As of now, we all have learned how D&O insurance policies are quite important in preserving the executive and managerial health of a company. We’ve also learned on what instances their policies may be invoked and on when they can not.
However, what has yet to be discussed in detail are the recipients of these policies themselves: the officers and directors. If you’ve taken notice on the name of the policy, you’ll get the idea that these two positions are distinct since all D&O policies do not use a single catch-all term to refer to either.
So, what is exactly the difference between an officer and director? How do people manage to get themselves into such positions? Just read on and find out.
What is a Director?
A director is simply any person elected into office to oversee the major decisions the company takes in its lifetime. Commonly, the work of a director involves framing policies meant to ensure better performance among employees whilst streamlining the different processes of the company. Also, they are responsible for creating, approving, and amending the different strategies that the company employs in its operations as well as relations to the public at large.
Aside from these, a director is responsible for other tasks including:
- Attending meetings with other directors
- Reviewing and approving annual budgets
- Recruiting new members to the Board of Directors and Determine who succeeds in the different executive and managerial positions of the company
- Building a strong presence for the company in the community through different corporate social responsibility drives.
Collectively, directors of a company form what is known as The Board of Directors. Also, directors can come in two distinct forms. An external director is a director who is not part of the company in paper but may provide technical assistance as well as unbiased advice to the company on certain matters. Think of them as something like consultants, only with more clout, influence, and responsibilities.
And then there’s the internal director. These are your typical directors whose main goal is to protect the interests of the shareholders and investors. Naturally, the intentions of these board members as well as their perspectives could differ which can lead to dissent and friction. However, it should be expected that the board eventually moves and acts as one when it comes to decision-making.
What’s an Officer?
An officer is basically an appointee to any of the topmost positions in a company. This includes the Chief Executive Officer or the President, the Chief Financial Officer or the Treasurer, the Secretary, and the Chief Operating Officer, among several others. If the directors act as the quasi-legislative branch of the company, then the officers act as the executive and judicial branch.
What that means is that they are primarily tasked with overseeing the entire operation of the company and ensuring that the guidelines and policies set by the directors are being met. They are primarily tasked with understanding the financial and human resources needed to operate the company efficiently and monitor every activity that affects either.
They are also responsible for conveying the concerns of the different departments to the directors. In fact, they can request for meetings with the directors in cases of emergency. They are also tasked with proposing the budget for the company as well as outlining the spending activities for the different apartments.
Aside from these, the officers are tasked with responsibilities that include:
- Hiring and firing department heads as well as employees
- Approving or canceling projects in case of overspending
- Speaking to the company management on behalf of the different departments
- Conduct risk assessments and conveying such to the directors before the latter finalises their decision
What’s the Difference Between them, Then?
Given that some companies tend to confuse one position from the other especially when defining their roles in the articles of incorporation, it is important to understand where these two differ. In fact, their differences are quite considerable even on a surface level perspective.
- Appointment/Election
Now, both directors and officers are positions achieved through appointment. However, where they differ greatly is in WHO decides such an appointment. For directors, they are appointed by the shareholders to serve on the board on behalf of the company. Usually, the election of directors occurs during regular general assemblies. However, that does not mean that directors can’t be replaced during their tenure in such a position. An emergency assembly might be called to discuss serious matters regarding the management of the company and the motion for a snap election of directors might be called in.
As for officers, on the other hand, they are appointed into such positions through the consensus of the board of directors. Of course, they have a fixed term of no less than a year or no more than 3 years depending on the company’s constitution and by-laws. Likewise, they may cut their tenures short under certain circumstances. Also, a person may never serve in the same position for more than three times.
- Existence
If we are to be quite simple about it, the position of a director exists only through the by-laws of the company. Simply put, the existence of the company’s juridical entity finally gives existence to the legal capacity of directors to act and make decisions on the company’s behalf. They may technically be “directors” before the company is incorporated but they can only function as one after the incorporation has occurred.
Officers, however, exist in spirit way before the corporation does as their positions are directly stipulated in the Corporation Code. Basically, anyone can fulfill the role of officers even without the directorial appointment. This is because there are inauguration paperwork that officers must prepare during the company’s incorporation process. However, they are only de facto officers at that point and must be replaced (or properly elected) once the company has been incorporated.
3, Liability
And here is the most crucial part as far as D&O policies are involved. Although the position of a director can be filled in by one person at a time, any decision they make is widely referred to in the more collective term. In short every company decision is a decision by the Board of Directors.
As far as liability is concerned, this means that every director is jointly liable for the decisions the other directors make. No single director can raise a mis-joinder (a legal term for being omitted from the official list of involved parties in a case) just because they dissented with the decision made by their peers. Also, a complaint directly filed to the juridical entity of the company is basically directed to the Board of Directors.
However, officers are simply agents of the corporation. As such, they may have the authority to act in an individual capacity but on behalf of the corporation. For instance, they can on their own bind the company to contracts or represent the company in official transactions.
This is where the concept of personal liability comes in. An officer can be held personally liable for damages arising from a decision they make. For instance, if a deal of theirs puts the company in a financially precarious situation, a creditor may personally have the officer charged by affixing their name on the complaint. Courts would allow this so as long as there are merits to the personal liability upon further investigation.
Also, this is where a lot of D&O insurance policies are going to be needed. Charges directed personally to agents in the company might not be covered by your general liability insurance which causes the defendant to personally pay for the clearing of their names during litigation.
Can a Person Hold Multiple Positions?
A common question in executive management is if a person can fill in two or three offices or be a director and officer simultaneously. The answer is in the affirmative. There is nothing in law that states that you can’t hold two positions at the same time. In fact, many directors also operate as officers in the same company especially if that company is relatively small.
What this only affects as far as personal liability is concerned is that it has to be determined under what office that erring director/officer committed the act in order for the case to be taken cognizance in the court. For instance, if a director operates in the capacity of a chief executive officer and one of their deals goes bad, the other party must state that that director committed the act serving as an executive officer. This way, the case would exclude the other directors not party to the deal and the proper D&O coverage could be sought by the company.
Do you think that officers and directors should share roles? What other distinctions do you think that these positions should have? Share your thoughts in the comments down below.
