Directors and Officers: Avoiding Conflicts

By: Drew M. Smith

Nov 2015 Vol.1

When a corporation or an LLC is formed, there are many types of insurance they should consider. One specific type of insurance that both public and private companies should consider is Directors & Officers liability insurance (D&O). D&O insurance protects those at the top of an organization; the partners, the owners, and the directors and officers in their capacity of setting direction, overseeing and managing the operations of a company.

Officers and Directors can be held personally liable for their negligence and oversight of the company, its operations and the conduct of their employees. Suits can come from shareholders, customers, employees and others. D&O insurance can provide coverage for legal and indemnity costs associated with such suits.

A potential for a conflict of interest occurs when a person is both either a Director and/or an Officer and also an investor or vendor. There has to be some distance between the decisions that are made as a D&O, even if it is in conflict with an individual’s position as investors. In many cases, D&O’s can make decisions which are in the best interest of the company which may or may not be in conflict with their position as an investor. However, it is a very fine line. Directors and officers must act responsibly in their capacity for the best interest of the company as a whole.

For example, a partner without knowledge of his associate purchased a piece of land he found out about and cut his associate out of any money generated. The plaintiff and the judge handling the case agreed that this constituted a breach of contract and the associate was awarded damages over $1.5 million.¹

In this case, there was a conflict of interest between personal gain and responsibility as a partner and certain steps should be taken to minimize the impact. First, D&O’s should disclose all transactions with related companies, vendors or clients. Second, they should have documented policies regarding such practices and recuse themselves from voting on such transactions.

This article does not constitute legal advice and is the sole opinion of this author. Consult your human resources and your attorney about investment strategies with your employees.

¹Insurance Journal-National Mar.9 2015 Pg. 16 &18