Role of Board of Directors. CPA Exam REG

In this video, I explain the role of board of directors as covered on the CPA exam.
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he roles and responsibilities of corporate directors encompass a range of duties and authority, primarily focused on guiding and overseeing the company's management and operations. Key aspects include:

Election, Removal, and Supervision of Officers: Directors are responsible for choosing and overseeing company officers. They evaluate officers' performance and have the authority to remove them, with or without specific cause.

Bylaws and Management Compensation: Directors play a crucial role in shaping the corporation's bylaws (including their creation, modification, or annulment) and determining the compensation for management.

Corporate Structure Changes: They are also instrumental in initiating significant alterations to the company’s structure.

Regarding distributions:

Declaration of Distributions: The board holds exclusive power to declare shareholder distributions, such as dividends, in various forms like cash, property, or shares. Shareholders themselves cannot enforce these distributions.
Liability in Unlawful Distributions: If a distribution violates legal boundaries (e.g., when the company is insolvent), directors might be personally accountable for the excess amount over what would have been legally permissible. However, directors can invoke their right to rely on certain defenses and can seek reimbursement from shareholders who knowingly accepted unlawful distributions.
In terms of fiduciary duties and the Business Judgment Rule:

Fiduciary Responsibilities: As fiduciaries, directors must prioritize the corporation's best interests.
Business Judgment Rule: This principle protects directors who act in good faith, believing their decisions serve the company's best interests, and exercise the care an ordinarily prudent person would. It does not hold them liable for the company's overall success, but rather for their conduct and decision-making process.
Liability for Negligence: Directors could face liability for negligent acts or omissions, like failing to secure adequate insurance or hiring unsuitable personnel without proper vetting.
In summary, corporate directors have substantial authority and responsibility, balanced by legal and ethical obligations to act in the corporation's best interest, manage risks responsibly, and ensure compliance with laws and corporate governance standards.


The concepts of "Right to Rely," "Duty of Loyalty," and "Indemnification" are crucial in understanding the roles and responsibilities of corporate directors:

Right to Rely
Basis of Reliance: Directors are entitled to trust information, opinions, reports, or statements, including financial statements, when these are prepared by:
Internal Sources: Officers, employees, or a board committee that the director believes to be reliable and competent.
External Professionals: Legal counsel, accountants, or other experts in matters falling within their professional expertise.
Duty of Loyalty
Primary Obligation: Directors must prioritize the corporation's interests, embodying the duty of loyalty.

Managing Conflicts of Interest: While directors are barred from competing against the corporation, they are not necessarily prohibited from engaging in transactions with it. However, such transactions must meet specific criteria:

Full Disclosure and Approval: The transaction must be fully disclosed and approved by a majority of disinterested directors or shareholders.
Fairness: The transaction should be fair and reasonable to the corporation.
Setting Director Compensation: The board has the authority to determine compensation for its directors.

Indemnification
Protection Against Legal Actions: Corporations can indemnify directors for expenses incurred in lawsuits related to their role as directors. This indemnification can cover:
Legal Expenses: Costs related to defending against lawsuits.
Judgments: Any judgment costs, except in cases of shareholder derivative suits.
Simplified Explanation
Right to Rely: Directors can trust the information provided by competent internal teams or external experts, ensuring they make informed decisions without needing to independently verify every detail.

Duty of Loyalty: Directors should always act with the corporation's best interests in mind. They must avoid conflicts of interest and ensure that any transactions involving them and the corporation are transparent, approved by uninvolved parties, and fair to the corporation.

Indemnification: To encourage directors to make bold but responsible decisions without fear of personal financial loss, corporations can cover their legal costs and judgements from lawsuits related to their corporate roles, except in suits brought by shareholders on behalf of the corporation.



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