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...

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?

Asked on by user8985815

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mkoren | Middle School Teacher | (Level 3) Senior Educator

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The Board of Directors are not liable in this case.  The Board of Directors must rely on reports developed by people whose job it is to develop these reports.  While the Board should certainly scrutinize those reports, it doesn't mean they have to be experts on all the details of each of the reports it receives.  The Board must rely on the advise and expertise of its financial staff. as well as that of other professional staff.  If the Board starts micromanaging, the professional staff will become frustrated and leave.  Once the Board has reason to doubt the reports, then they can be more heavily involved.  If anything should happen in this case, it would be to replace the chief financial officer who prepared the reports.  Additionally, the stockholders could replace some members of the Board at the next election.  The Board can't be held liable just because they received poor advice from the financial department.

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