This section is from the book "Business Finance", by William Henry Lough. Also available from Amazon: Business Finance, A Practical Study of Financial Management in Private Business Concerns.
A more ingenious and more insidious form of exploitation for the advantage of officers consists in diverting profitable business from the corporation which the officers are serving to another corporation in which their personal interests are larger.
The question as to when an officer is entitled to use for his personal benefit knowledge that comes to him in the performance of his duties and when he is under obligation to use it exclusively for the benefit of the corporation, is often puzzling. For example, the manager of a manufacturing concern has had brought to his attention a new device which is likely to prove highly profitable. The information comes to him as an individual, not as an officer. Is he entitled to organize a new company and to become personally interested in the manufacture of the device? Or is he under obligation to turn over the information he has secured to his company? As a practical matter, probably few would object if the officer, under such circumstances, were to drop his former connection and devote himself to the new enterprise.
This leads, however, to the next question: whether it would be proper for the officer to become interested as a stockholder and director in the new enterprise without dropping his connection as an officer. If it is granted that he may properly do so, can any objection be raised to his permitting the company which manufactures the new device to do business with the company of which he is an officer? And, if we grant that the officer may proceed to that extent, can objection be raised to his actively favoring the use of the new device by the company of which he is an officer?
* Daggett's "Railroad Reorganization," pp. 223, 224.
It will be seen that the honest and honorable course in such matters is not always clear, and men whose ideals of business honor are hazy often fail to keep on the right side of the line. A director of a corporation should regard himself and act as a trustee for the stockholders he represents, and their interests should come before his own.