Am I My Director’s Keeper?

Originally published by Cleve Clinton.

Board of directors member Y.I. Gnough, who is also president of Algae Company, is in a pickle. Although denying any knowledge of sexual harassment and misconduct by the company founder and deal-maker Iam Algae, three co-board members resigned fearing for their reputational and financial survival. Employees are fueling the rumors of women who complained of unwanted touching, sexual harassment and other over-the-line behavior. Even Algae’s former counsel discloses that several years ago the board and the company were told of three or four confidential settlements with women. Company investors suggest that Y.I. and fellow officers and directors breached their fiduciary duty. Should Y.I. be concerned about his pocketbook and his reputation?

 

His reputation? Probably. His pocketbook? Depending upon what state law applies, maybe. And that’s a big maybe. If it happened in Texas, a successful investor claim would not be likely.

Corporate directors in Texas owe fiduciary duties of obedience, loyalty, and due care. The duty of obedience requires a director to avoid exceeding the corporation’s authority – either in its articles or state law. The duty of due care requires that a director must handle his corporate duties with such care as an ordinarily prudent man would use under similar circumstances. The duty of loyalty dictates that a director must act in good faith and must not prefer his personal interests over the corporation’s interests.

While corporate directors are obligated to act “in good faith,” and directors face personal monetary liability to their shareholders for acts “not in good faith,” no modern court has imposed liability along these lines. When a director’s good faith is challenged in court, the complaining shareholder is forced to prove that directors acted in bad faith – not just the absence of good faith. Because proving that someone did not act in good faith is easier that proving that they acted in bad faith, courts miss the point, effectively rendering impotent a director’s obligation to act in good faith. For example, an inattentive director who does not delve into why the company founder had 3 or 4 expensive settlements out of court with women may not be acting in bad faith. Failure to inquire may simply be inattentive or half-hearted conduct, but not done intentionally bad faith conduct.

Tilting the Scales in Your Favor

Strictly Speaking – the pocketbook. If you are the unsuspecting member of an Algae-like board of directors, which is inattentive or half-hearted, you will probably not face civil liability, unless your actions or inaction could be construed as “bad faith.” In all probability such conduct is not “in good faith,” but that’s not likely to be enough bad acting to get you into “bad faith” trouble.

Reputation – or perhaps doing the right thing? However, being the inattentive or half-hearted member of the company board of directors may not be good enough to keep your otherwise unsullied reputation intact. While you may not be your director’s keeper, failing to deal with another director’s inappropriate conduct may make you wish you had been your director’s keeper.

Many knew about the brash conduct of the founder, you say. What could a single, simple board member do? When presented with information surrounding a number of seemingly related settlements, ask questions about the implications of each on the past and whether the issues that necessitated the settlements have been resolved, or if they risk being repeated to impact the future. If there is support from a majority of the other members of the board of directors or from officers with authority, pursue the inquiry and the options to an appropriate conclusion. If there is no such support or interest, strongly consider resigning.

RELATED ARTICLES: “Best Interests” of Investors and Employees

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