The modern business environment is a legal minefield for an organisation and its management. Management’s decisions can impact an organisation’s stakeholders in a variety of ways, and as a result, they can be personally exposed to claims from a range of sources.
Here are 8 common sources of claims against directors and officers:
Shareholders often attempt to hold executives liable for errors and omissions in financial reporting, such as during the release of annual reports, or when an organisation hasn’t perform as expected.
It’s also quite common for management to face significant scrutiny when they conduct merger and acquisition activities that are not perceived to be in the best interest of the company and it’s investors.
Other examples of claims by shareholders include breaches of directors’ duties, negligent mismanagement, misappropriation of company funds, and allegations of misleading, deceptive or inaccurate disclosure.
The relationships between managers and employees can be challenging at the best of times, so it’s unsurprising that claims often arise from disgruntled staff members.
Risk exposures exist for executives when hiring and firing staff, as well as situations where they have failed to provide a safe working environment, free of harassment and bullying.
Lawsuits brought by employees can include allegations of defamation, wrongful dismissal, constructive termination, as well as sexual harassment and discrimination, to name a few.
If debts are left unpaid when an organisation goes into administration or bankruptcy, its board of directors may be held liable for insolvent trading.
Management has a responsibility to keep informed about an organisation’s financial position, and its ability to meet the payment of debts as they become due.
If this duty has been ignored or errors have been made, and an organisation has continued to incur debt irresponsibly, creditors may look to pursue directors personally to recover any outstanding funds.
Directors and officers can face claims as a result of providing everyday goods and services to their organisation’s customers, if customers feel unfairly sold or lied to.
An organisation’s customers and the consumer groups who represent them have been known to bring lawsuits alleging misleading conduct and breaches of fair trading laws.
Claims may also arise from contract disputes, the quality of business services provided, or even allegations that fraudulent or dishonest acts have taken place.
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Other players within industry can litigate against an organisation’s executives if they feel that wrongful conduct has been committed to their detriment.
Claims can vary from breaches of intellectual property and misappropriation of trade secrets, to allegations of collusive and anti-competitive behaviour.
Management can be also held accountable for actions that are perceived as defamatory or misleading, with claimants often seeking a remedy for their perceived losses.
Directors and officers have a duty to ensure that their behaviour, as well as the organisation’s, complies with the requirements of a range of government and industry specific legislation.
Actual and alleged breaches of these laws are thoroughly investigated by regulatory authorities, with any subsequent prosecution potentially resulting in severe penalties for the offending executives.
Government and regulatory authorities monitor the laws across many facets of the commercial landscape, including corporation law, securities law for publicly listed companies, fair trading law, employment law, environmental law, occupation health & safety, and taxation law, to name a few.
7. Retirement fund beneficiaries
Depending on the location of an organisation, its directors and officers may be responsible for arranging the retirement, superannuation and 401k entitlements of employees.
If so, they are accountable for registering employees with approved retirement schemes, managing records and ensuring that accurate and timely contributions are made.
Management must ensure that they adhere to the legislative requirements monitored by scheme regulators, or risk being held personally liable for any discrepancy.
8. The organisation itself
In certain circumstances, management can be exposed to claims from the very organisation in which they represent.
If an organisation goes into liquidation, its directors may be investigated and held personally liable if they have breached their fiduciary duty, or traded whilst insolvent.
Additionally, mergers or acquisitions resulting in a change in management can provide the new board of directors with an opportunity to pursue past executives, if they are found to have behaved badly in their past dealings with the organisation.
Finally, if shareholders believe that management has caused damage to an organisation in any way, they may bring a derivative lawsuit against the responsible executives on the company’s behalf. A derivative proceeding allows shareholders to ‘step into the shoes’ of an organisation and hold management personally responsible for their actions.