Liable directions and legal responsibility

LIABILITY

Liable Directions?

As company ombudsman, your task is to investigate complaints of wrongdoing on the part of corporate directors and officers, decide whether there is a violation of the law, and deal with the wrongdoers accordingly. Jane, a shareholder of Goodly Corporation, alleges that its directors decided to invest heavily in the firm's growth in negligent reliance on its officers' faulty financial reports. This caused Goodly to borrow to meet its obligations, resulting in a drop in its stock price. Are the directors liable? Why or why not?

In most instances, the directors of a company operate under the legal doctrine of the business judgment rule (BJR) "which generally provides directors with broad discretion, absent evidence of fraud, gross negligence or other misconduct, to make good faith business decisions"(The role of the board of directors in Enron's collapse, 2002, Government report). In some recent, much-publicized incidents, corporate boards of directors have been found to be in violation of the law and/or generally accepted ethics, as when the BOD of Enron intentionally reported misleading financial information to the investing public regarding the corporation's financial health -- ultimately resulting in the company's financial demise.

However, in the case of the Goodly Corporation, the situation is far more ambiguous. It seems possible that the directors merely made a decision regarding the company's future that proved to be unsound based upon financial reports that were inaccurate but were not necessarily deliberately fraudulent. It is uncertain if BOD intentionally misrepresented financial actions or acted in good faith. It is true that "among the most important of Board duties is the responsibility the Board shares with the company's management and auditors to ensure that the financial statements provided by the company to its shareholders and the investing public fairly present the financial condition of the company" and the BOD has a responsibility to ensure its own decisions are made on sound financial information (The role of the board of directors in Enron's collapse, 2002, Government report).. The question arises if the members of the Board used all due diligence to check the financial statements.

However, given the volubility of the business environment, it is extremely difficult to prove such negligence. The BJR is considered a necessary part of doing business in a capitalist environment, given that company decision-makers cannot live in fear that every possible risk they incur will result in legal liability. According to the BJR: "when a director or officer acts in good faith and with prudence in her determinations and actions, then there will be no liability implied by the court for resultant changes in the company's circumstances or loss of value" (NJR, 2013, National Paralegal). Thus the BOD would liable if they knew that the financial reports were intentionally orchestrated to be faulty or if they chose to ignore obviously questionable information to justify their decision in defiance of good sense. "The BJR will generally protect the actions of directors and officers who acted on their beliefs that the information, which ultimately turned out to be a lie, was in fact the truth. In other words, the courts will still protect the director who reasonably believed the advice of an employee who lied. However, other directors who know of or have reason to know of the director's fraud and still choose to act on the basis of that information will do so without the protection of the BJR" (NJR, 2013, National Paralegal).