Lecture 5 - Officers: Monitoring, Agency and Compensation

Question 1

Board Structures (Officers)

Answer 1

o Independent Directors
♣ Fully independent committees (audit,
comp, nominating)
o One-tier or Two-tier boards

Question 2

Officers (key points)

Answer 2

o Appointed and removed by board of
directors
o Act under delegation of authority from board
o Subject to supervision and monitoring of board
o Relationship to the corporation?
♣ Agents

Question 3

Principal-agent problem

Answer 3

occurs when one person or entity (the “agent”) is able to make decisions on behalf of, or that impact, another person or entity: the “principal”. This dilemma exists in circumstances where the agent is motivated to act in his own best interests, which are contrary to those of the principal, and is an example of moral hazard. Natural persons, corporations, partnerships and other organizations may all be principals and may appoint agents.

Question 4

Officers - Agents

Answer 4

o Officers are agents of the corporation
o Principal retains power and duty to control
agents
o Corporation = organizational principal; how
does organizational principal monitor?
o Board acts as monitoring organ for the corporate principal

Question 5

Officers – Fiduciary Duties (general)

Answer 5

o Care
o Loyalty
♣ Good Faith
o Disclosure/Candor

Question 6

Officers – Duty of Care, Consequences for Breach?

Answer 6

o Precise standard of care for officers
remains “murky”
o Many unresolved issues including, gross negligence or ordinary negligence?

Question 7

Gantler v. Stephens, (Del. Supr., Jan. 27, 2009)

Answer 7

Delaware’s High Court for the first time confirmed and clarified that officers of Delaware corporations have the same fiduciary duties as directors of Delaware corporations.

Question 8

Officers – Duty of Care clarification remedy

Answer 8

Applying ordinary negligence would subject officers to liability for “the omission to take that care which a person of common prudence usually takes of his own concerns”
(Black’s Law Dictionary, citing Briggs v. Spaulding)

Question 9

Officers and Agency (Two meanings)

Answer 9

• As legal agents of the corporation, officers are authorized by the corporation (by-laws or delegation from board) to act for the corporation
• Agency problems – the welfare of the corporation and its shareholders depends upon actions taken by the officers – are exacerbated when officers have extremely broad delegations of authority with reduced accountability

Question 10

Officers - Agents - What are the legal consequences?

Answer 10

o Officers can bind the corporation
o Requires monitoring by the principal
o Fiduciary duties

Question 11

Officers - Duty of Loyalty definition

Answer 11

The agent must act solely for the benefit of the principal in all matters connected with his agency

Question 12

Officers – Duty of Care definition

Answer 12

An agent has a duty to the principal to act with the care, competence, and diligence normally exercised by agents in similar circumstances.

Question 13

Officers - Duty of Candor

Answer 13

Corporate directors and officers owe a duty to disclose material information to the shareholders. Corporate officers owe a duty to disclose material information to the directors.

Question 14

Functions of the officers

Answer 14

♣ entering into ordinary business transactions,
♣ devising business strategies,
♣ setting business goals,
♣ managing risks,
♣ generally working with subordinates to “[p]lan, direct, or coordinate operational activities.