A corporate officer is permitted to engage in external business opportunities without pre-approval from the board of directors, per the following stipulations. An officer may continue pursuing opportunities presented prior to his/her position with this organization with no foreseeable conflict of interest. Opportunities presented to him/her outside of his officer capacity, that do not fall within the same industry and would not cause a foreseeable conflict of interest.
Board pre-approval is required under the following circumstances. Opportunities presented to the officer due to his position and are within the same industry as this organization. Any opportunity with a foreseeable conflict of interest regardless of how it was presented to the officer. The officer must first present it to the board per the doctrine of corporate opportunity. The board has the option to accept the opportunity, reject it on the officer’s and the organization’s behalf, or permit the officer to usurp the opportunity.
In the event an officer usurps an opportunity that requires board pre-approval and he/she fails to present it, the officer will be terminated. If the board approves an opportunity with a detrimental conflict of interest, shareholders will have the ability to bring a derivative suit against the board. If an officer’s opportunity that did not require board pre-approval results in damage, the board must examine if the opportunity had foreseeable conflict of interest and determine penalization if necessary.
To: Board of Directors
From: Alyssa Blake
Date: March 10, 2018
RE: Moonlighting Policy
Corporate officers’ lives, like many individuals, do not solely revolve around the organization they are employed by. It is understood that there are a multitude of opportunities that can be presented to them inside and outside their capacity as an officer. An officer should not be forced to refrain from taking advantage of them because of their position with this organization. They are sought out and hired because of their professional reach and the opportunities they can bring to the table.
The policy allows for corporate officers to continue pursuing opportunities presented before their hiring because it is unreasonable to bar them from doing so; especially if the opportunity fulfills a purpose his/her position cannot. Demanding officers to sully affiliations established prior to their employment is selfish and does not benefit the organization in anyway. These pre-established affiliations may become beneficial in the future.
An officer should be able to discern between an acceptable opportunity and one with a blatant conflict of interest. He/she should be able to reasonably foresee whether a conflict of interest is present or the probability of one arising. The officer does have the agency to present the opportunity to the board for further review or insight, even if it does not have a foreseeable conflict of interest. It is better to second guess and be certain than to not be certain at all. When opportunities are presented outside of their capacity as an officer, it is not this organization’s burden to police their external affairs. An officer’s associations outside of this industry should not be subject to our policies and procedures unless it directly affects the organization. This organization should not have the ability to control an officer’s every encounter that is not related to their position as an officer.
The board has the authority to step in when the opportunity poses a conflict of interest due to the officer’s position. It would be irresponsible for the board to take a backseat on external affairs if and when they directly affect the organization. The officer should not be able to violate his/her duty of loyalty and duty of care. By doing so, the officer would have unlimited power which is a disservice to the organization. The board also must maintain a duty of loyalty and care to the shareholders. Allowing an officer unlimited, unrestricted power breaches those duties.
The policy requires the officer to present all opportunities with a conflict of interest to the board because it is highly probable that the organization can benefit from it. It is also a possibility that the organization can be put at a disadvantage if the officer takes the opportunity for his/herself. The board manages the management of this organization. They are accountable for the actions of officers that are in relation to this organizations.
There are severe consequences for both the officers and the board if they fail to comply with this policy. It is a part of their employment agreement and it remains binding until resignation or termination. Officers can face scrutiny from the board, while the board can face scrutiny from shareholders. There is zero tolerance for noncompliance with this policy. Termination is a suitable price to pay because violating the policy highlights an officer’s character and professionalism. The policy does not aim to deter officers from usurping opportunities. Its purpose is to remind the officer he/she is an agent of this organization and his/her actions will have a lasting effect.
David G. Epstein et al., Business Structures, 3d ed., pg. 233-254, 260-308