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The Contrast Between Accountability and Liability

The ownership does not define the law, and the law does not define the wishes of the ownership.

By John Carver October 15, 2011
This article was originally published in the March-April 2005 issue of Board Leadership,

Incorporated and statue-based organizations and their boards are creatures of law and as such owe an allegiance to the law. To be sure, the fidelity of any given organization should be primarily to its ownership-whether a legal ownership, as in the case of an equity corporation’s shareholders, or a “moral” ownership, as in the case of a community hospital’s community or a public school system’s public. But just as my personal property is mine alone, it can only be used within the limits of public policy or law. So it is that a governing board of a school system or of an auto manufacturer must avoid unlawfulness while serving the wishes of its ownership. The ownership does not define the law, and the law does not define the wishes of the ownership.

Legal counsel is an invaluable resource to a governing board, both to help it avoid unlawfulness and to advise it concerning liability. Except in rare cases of intentional civil disobedience, it is generally assumed that law is not to be violated. But it is not similarly to be assumed that liability is to be avoided. In fact, liability is necessarily risked in the conduct of any enterprise. To avoid liability is to cease to operate. Ceasing to operate would, in most cases, be failing in accountability to the ownership.

It is the responsibility of legal counsel to detect sources of liability and to argue for minimal liability. It is the board’s job to understand legal counsel’s opinion, thereby reaping the benefit of professional knowledge. But it is not the board’s job to accept legal counsel’s opinion of how much liability is too much liability, how much risk is too much risk, or how much organizational achievement it should sacrifice to avoid various types and levels of risk. The board is accountable to the ownership for achieving its purpose for existence, not for minimizing its liability. This is not to say liability is no concern at all but that it must be prudently assumed. Legal counsel is and should be an advocate for reduced risk, but the board has a larger charge than counsel. The primary concern of a responsible board must be its accountability, not its liability.

Proper leadership requires that the board accept and even accentuate its accountability for organizational performance, circumstances, activities, and status. To cloud that clarity in the name of reducing liability is to cheat the ownership. Does it increase liability to instruct a school system to produce better results for children or a municipal government to create a level of safety for citizens? If so, does that then mean that the governing body should avoid stating boldly and clearly what it expects its subordinates to achieve? In that case, why have the board?

Whereas assuming liabilities that promise no payoff in performance is clearly imprudent, it is simply irresponsible to shrink from liability in the course of pursuing potential gains. It is wise for the board to learn the nature of its risks, but it is its moral obligation to maximize the performance of its organization.