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Duties Of Corporate People
BUS 670: LEGAL ENVIRONMENT
Instructor: Gary Gentry
Date: May 24th, 2011
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Corporate people work in various types of corporations. Corporations vary from government-owned and non-profit corporations, from publicly held corporations to close corporations. Within such corporations, there??™s often a director, officers??™, and shareholders, all working together in the best interest of the corporation. Thus, this paper seeks to analyze the difference between publicly held and close corporations, as well as the duties of a corporate director, officers??™, and shareholders.DUTIES OF CORPORATE PEOPLE 3
Corporations are generally formed in the same manner. Money is needed which is often provided by investors, banks, or shareholders, yet many corporations differ with limitations according to the type of corporation formed.
According to Mallor, Barnes, Bowers, and Langvardt (2010), the General Motors Corporation is type of publicly held corporation due to the fact that its??™ shares are available to the public through public investors. This type of corporation is run qualified managers who perform duties in the best interest of the organization and shareholders, yet run by professional managers who also own a small percentage of the corporation. This differs from a close corporation in that the shareholders have controlling interests and manage the corporation themselves. Between the two types of corporations, they both must abide by the same rules outlined in state corporation law. On the other hand, several states allow more freedom for close corporations regarding their internal matters, versus public held corporations. For example, shareholders of a close corporation may be permitted to dispense with the board of directors and manage the close corporation as if it were a partnership (p.1010, paras.4-6). The observation here is that anytime public interest is involved, a corporation like GM or even Enron is usually held under a microscope to ensure that ethical practices are followed in order to protect the public just as much as the investors. However, ???legal loopholes??? found by trusted officers within a corporation, often leads to exposed scandals due to unethical practices by corporate officers. Therefore, it is important to understand the duties of corporate directors, officers??™, and shareholders.DUTIES OF CORPORATE PEOPLE 4
Directors and officers??™ of corporations have serious responsibilities. Mallor, Barnes, Bowers, and Langvardt (2010) note that directors and officers??™ are trusted to oversee all belongings of the corporation, as well as act on behalf of the corporation with trusted power, which means they owe fiduciary duties to the corporation with loyalty (p.1056, para.4). Directors and officers??™ are to operate under duty of care, or diligence, and must perform according to MBCA standards. Under MBCA section 8.30, members of he board of directors must act in good faith, in the best interest of the company, and make decisions accordingly with the best interest of the company in mind. For officers??™, the MBCA section 8.42 imposes that corporate officers??™ must also act in good faith, exercise good care and judgment reasonably under like circumstances as a director would, and act perform to the best interest of the organization (p.1056, paras.7-8). The difference here is that directors are part of a board of directors, and perhaps have a higher level of responsibility compared to an officer. Although they both share the common goals of the corporation, more pressure tends to fall on a director who has more people to answer to performance wise. Often at times, pressures on a director stem from having to make tough decisions financially, in order to cut costs according to shareholder demands.
