Almost every business is set up as a corporate entity. Why? Because a corporate entity provides executives a “corporate shield” from personal liability. This shield saves executives from liability for things that go wrong in a business. But just how good is that shield? The answer is not what you would expect.
Most executives assume they are not personally liable for the wrongs of the company. They believe their corporate office protects them. They assume it will be the company, and not them, who takes the hit. However, that assumption can be very wrong.
First of all, we all are personally liable for our own acts or omissions that cause injury. If you run into someone while on company business, you will be liable for the damages. Likewise, if you intentionally engage in a business fraud, you will be responsible for the
harmful consequences. No corporate shield can protect you from your negligence
or willful act.
But that’s not the end of the story. If you control the affairs of the company, you can also be held personally liable for what someone else does. This arises from your authority to control. For example, if you fail to properly instruct an employee who works under you, you could be held liable for any harm caused by that employee’s negligence. The same
result would apply if you hire someone unqualified for a job or someone who has a shady history. You can even be held liable when an employee fails to follow policies and procedures that you designed to avoid liability.
Such extended liability is based on the “universal duty of care” standard which means everyone owes everybody else a duty to act carefully. This rule applies to everybody, even executives. No matter who you are, or what you do, or why you do it — you must act carefully. No one is exempted.
So what does this all mean to the executive? Simply stated, the executive must exercise “reasonable care” in managing the affairs of the company or suffer the consequences. This applies to all aspects of a business operation: hiring, training, instructing, supervising and firing. If an executive fails to exercise reasonable care, he or she is at
Here are some tips to avoid personal liability:
- Do a thorough background check on each applicant you employ. Avoid employing people who have a history of being untrustworthy or careless.
- Hire applicants who are well qualified for the job. If they are not qualified, make sure they get qualified.Provide clear and meaningful instructions to employees. Make sure they understand those instructions and carry them out.
- Provide continual supervision to ensure employees are doing their jobs correctly. If you delegate this responsibility, make sure you delegate to someone who is qualified and trustworthy.
- Adopt and enforce written policies and procedures that direct employees in the performance of their jobs.
- Conduct periodic employee sessions to review policies and procedures. Make sure employees understand what they mean and what happens if they are not followed.
- Take immediate disciplinary action against any employee who fails to comply. In the event of a serious infraction, terminate the worker.
- Above all else, make sure the company has plenty of insurance that covers you. The more, the better. When all is said and done, this is the very best protection you can have. It’s the only thing that will keep the wolf away from your door.
Printed in Four Rivers Business Journal (Paducah Sun), September, 2008