Liable Directions Essay

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LIABILITY

Liable Directions?

As company ombudsman, your task is to investigate complaints of wrongdoing on the part of corporate directors and officers, decide whether there is a violation of the law, and deal with the wrongdoers accordingly. Jane, a shareholder of Goodly Corporation, alleges that its directors decided to invest heavily in the firm's growth in negligent reliance on its officers' faulty financial reports. This caused Goodly to borrow to meet its obligations, resulting in a drop in its stock price. Are the directors liable? Why or why not?

In most instances, the directors of a company operate under the legal doctrine of the business judgment rule (BJR) "which generally provides directors with broad discretion, absent evidence of fraud, gross negligence or other misconduct, to make good faith business decisions"(The role of the board of directors in Enron's collapse, 2002, Government report). In some recent, much-publicized incidents, corporate boards of directors have been found to be in violation of the law and/or generally accepted ethics, as when the BOD of Enron intentionally reported misleading financial information to the investing public regarding the corporation's financial health -- ultimately resulting in the company's financial demise.

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However, in the case of the Goodly Corporation, the situation is far more ambiguous. It seems possible that the directors merely made a decision regarding the company's future that proved to be unsound based upon financial reports that were inaccurate but were not necessarily deliberately fraudulent. It is uncertain if BOD intentionally misrepresented financial actions or acted in good faith. It is true that "among the most important of Board duties is the responsibility the Board shares with the company's management and auditors to ensure that the financial statements provided by the company to its shareholders and the investing public fairly present the financial condition of the company" and the BOD has a responsibility to ensure its own decisions are made on sound financial information (The role of the board of directors in Enron's collapse, 2002, Government report).. The question arises if the members of the Board used all due diligence to check the financial statements.

However, given the….....

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