Book Opener

Figure 29.3Duties of Corporate ManagersRuleBusiness judgment ruleSituationManager does not profit fromdecision.ExplanationDecision stands if it is made: (1) ingood faith, (2) with due care withinthe law, and (3) in corporation’s bestinterest.Fairness ruleInsider trading ruleCorporate opportunity doctrineManager profits from decision.Manager possesses inside informationnot available to outsiders.Manager learns of a business opportunitythat might reasonably interestthe corporation.The decision must be fair to thecorporation because managers mustremain loyal to the corporation.Manager must either reveal theinformation or refrain from tradingon that information.Manager must offer the opportunityto the corporation before taking itfor personal gain.DUTIES OF CORPORATE MANAGERSDirectors and officers owe fiduciary duties tothe corporation. Are corporate managersrequired to show a profit every year to fulfillthose fiduciary duties?How can directors or officers be negligent in performing theirduties? One way is by not acting in a situation that demands action. Forexample, a director or officer who enters a deal with another corporationwithout doing research into the benefits and detriments of the transactioncould be negligent. A director or officer who fails to take stepsto remedy a major company problem also harms the corporation by nottaking action.Another way to be negligent is by making hasty management decisions.Negligent directors might spend only minutes reviewing reportsand records about a proposed transaction, when they should have spentseveral days. In contrast, if the directors do their best and act carefully,their decisions will stand. Shareholders cannot fault directors for thaterror. Shareholders can, however, vote against these directors in the nextcorporate election at the annual shareholders meeting.Some states have recently enacted antiliability statutes to limit theliability of directors. These statutes usually protect directors, rather thanofficers, because the directors are not involved in the day-to-day activityof the corporation. Still, some states have also extended the protectionto officers.The typical antiliability statute allows a corporation to add to itscharter or bylaws a provision that will protect directors from liability634 Unit 6: Starting a Business