In most states, a corporation may loan money to an officer or director if the board of directors authorizes the loan and finds that it will "benefit" the corporation. According to Professor Jayne W. Barnard, however, this benefit requirement has proved to be an illusory standard. Barnard reviews existing law on the subject and surveys the executive lending practices of 152 publicly held corporations. She concludes that executive loan enabling statutes have failed to consider the risks involved in making such loans, such as illiquidity, inadequate collateralization, inclination to default, and volatility of the economy. As a result, current laws permit the diversion of corporate resources to nonproductive uses and encourage the overcompensation of certain executives.
1988 Wisconsin Law Review 237-291
Barnard, Jayne W., "Corporate Loans to Directors and Officers -- Every Business Now a Bank?" (1988). Faculty Publications. 323.