According to BusinessWire (2011), corporate Directors biggest executive compensation concerns are selecting performance goals that are aligned with shareholder value creation and holding onto executives with proven track records, according to a new survey by the National Association of Corporate Directors (NACD) in collaboration with compensation consultancy Pearl Meyer & Partners. The survey, part of the NACDs new quarterly Board Confidence Index conducted in collaboration with Pearl Meyer &
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Partners and Heidrick & Struggles, asked 176 leading corporate Directors to rank seven key executive compensation issues in importance, as well as to assess their ability to effectively address those issues. A total of 33% of respondents in the NACD survey ranked “the selection of performance goals that align with shareholder value creation” as their top Board issue, while 19% cited “the need to retain top-performing executives.” “Say on Pay votes and the growing influence of proxy advisory firms require Boards to demonstrate they have meaningful performance targets for executives and proportionate rewards,” said Jim Heim, Managing Director at Pearl Meyer & Partners. “At the same time, Directors know that retaining their top-performing executives will be an increasing compensation consideration as the economy improves and competitors more actively recruit from their ranks (p.1, paras.1-2).” The issue here that many corporate directors now face is deciding how to financially meet organizational goals according to shareholder demands, while keeping top-performing executives with proven abilities to help keep the shareholders happy. Many organizations tend to layoff top executives in order to cut costs during tough times, yet the top performing executives are huge reason why the pockets of shareholders stay full. Letting go of top performing executives not only presents a risk of losing profits, but it also makes it harder for directors to continue meeting the aligned organizational goals. For example, the corporation lets go of a top executive who has closed deals for the company totaling $100 million over the last three years, and the shareholders insist the executive has to be let go because they see profits declining. However, after they let the high-earning executive go, they realize that he established several leads and clients that were happy with his services, and referred him
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to other potential clients and buyers. They contact the corporation only to discover that he no longer works there, and don??™t really trust anyone else to do business with. That said, the pressure falls back on the director to find someone else that can step in and do the same job, yet they??™re losing money in the process and things fail to align accordingly. Although this is one issue corporate directors??™ face, corporate officers can face tougher issues, especially when the issues stem from unethical practices.
Aside from performing in the best interest of the shareholders and corporation, corporate officers also have a duty to perform in the best interest of the public. Paliani (2011) discusses a case warning that corporate counsel in any company that operates in the pharmaceutical industry should take careful note of the recent decision of the United States District Court for the District of Columbia in Friedman v. Sebelius.1 In an opinion written by Judge Ellen Segal Huvelle, the court upheld an exclusion order of the Secretary of the Department of Health and Human Services which had excluded three senior officers (including the General Counsel) of the pharmaceutical manufacturer, Purdue Frederick Company, from participation in any Medicare, Medicaid or other federal health care program for a period of twelve years. The exclusion order was based on misdemeanor guilty pleas by each officer admitting that they had served as “responsible corporate officers” during a five year period for which the company had been convicted of marketing misbranded drugs (OxyContin) with the intent to mislead the FDA (p.1, para.1). Criminal charges for misbranding were then filed against the company and its three senior officers, the CEO, the EVP in charge of Medical and
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Scientific Affairs, and the General Counsel. All of these defendants entered guilty pleas and the company also agreed to pay a $600 million monetary sanction.
Although the convictions of each of the individual plaintiffs were only for misdemeanors, this was sufficient under the relevant exclusion statute to seek an exclusion order. The original penalty was for 20 years, but then reduced to 15 years by the appointed Administrative Law Judge based on mitigating factors. The individual corporate officers argued that they were innocent third parties with no direct responsibility for any of the wrongdoing, but the Departmental Appeals Board that ultimately decided the exclusion issue at the administrative level disagreed, finding that they bore: a measure of culpability and blameworthiness for the misbranding because they had, but failed to exercise, the duty and responsibility, and the power and authority, to learn about and curtail the fraudulent activities of Purdue employees (p.2, para.2).7 Judge Huvelle reasoned in her opinion that the mere fact that a corporate officer holds a senior position in the corporate hierarchy is not sufficient to establish criminal misdemeanor liability under the “responsible corporate officer” doctrine. Instead, there must be evidence that the defendant had the responsibility and authority in the company to prevent or promptly correct the violation complained of.13 Nevertheless, despite efforts by the plaintiffs to persuade the court that none of the individual officers had anything to do with the wrongful acts that gave rise to the corporations criminal liability, the court upheld the exclusion order reasoning that: their criminal convictions [were] no different than those in any number of cases, dating back over one hundred years, in which the liability of managerial officers did not depend on their knowledge of, or personal participation in,
