Corporate Officers as Agents

Deborah DeMott is David F. Cavers Professor of Law at Duke Law School. This post is based on her recent article, forthcoming in the Washington and Lee Law Review.

Although officers are crucial to corporate operations, scholarly and theoretical accounts tend to slight officers. Officers are often amalgamated with directors into a single category, “managers,” which elides significant differences. In my article, I anchor officers within the common law of agency—as does black-letter law—which crisply differentiates officers from directors. Understanding that agency is central to the legal account of officers’ positions and responsibilities is crucial to seeing why, like directors, officers are fiduciaries, but distinctively so, not as instances of generic “corporate fiduciaries.” Officers, like directors, owe duties of loyalty to the corporation, but also particularized duties of care, competence, and diligence. Additionally, officers’ duties of performance encompass two distinct to agency law: a duty to comply with reasonable instructions and a duty to share material information with the board of directors or others within the corporation. These furnish the legal underpinning for a corporation’s ability to exercise control over its officers’ actions.

More generally, agency law is an analytically powerful framework that provides coherence to accounts that incorporate officers as well as directors. Agency law also supplies guidance on issues for which explicit statutory guidance is sparse and that surface only occasionally in judicial opinions. The article does not claim to answer just why—despite some noteworthy exceptions—there are so few cases cleanly on point. Instead, it stresses the salience of agency principles to answering questions about officers. A crucial starting point is the fundamental requirement that an agent act on behalf of a principal and that the principal possess powers of control over the agent. Thus, an officer has a duty as an agent to comply with reasonable instructions received from the principal (typically the board of directors), whether or not the officer’s functions require the exercise of discretion.

Characterizing officers as agents provides crucial support to the central position directors occupy within contemporary corporate law. Boards of directors effectively serve as the principal as or on behalf of the corporation in ongoing relationships with officer-agents. Anchoring the account of officers within agency law also clarifies the resolution of long-standing disputes, beginning with whether the presumptions embodied in the business judgment rule should apply to officers, not just to directors, as well as the standard for liability when an officer’s breach of a duty of care, competence, or diligence causes loss to the corporation. The article argues that when an officer breaches such a duty, the standard for liability should be the same applicable to non-officer agents who provide similar services, not the more-forgiving standard of gross negligence applicable to a director’s breach of the generalized duty of care owed to the corporation. The rationale is that agency focuses on gaps between actual performance and the reasonable expectations held by a principal who chose to be represented by a particular agent, one having (or claiming to have) particular skills and experience.

Additionally, casting officers within an agency framework furthers directors’ robust right to rely on officers. To hold officers to a standard that’s less exacting than the standard applicable to externally-situated agents who perform comparable functions weakens directors’ rights to rely on officers by calling into question whether appropriately careful directors would supplement officers’ efforts by engaging external agents. Beginning from the premise that officers are agents also underlines the potential role of prior agreement between agent and principal to define the terms of engagement. It’s long established in agency law that an agent’s duties of performance are subject to agreement between agent and principal, including the criteria against which the agent’s performance will be evaluated. an officer-agent. The mutability through contract of duties of performance enables a board of directors and a prospective officer to strike a bargain (with a price) through which concerns about liability harbored by the officer can be specified in advance and addressed through an agreement.

Finally, seeing that officers are agents can help resolve disputes stemming from the definitional fluidity of “officer” within corporate law, most recently in the context of disputes over entitlements to advancement and indemnification arguably created by corporate bylaws. Many cases, applying the robust doctrine of apparent authority, address the consequences of appointing agents to positions with particular titles and positions, including organizational officers. As an agent, a corporate officer occupies a role with both external and internal dimensions. By assigning a title conventionally held by an officer, a corporation runs the risk of creating apparent authority in the title-holder to do acts conventionally associated with an officer who holds a like title. Agency law thus responds to definitional fluidity by turning to conventional usage and meaning associated with particular titles and positions. But agency law also suggests an internally-oriented perspective on the term “officer.” For its own purposes, a corporation may assign an officer’s title to an employee, either as an honorific reward or to enable the employee to perform specified tasks on the corporation’s behalf. To the employee so designated, being named an “officer” may appear to be internally meaningful and to confer rights as against the corporation.

The full article is available here.

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