Most states recognize that corporate directors and upper-level officers owe the corporation the duties of care, loyalty, and obedience. The duty to act in good faith has emerged
in some jurisdictions as an equally important fiduciary duty imposed upon directors and officers. Historically, directors and officers frequently were exonerated of personal liability for
business decisions because of courts' long-standing deference to the business decision under the business-judgment rule or because the transaction was deemed fair to the corporation and its
shareholders overall. In the wake of recent corporate scandals, however, officers and directors are under ever-increasing scrutiny by shareholders, the courts, state governments, and the
federal government. Many corporate commentators bemoan the fact that conduct once protected under the business judgment rule may not be viewed with such deference in the future.
Congress responded to the corporate scandals by passing the Sarbanes-Oxley Act of 2002 (Act). Generally, the Act covers any public company (domestic and foreign) that registers securities with the Securities Exchange Commission or that is required to file reports under the Exchange Act. Federal securities laws that were in place prior to passage of the Act prohibited and criminalized securities fraud and other acts that harmed investors or eroded public confidence in the securities markets. For example, if a director or officer violated the securities laws, a court could punish a director or officer by barring them from serving as an executive of any other public company in the future. However, the bar could be imposed only upon a showing that the officer or director was "substantially unfit" to serve.
Under the Act, a director or officer is now subject to a bar on future service as a public company executive "if that person's conduct demonstrates 'unfitness' to serve." This lower standard evidences the legislative intent that corporate executives who violate securities laws will not be allowed to profit from their wrongdoing or to harm other investors in the future. A court has discretion to impose conditions on the bar and to fix the length of the bar. As was the case before passage of the Act, the bar may be permanent. Additionally, the Securities and Exchange Commission (SEC) is now authorized in its administrative proceedings to bar a securities violator from acting as a director or officer when that person demonstrates "unfitness" to serve as such. Prior to passage of the Act, the SEC had to obtain a court order before the bar could be imposed.
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