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Weekly UpdatesIn addition to a president, vice president, secretary, and treasurer who serve on an electric cooperative's board of directors, many cooperatives have a chief executive officer, chief financial officer, and other officers. Usually, these other officers are not members of the board. They are "nondirector officers." A nondirector officer is an "officer," usually an employee, who does not serve on the board of directors. While directors owe a fiduciary duty, do these nondirector officers owe a fiduciary duty? If so, is the duty more extensive than the duty owed by directors? As discussed below, the answers are probably "yes" and "yes." Many nondirector officers of electric cooperatives, however, are unaware of this duty.
Historically, few courts or legal commentators addressed the fiduciary duty of nondirector officers. To the extent courts addressed the fiduciary duty of officers, the cases usually involved officers serving as directors also. In response to recent corporate misconduct, much has been written, legislated, and litigated regarding the fiduciary duty of directors. Very little, however, has addressed the fiduciary duty of nondirector officers. (1)
While educators and attorneys often remind directors of their fiduciary duty, they seldom remind nondirector officers. The fiduciary duty of nondirector officers, however, is an important part of, and a potential source for improving, corporate governance and avoiding corporate misconduct. Importantly, lawsuits alleging that nondirector officers violated their fiduciary duty will probably increase. Today, some legal commentators even suggest that attorneys are obligated to advise nondirector officers of their fiduciary duty. (2)
In performing their duties and responsibilities, nondirector officers of electric cooperatives should be educated about, and should remember, their fiduciary duty. In addition to loss of employment, demotion, or decreased compensation, neglecting or breaching this duty may result in personal liability.
Some electric cooperative employees may question the advantages and disadvantages of being a nondirector "officer." The advantages seem to be increased prestige, recognition, and responsibility; potentially increased indemnification (3) and liability insurance coverage; (4) increased compensation; and increased ability to act for and bind the cooperative. The disadvantages seem to be increased expectations and increased risk of personal liability.
While "agency law" is helpful in addressing the fiduciary duty owed by nondirector, employee officers of electric cooperatives, "corporate law" is probably more helpful. (5) To the extent it is not inconsistent with an electric cooperative act, general corporate law usually applies, directly or indirectly, to electric cooperatives. (6) General corporate law includes, among others, the American Bar Association's Model Business Corporation Act ("Model Act") and its Model Nonprofit Corporation Act ("Model Nonprofit Act"), the Fletcher Cyclopedia of the Law of Private Corporations ("Fletcher"), and the American Law Institute's Principles of Corporate Governance ("ALI Principles").
Definition of Nondirector Officer
Before addressing the fiduciary duty of a nondirector officer, it is important to define an "officer." While specific statutes or regulations define an officer for specific purposes, (7) corporate law is probably most helpful in defining an officer for fiduciary duty purposes.
Electric Cooperative Acts
Many electric cooperative acts state that: (1) a cooperative's officers shall consist of a president, vice president, secretary, and treasurer, each of whom is elected "by and from" the board of directors and (2) the board of directors may elect or appoint other officers it deems necessary or advisable and shall prescribe the powers and duties of these other officers.
