If a business is run by a boarf of directors and a board member is suspected of stealing money from the business, can the other board members be held accountable if they do not report it?

Can the employees?

Asked on March 13, 2012 under Business Law, Kentucky

Answers:

Kenneth Avila / Kenneth Avila, Patent Attorney

Answered 8 years ago | Contributor

A director has two duties to the entity that he/she manages - duty of due care and duty of loyalty. Normally the entity is a corporation but there are other types of entities such as non-profits and LLCs.  I will explain the duties in more detail later but these duties are imposed on each director and officer of the business entity, but not on employees that operate below an officer.  How can you separate the officers from employees?  Normally a board of directors appoints officers and officers hire employees.  Although there are exceptions to this simple test it should provide you with a simple guideline.  Now that you know that the duties only applies to directors and officers let me go over the two duties.

Duty of Due Care Defined:  Officers and Directors owe a fiduciary duty to the corporation and must discharge their duties with the same degree of diligence, care, and skill which the ordinary prudent person would exercise in the management of his own affairs.

Here the duty of due care applies because the individual is a director.  So this Director must conduct his affairs with the entity with the same degree of diligence, care, and skill which the ordinary prudent person would exercise in the management of his own affairs.  Here the Director is suspected of stealing money from the entity and if that was the case then the Director would violate his duty of due care to the entity.

This duty would also applies to officers and other directors as well.  If the officers and other directors knew of the Director’s actions and did nothing about it would they be discharging their duties with the same degree of diligence, care, and skill which the ordinary prudent person would exercise in the management of his own affairs?  If these facts are true then the answer would be no and they have breached their duty of due care.

Duty of Loyalty Defined:  Officers and directors are held to a fiduciary duty of loyalty in all of their dealings with the entity so as to promote the interests of the entity without regard for personal gain.

Here the duty of loyalty applies because the individual is a director.  So this individual must conduct his affairs with the entity so as to promote the interests of the entity without regard for personal gain.  Here the director is suspected of stealing money from the entity and if that was the case then the director would violate his duty of loyalty to the entity.


This duty would also applies to officers and other directors as well.  If the officers and other directors knew of the Director’s actions and did nothing about it would their dealings with the entity promote the interests of the entity without regard for personal gain?  If these facts are true then the answer would be no and they have breached their duty of loyalty.

Summary

In conclusion, if the facts as you presented were true, the Director breached his/her duties to the entity and so did the officers and other directors if they knew of the Director’s actions and did nothing about it.  

A couple of comments here.  The Director’s actions, if true, could also be the criminal act of embezzlement and the police should be notified.  Finally the act of stealing by a director many times is not black and white.  For example the Director could have done some work for the entity from which he/she expected to receive payment or that the board agreed to provide compensation to the Director.  I strongly suggest that you meet with an attorney to discuss all of the facts of this matter as I have only given you general guidelines here.

I hope that I was of assistance.

FreeAdvice Contributing Attorney / FreeAdvice Contributing Attorney

Answered 8 years ago | Contributor

It is entirely possible that members of the board of directors who suspect that an employee (fellow board member) is stealing money from the business could be held accountable for the loss if they do not take action concerning their suspicions and place impediments in place to prevent the possible theft of money.

Such knowledge and inaction is called "negligence".

The employees cannot be held accountable for any business loss by theft if they are not aware of it. I suggest that if you suspect that a board member is stealing from your place of employment you meet with your supervisor about the situation and contact law enforcement about it.


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