Ever wonder how a board of directors is formed? Here’s roughly how it goes: At the top of the corporate ladder are the shareholders who own stock of the company. Usually at an annual general meeting, they vote in a group of directors who form a board of directors, responsible for the overall bearing and activities of the corporation.
The directors in turn hire the officers of the corporation — the President (CEO), the Treasurer (CFO) and the Secretary (CAO) — who are responsible for day-to-day business activities and must report to the directors.
Many firms in Canada are known as closely held private corporations where the primary shareholder is often the director(s) with decision-making power. Sometimes, they are also appointed as CEO, CFO or CAO. Many of these triple-acting individuals are tempted to use their position of power to further their personal interests. However, other shareholders have rights, too. This has raised a whole area of the law covered under a large number of cases focusing on director’s liability.
Directors should act in the best interests of the corporation and shareholders — maximizing profits without breaking laws, and using their best judgment. Many have been found negligent, and the courts have often ruled they should be liable for their actions.
Enter director’s liability insurance. Now, even if the courts deem the director(s) to be negligent, insurance paid by a company can cover costs should their actions — or non-actions — lead to liability. Still, an insurer can deem the actions to be outside the limits of policy.
Even a small business owner, who could be sole shareholder, director, officer and employee — you must be aware that your actions can still lead to personal liability in your capacity as a director of the company.
Jeffrey D. Cowan, B.A., B.Comm, LL.B., M.B.A., appears in Your Money every other week. E-mail firstname.lastname@example.org call 416-363-5046 with questions. This column should not be relied upon as legal advice.