Model Acts
As amended in 1999, the Model Act states that a corporation has the officers described in its bylaws, or appointed by its board of directors in accordance with its bylaws. Permitting a corporation to designate the officers it wants departs from earlier versions of the Model Act and many state corporation acts requiring certain officers. While it is "generally the responsibility of the board of directors to elect officers," the amended Model Act authorizes an officer to appoint other officers if authorized by the bylaws or the board of directors. (8)
Unless otherwise provided in the articles of incorporation or bylaws, the Model Nonprofit Act states that a nonprofit corporation must have a president, secretary, treasurer, and other officers appointed by the board of directors. Importantly, "The board shall appoint all corporate officers." (9) Patterned after the amended Model Act, a February 2006 proposed revised version of the Model Nonprofit Act states that a nonprofit corporation has the officers described in its articles of incorporation or bylaws, or appointed by its board of directors in accordance with its articles of incorporation and bylaws. Likewise, an officer may appoint other officers if authorized by the articles of incorporation, bylaws, or board of directors. (10)
Legal Commentary
According to Black's Law Dictionary, an officer holds an office of trust, authority, or command. A corporate officer is elected or appointed by the board of directors to manage a corporation's daily operations. (11)
According to Fletcher, an officer is usually charged with important managerial functions like administering and operating a company, recruiting key employees, and signing checks. Depending upon the services a "general manager" performs, he or she may or may not be an officer. An officer is more than a "mere" agent or employee. Generally, officers are specified in the articles of incorporation or bylaws, and appointed or elected by the board of directors. In determining whether an individual is an officer, courts consider the particular context and circumstances, and whether the individual has management authority. (12)
According to the ALI Principles, an officer means a corporation's: (1) chief executive, operating, financial, legal, and accounting officers; (2) chair of the board of directors, president, treasurer, and secretary; (3) vice-president or vice-chair who is in charge of a principal business unit, division, or function, like sales, administration, or finance, or who performs a major policymaking function for the business as a whole; and (4) any other individual designated as an officer, even if the individual does not have wide power. (13)
De Facto Officer
A "de facto" officer is not a "legal" officer, but is: (1) informally, irregularly, or unlawfully elected or appointed as a legal officer, or is formally, regularly, and lawfully elected or appointed as a legal officer, but is not eligible or qualified to be a legal officer and (2) continuously performs the duties and responsibilities of a legal officer. A de facto officer usually refers to a director, but may refer to a nondirector officer. There must be a legal "office" before there can be a de facto officer. While a de facto officer has the same general powers as a legal officer and usually binds the corporation with his or her acts and contracts, he or she may not have the same rights or protections as a legal officer. Importantly, a de facto officer has the same fiduciary duty, and is subject to the same liability, as a legal officer. (14)
Summary
In summary, general corporate law seems to define an "officer" as an individual: (1) appointed by the board of directors, or by another officer if authorized by the articles of incorporation, bylaws, or board of directors and (2) serving as a chief executive, operating, financial, legal, or accounting officer, being in charge of a principal business unit, or performing a major policymaking function. Determining whether an individual is an officer is based upon the specific facts and circumstances.
Because a de facto officer has much of the power and fiduciary duty, but little of the rights and protections, of a legal officer, an electric cooperative should avoid de facto officers. If a cooperative has nondirector, employee officers, then it should document its creation of the offices and its appointment of the officers. The cooperative's bylaws or board of directors should create each office or delegate to its chief executive officer the authority to create each office. Likewise, the cooperative's bylaws or board of directors should appoint each officer, or delegate to its chief executive officer the authority to appoint officers. In either case, the board may act or delegate through a policy or through an action recorded in its minutes.
Duty of Nondirector Officer
Among other things, the fiduciary duty of a nondirector officer involves a standard of conduct, reliance on others, and the business judgment rule.
Standard of Conduct
in general, an officer has a duty to act: (1) in good faith; (2) with the care that an ordinarily prudent person in a like position would reasonably exercise under similar circumstances; and (3) in a manner the officer reasonably believes to be in the corporation's best interest. This duty is similar to a director's duty and applies to nondirector officers. Compared with a non-employee director, an employee officer spends more time dealing with a corporation's business, is expected to be more familiar with the corporation's affairs, has a more extensive duty, and is subject to greater potential liability. (15)
A nondirector officer also has a duty to act loyally. Without certain disclosures, consents, authorizations, ratifications, and conditions, a nondirector officer has a duty not to: (1) acquire a material benefit from a third party, or take advantage of a corporate opportunity, in connection with transactions and actions taken on behalf of the corporation; (2) deal or transact with the corporation as, or on behalf of, an adverse or interested party; (3) compete with the corporation or act on behalf of, or assist, the corporation's competitors; or (4) use the corporation's property, or communicate the corporation's confidential information, for the officer's own purposes or pecuniary benefit, or those of a third party. (16) A nondirector officer also has a duty to obey the law and to make sure the corporation obeys the law. (17)
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