Officer and Director Liability
Decisions made by officers and directors of corporations typically have not subjected these individuals to personal liability. Even if an officer or director makes what turns out to be a bad business decision, the law does not render the person liable unless that decision violates a specific duty imposed on the officer or director.
On the other hand, the law governing corporations has expanded liability in many instances. This is especially applicable when a director or officer makes a decision that causes financial harm to a corporation, acts in their own interests in making decisions to the detriment of the corporation, or commits a wrongful act or crime.
High-profile cases involving wrongdoing by corporate executives in the early 2000s intensified the exposure on how decisions made by those executives can impact a large number of people. For example, Enron Corporation, an energy company based in Houston, Texas, suffered a major collapse in 2001 that led to the largest bankruptcy in U.S. history. Acts of fraud on the part of corporate officers and others caused many of the problems. Employees of the company lost most of their retirement investments as a result of the company’s collapse. Other companies, such as WorldCom, Tyco International, and Global Crossing, suffered similar fates.
Both officers and directors of those corporations faced civil and criminal liability. Members of boards of directors for Enron and WorldCom agreed to pay millions of dollars out of their own pockets as part of settlement agreements. The U.S. Securities and Exchange Commission brought charges against top company officers, seeking to recover large fines in addition to criminal convictions. These incidents also led to major changes in federal securities laws regarding the potential liability for officers and directors.
Officer and Director Liability: Related Pages
- Officers’ and Directors’ Roles in Corporate Governance
- Responsibilities of Officers and Directors
- Business Judgment Rule
- Securities Regulations
- Rights and Duties of Shareholders
- Insurance and Indemnification
- State Laws Governing Officer and Director Liability
- Additional Resources