A shareholder’s interests are tied up in how the company is being run and managed. How? It is simple: the better managed a company is, the more success it often has, which means a shareholder’s stock in the company is often more valuable. Financial setbacks that cut into profits and success such as large fines against a company can be considered mismanagement. So when a company is being mismanaged, it not only hurts the company but a shareholder is certainly going to care, but can they bring a lawsuit?

In some cases, a derivative lawsuit is the path in which the shareholder can find relief. A derivative lawsuit is one in which the shareholder sues on behalf of the corporation. Often, these lawsuits name those who manage the company — executives and board members — as defendants. A recent judicial sanction cost one company $1.5 million plus the forfeiture of the possibility of a multi-million dollar damage award, and the shareholders were not pleased.

The company was Eaton Corp., and eleven directors were named in the derivative lawsuit filed by shareholders alleging that the directors should have known about in-house counsels’ improper conduct in a separate lawsuit. The separate lawsuit was on behalf of the company in a separate matter. It cost the company a decent sum to file the lawsuit, but it could have produced a significant damage award paid to Eaton Corp. The improper conduct not only caused the judicial sanction against the company, but it resulted in the dismissal and thus the forfeiture of any possible damage award.

Directors and officers have a duty to guard the best interests of a company, and a failure to correct improper actions of those employed by the company are a part of this duty. As seen in the separate lawsuit, failure to correct an individual’s actions can cost the company as a whole.

Source: cleveland.com, “Shareholders’ lawsuit against Eaton managers signals concern for companies,” Alison Grant, Oct. 18, 2012