Board of Directors, managers and liability (Sarbanes Oxley) 1535

  • Some years ago, investors could lose their money. These days, investors have two options:

    1. To earn money directly
    2. To earn money indirectly (blaming the company).
      Excuses: Misleading information and disclosures, management failed to perform, acted in self-interest etc. Almost everything can form the basis for past claims.
      Sarbanes Oxley disclosure requirements play a significant role to this outcome. For years, directors have the traditional directors and officers (D_and_O) liability insurance coverage. Today, it is not sufficient. The potential liability and losses far exceed the limits of any D_and_O liability insurance program. Shareholders go after the personal assets of executives and board members.
      More likely than not, your company is honestly trying to cover your personal liability costs resulting from activities performed on behalf of the company (this is called indemnification). Even in cases where indemnification is available…
      … and protection for service by directors or officers of affiliated or unaffiliated entities who are serving at the organization’s request or direction…
      … and protection for personal liability relative to employment practices claims…
      … there are several vulnerabilities and exceptions. For any company, the cost of defending suits against its directors and officers can become really material (have you disclosed this legal risk to your investors?)
      There are some surprises:
      Example: Professional Liability Exclusion from the (D_and_O) liability insurance coverage. You are an IT professional and IT manager. (These are TWO different things for insurance coverage, even if you believe the opposite). D_and_O policies provide coverage for your omissions as a manager, but do not provide coverage for liability associated with the provision of professional services(.)
      Insurance coverage often does not provide coverage for professional malpractice claims. Lawyers can quarrel for days: Which is the distinction between a professional act (with all your training and experience) and and administrative act.
      (Hint: Have you signed your self assessment?)
      I did not even mention public companies. Directors and officers of private companies are also exposed to lawsuits filed against the companies they serve. Don’t forget it: We have new standards today. Everybody has to meet the standards. Although the Sarbanes-Oxley Act should apply to public companies only, it is being used as the ‘standard of due care’ against private companies. There are recent court decisions that are very important. Example: In New York, we read in a court decision that the directors and officers of a privately held company had the same fiduciary duties as would those serving a public company.

  • Some years ago, investors could lose their money. These days, investors have two options:

    1. To earn money directly
    2. To earn money indirectly (blaming the company).

    Ooh, you cynic. This would never happen in America 😉

  • Dear old friend, Denis, how are you?
    It is true that some directors deserve what investors do. Directors and officers have some duties:

    1. Duty of Loyalty
      Directors and officers must not compete with their organization. They must not realize personal gain from the use of in-house information.
    2. Duty of Care
      Directors and officers must act with care, this care that a prudent person in a similar position would use. They have to learn all material information prior to making decisions (dear directors, most times you do not have the necessary information). They have to monitor (COSO, 5th paragraph). They must exercise stewardship of the organization’s resources.
    3. Duty of Obedience
      Directors and Officers must perform their duties in accordance with laws and the terms of the organization’s charter.
      It is true that the majority of the federal securities class-action claims filed are based upon:
    4. Fraudulent or misleading financial statements
    5. Illegal insider trading
      NASDAQ high-tech companies often have no effective board of directors. These companies are far more likely to be sued than companies listed on the New York Stock Exchange or AMEX.

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