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the act made criminal by the statute, but rather on an omission or failure to act when the agent, by virtue of the relationship he bore to the corporation, had the power to prevent the act complained of (p.4, para.4).14 This case presents many issues, duties the said officers failed at. For one, they didn??™t act with authority appointed them within the realm of corporate powers. As mentioned earlier, officers have a duty to act and perform in good faith, make decisions according to the best interest of the company, shareholders, and in this case the public. Prescription drugs are amongst the top drugs people become addicted to. That said, allowing what was promoted as a less powerful form of OxyContin to be distributed, presented serious liabilities and risks not only to the corporation, but to those who prescribed and purchased the drug unaware of its??™ true potency. Something of this magnitude could cause a ripple effect of lawsuits between doctors and patients as a result of overdose. The judgment in this case boiled down to the fact that officers did not take measures to ensure the claims of the drug according to FDA standards, yet also tried avoid disclosing the truths about the drug from the FDA. Not only did this bring about charges and monetary penalties for the defendants, it cost the company and shareholders millions of dollars; which would only result in long-term losses. Therefore, this could detour any future investors or shareholders from investing anymore money into the company, with share values certain to drop, and business decline. The duties of directors and officers??™ can have a huge impact on themselves and the corporation, if proven unethical or criminal, yet it??™s the shareholders who suffer the brunt of the financial loss, money they expected to get back with profit now gone.
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Not only do directors and officers??™ have corporate duties, but shareholders do as well. Shareholders are generally known for investing the money into a corporation, then receiving profit compensations based on their investment or shares. However, shareholders do have duties since they are in fact principle characteristics of corporations.
Mallor, Barnes, Bowers, and Langvardt (2010) note that shareholders elect a board of directors, which manages the corporation. A shareholder has no right or duty to manage the business of a corporation, unless he is elected to the board of directors or is appointed an officer. Furthermore, shareholders have limited liability. With few exceptions, they are not liable for the debts of a corporation after they have paid their promised capital contributions to the corporation (p.1009, Fig.1). Based on the noted points above, shareholders are mostly hands off regarding day-to-day operations of a corporation, yet they are required to have certain annual meetings. If a shareholder holds another office in addition to being a shareholder, such as Vice President of the company, then they have more of an authoritative role and must also act in the according to the best interest of the corporation. For the most part, Mallor, Barnes, Bowers, and Langvardt (2010) state that in a for-profit corporation, the shareholders??™ rights to elect directors and to receive dividends are their most important rights. The shareholders??™ duty to contribute capital as promised is the most important responsibility (p.1107, para.1). Again, unless a shareholder holds another position within the corporation, their primary duty is to uphold their financial obligations for the duration of their contracted commitment.DUTIES OF CORPORATE PEOPLE 10
To close, duties for corporate officers vary according to the type of organization they work for. Whether in publicly held corporations or close corporations, the duties and ethics hold true as they all boil down to doing what??™s best for the corporation.DUTIES OF CORPORATE PEOPLE 11
Anonymous.? (2011). Alignment of Performance Goals with Shareholder Value Top Compensation Challenge in 2011 (pp.1-3). Business Wire.? New York: May 4, 2011.? Retrieved from: http://proquest.umi.com/pqdwebdid=2336822151&Fmt=3&clientId=74379&RQT=309&VName=PQD
Paliani, A.R. (2011). THE RESPONSIBLE CORPORATE OFFICER DOCTRINE AND THE DECISION IN FRIEDMAN V. SEBELIUS: A CAUTIONARY NOTE FOR CORPORATE GENERAL COUNSEL IN THE PHARMACEUTICAL INDUSTRY
Defense Counsel Journal.? Chicago: Apr 2011.? Vol. 78,? Iss. 2,? p.? 229-232? (4? pp.) Retrieved from:
1 2010 WL 5079937 (D. D.C. Dec. 13, 2010).
2 21 U.S.C. ?§333(a)(1).
7 Id. at *4 (quoting Administrative Record 3132).
13 Id. at *9.
14 Id. at *11 (quoting Park, 421 U.S. at 670671).
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