Part 10- Corporations, Chapter 43: Management of Corporations, Doc 8

This section examines various legal responsibilities of corporate directors and officers, including those in nonprofit organizations, liability for torts and crimes, insider trading, and significant regulatory changes under the Sarbanes-Oxley Act. It also presents cases like United States v. Jensen, highlighting corporate misconduct and the consequences of financial misrepresentation. Fiduciary Duties of Nonprofit Directors and Officers Directors and officers in nonprofit organizations are subject to fiduciary duties similar to those in for-profit corporations. Key obligations include:    Duty of Care: Requires directors to act in good faith, with the care of an ordinarily prudent person. Duty of Loyalty: Prevents directors from engaging in conflicts of interest, with transactions needing to meet the intrinsic fairness standard. Liability Protection: The Model Nonprofit Corporation Act allows nonprofits to limit director liability for breaches of the duty of care but not for bad faith actions or conflicts of interest. Right to Dissent Under the Model Business Corporation Act (MBCA), a director who dissents from board actions can avoid liability by ensuring their dissent is recorded in meeting minutes or by providing written notice after the meeting. Directors are typically not liable for missing meetings, but habitual absenteeism that prevents effective oversight may result in liability. Sarbanes-Oxley Act’s Impact on Corporate Accountability In response to early 2000s corporate scandals, Sarbanes-Oxley (SOX) imposed stricter accountability for financial reporting: 1. CEO and CFO Certification: These officers must certify the accuracy of financial reports, facing penalties up to $5 million and 20 years in prison for willfully certifying false statements. 2. Disgorgement of Profits: Executives must return bonuses or profits if a financial restatement is needed due to material noncompliance, regardless of whether they were aware of the wrongdoing. Corporate Liability for Torts and Crimes Corporations can be held liable for employees' torts committed within the scope of employment under respondeat superior, even if not directly authorized. Courts also impose corporate criminal liability, particularly when high-ranking officials are involved or when the corporation’s actions violate public welfare statutes, regardless of intent. High-Profile Corporate Crime Cases Cases of corporate malfeasance have resulted in significant prison sentences for executives:   WorldCom: CEO Bernard Ebbers received 25 years for orchestrating an $11 billion fraud. Adelphia and Tyco: Executives were convicted of using corporate resources for personal gain, with penalties including lengthy prison sentences and substantial fines. Case Study: United States v. Jensen In this case, Stephanie Jensen, VP of Human Resources at Brocade Communications, was convicted of falsifying records to cover up backdated stock options. The practice, meant to show artificially high profits by avoiding compensation expenses, resulted in a significant misstatement of Brocade’s earnings. Jensen’s defense argued her lack of awareness of SEC rules prohibiting such acts; however, the court found sufficient evidence that she knew her actions were unlawful and upheld her conviction. This case underscores the legal and financial risks of backdating stock options, especially after SOX shortened the reporting timeframe for stock option grants. In conclusion, the evolving legal standards reflect increased scrutiny on corporate conduct, imposing severe consequences for financial misrepresentation and breaches of fiduciary duty.