a duty to inform the board of situations within the corporation that require the board’s oversight, even if the acts reported are not necessarily dishonest or illegal and even though the officer did not benefit personally from the activity to be reported.
Given the heightened awareness of the issues of corporate governance, it is not sufficient to focus solely on the board’s fiduciary duties. Corporate boards of directors also should take steps to minimize the risk of officer liability. Officers must be advised as to the nature of their duties to the corporation. The scope of an officer’s duties and the limits of his or her authority should be clearly defined. The corporation must develop standards as to the types of internal situations that must be reported to superior officers or to the board, and the officers must be informed that their duty of care to the corporation includes reporting such situations to the board.
In addition to the common law duties of officers, substantial amendments to the Illinois Criminal Code (“ICC”) effective January 1, 2004, provide criminal liability for certain actions or omissions of corporate officers, including, but not limited to, executing, or attempting to execute, a scheme to obtain stock through false representation; or causing, or attempting to cause, the corporation or its accountants to: (i) fail to file a required financial report; or (ii) file a report which contains a material omission or misstatement of fact. Violation of these amendments to the ICC, if the benefit derived is greater than $500,000, is a Class 2 felony punishable by imprisonment from three to seven years, and if the benefit is less than $500,000, an officer is guilty of a Class 3 felony punishable by imprisonment from two to five years.
Effective January 1, 2004, officers of private employers in Illinois also will be prohibited from enforcing any rule or policy that prevents an employee from disclosing information in good faith about a violation of a federal, state or local law to a governmental or law enforcement agency. The law also prohibits an employer from retaliating against an employee for “whistleblowing” to a government agency and from retaliating against an employee who refuses to participate in an activity that would result in a violation of state or federal law. Violations of the Illinois Whistleblower Act constitute Class A misdemeanors that can result in job reinstatement and damages, including back pay, litigation costs and attorney’s fees. Punitive damages are not available under this Act.
The new state law codifies what already is known and prohibited as “retaliatory discharge” under the common law of Illinois and many other states. However, it goes further by not limiting its protections to discharge from employment. Arguably, any adverse employment action taken in retaliation for good faith whistleblowing may create liability under the statute. Because it is a new statute its full impact is presently unknown.
Please do not hesitate to telephone us if you have any questions regarding officers’ duties or if you need our assistance in the preparation of internal guidelines and a program to educate officers on their duties to the corporation.