Legal Obligations of Directors

Legal Obligations of Directors

Corporate Governance: The Jack Wright Series #2

The Jack Wright Series #2 case study is all about the legal role and obligations of directors regarding corporate governance. The case study highlights various challenges that board of directors faces while in office as identified in this paper. A discussion of the considerations in the selection process is helpful as it identifies ways of alleviating the challenges so that board members can work effectively.

Boards of directors have been facing increased scrutiny for regulators and shareholders over the past few years. This trend has been properly demonstrated throughout the Jack Wright Series #2 case. This case is all about how a company’s board weighs itself and conducts due diligence in the process of inviting and narrowing the list of desirable candidates to join the board (DeKluyver, 2012). Wright has been invited to join the Mega’s board of directors. Though this proposal looks like a prosperous opportunity for all participants, Wright’s decision to join the board might be setting him up for possible failure. The case raises eight major concerns:

  • Some of the board members, eight, to be precise, have served for over 14 years
  • Wright must make a $100,000 investment in Mega stock within the next two years (Marquis and Villa, 2012).
  • The stock prices are declining
  • The company’s defined benefit pension program has been underfunded
  • Out of 11 subsidiaries, only four of them are growing
  • The CEO of Mega holds 40% of the company’s outstanding stock (Gregory and Austin, 2014).
  • Conflicting interests with Dryden and
  • Lack of a proper strategy occasioned by conflicting subsidiary interests

All of the above listed issues are very significant to the company. As it stands, some of the board members have been serving on the board for over 14 years. Looking at Mega’s recent financial reports, this is a minus rather than a plus because the board has not facilitated the much-needed change in the management structure to address the dwindling stock prices and sales (DeKluyver, 2012). It seems the current board members are comfortable with the present business operations and are not interested in making necessary changes to revive both stock price and sales. Since Wright becomes part of the board, he might not achieve anything or make a difference since most of the board members would side with the goals and ideas of a newcomer.

According to the law, one area of directors’ duties falls under the sub-heading of fiduciary duties (Gregory and Austin, 2014). In its simplest terms, this entails the requirement that board directors must act bona fides in respect of the institution. However, in Jack Wright Series #2 case, we have learned that the wife of the founding directors made a major purchase of the bank’s stock via a privately negotiated transaction. In the banking industry, insider purchase of equity is not allowed. Neither the counsel nor the board members including Jack, the chair of the Governance and Nominations Committee were aware of this purchase. This sets out some of the instances in which boards are in danger of breaching this specific duty. Board members should not breach the duty to act bona fides even when authorized by shareholders or through privately negotiated transactions.

In this case study, three major issues hamper the board members’ ability to discharge their roles effectively. The first is the issue of directors’ credibility (DeKluyver, 2012). The committee felt that the director is an honest individual and he could not commit an improper act. According to the committee, Jack’s poor judgment about the transaction can be easily explained by his inexperience in operating a public entity or by embarrassment when he discovered the transaction. However, the committee lacked any proof of intentional wrongdoing. The next issue is the impact of any actions on the bank (Gregory and Austin, 2014). The director is a well-known individual, and any punishment against him would negatively affect the bank’. Such a move would even divide the community since he has many friends in the community. In such a situation, nothing can be gained and the risk of potential damage if the director were to be sent packing from the board. The third issue is that the stockholders have been harmed and if they discover, then, they would want an explanation for why the board did not take any action (Gregory and Austin, 2014). In essence, this implies the board must ensure that the problem remains confidential because they took no action. This makes us wonder whether the board’s actions were ethical as the counsel legally advised them.

Certainly, the selection of board members is a critical step to achieving the goals of board effectiveness and good governance (DeKluyver, 2012). This selection must be based on certain considerations such as diversity, experience and a mix of skills. The first determining consideration in board member selection is shareholder influence. In Jack Wright Series #2 case, the shareholders and the board failed to find the right mix of diversity, skills, and experience. Instead, some of the board members have been serving on the board for over 14 years (Marquis and Villa, 2012). Moreover, the organizers formerly constituted themselves as a board of directors and started to establish their committee structures (Marquis & Villa, 2012).  There were no official processes followed in making high ranking appointments. For instance, the board chair asked Jack to head the Governance and Nominations Committee. Though Jack already knew that he was at the moment facing an unexpected and difficult issue regarding the Mega appointment, he still went ahead and accepted the new assignment graciously and seriously. Banking is a highly regulated industry and effective governance is absolutely critical because it has a direct bearing on the financial success of the institution (DeKluyver, 2012). In this view, renewing the company’s board forms a cornerstone in its life. As such, the shareholders hold the duty to not only monitor the board’s performance but also to select a strong board. In this case study, shareholders’ influence, and rights are prominent because the company has controlled share ownership (Marquis and Villa, 2012). Further, the members of the board must be selected based on the general interests of the shareholders, independent, and  serving in executive positions.

The company tends to hold board members for as long as 14 years without making any new board recruitments. The company must understand that large boards of directors offer a diversity of views and experience. Nevertheless, if many people sit on the board, it may interfere with effective decision-making. The company should weigh such considerations based on the current circumstances before making any board member selection (DeKluyver, 2012).

Board members are never paid for their contribution to the business. However, the demands imposed on them are often more grueling compared to those made on paid company executives. Hence, it is important to select board members who demonstrate a greater degree of commitment to the organization, its values, and goals (Gregory and Austin, 2014). Since their commitment to the company is important, it is commendable to see donors, former employees and other representatives from different stakeholder groups on the current board of directors.

Overall, the board carries all the practical and ethical demands of the corporate board of any company. For this reason, the company should increasingly pursue individuals with corporate experience. However, some challenges involved in joining a board include personal, cultural, and educational dimensions, which are likely to come into play. Companies should strive to resolve such issues so that the members of the board can discharge their roles effectively.


DeKluyver, C. (2012). Corporate Governance: Chapter 11 Epilogue: The Future of Corporate Governance, pp. 185-200.

Gregory, H. & Austin, S. (2014). Corporate Governance Issues for 2015

Marquis, C. & Villa, L. (2012). Case Study: Managing Stakeholders with Corporate Social Responsibility. Boston, MA: Harvard Business Publishing.

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