Duties of directors and officers
Any judgement as to whether or not directors or officers have acted as they should is assessed by the legal system in light of their legal duties. Have they acted as they agreed to when they signed on as directors and officers of the organization? Have they fulfilled their legal duties?
In the corporation laws enacted by provincial, state, territory and federal governments you’ll find guidance on the principle legal duties held by directors and officers:
- Duty to manage;
- Fiduciary duty; and
- Duty of care.
(with some variation in terminology)
Let’s look at the ‘Duty to Manage’:
Duty to Manage
The Canadian Business Corporation Act states that:
“102 (1) Subject to any unanimous shareholder agreement, the directors shall manage, or supervise the management of, the business and affairs of a corporation.”
This seems rather straight forward and in many cases it is. But consider the following situation:
The management of an organization becomes aware of soil contamination on a recently acquired plot of land. Management decides to handle it in house. They use local resources to remediate the situation by removing, disposing of and replacing the contaminated soil. The management team feels they have everything in control. They quickly complete the remediation and therefore, see no need to inform the board. They also do not report the contamination to the regulatory authority. Nonetheless, the news gets out, the regulator investigates.
While there had been some earlier discussion at the board level of what should be done in the event of environmental issues, specific reporting guidelines had not yet been drawn up.
If the above situation were to result in legal action, the board of directors may be deemed liable for failing their duty to manage or to supervise the management and penalized for failing to put the necessary management reporting mechanism in place.
Read another article about Directors and Officers Insurance