What does fiduciary duty mean? The term fiduciary refers to someone who manages someone else’s money or property. As a fiduciary, you are required to manage the assets for the benefit of the other body – not for your use.
What does fiduciary duty mean?
Fiduciaries are individuals who must put their clients’ interests ahead of their own. Their clients are called beneficiaries or principals.
A board member’s fiduciary responsibility is to act in the best interests of their company and shareholders.
Having a fiduciary duty is an important responsibility. Damages could be awarded to beneficiaries if a fiduciary fails to fulfil their duty, and this is called a breach of fiduciary duty.
The fiduciary duties of company directors
The primary fiduciary duties of company directors are set out in the various companies acts of different states, and most are the same.
There is a requirement for directors to act in good faith, act honestly and responsibly, and according to the company’s constitution.
Directors and board members should disclose any potential conflicts of interest. They should not use company information or property for anyone else’s benefit unless permitted to do so by the company’s constitution.
Who should be bound by such duties?
There can be a lack of focus on executive committees where leaders juggle too many priorities, resulting in high attrition rates or poor financial performance. So, one role of the executive committee would be to choose a limited set of preferences to focus on and ensure that they are aligned on these core priorities. They must monitor the external environment for threats and opportunities, communicate the vision and strategy to the board and executive, motivate the workforce, and build solid and accountable teams.
The committee should choose which priorities should be focused on at their level and which can be delegated. They should consider the organisation’s mission, vision, and values and address emerging issues and crises. An executive committee can be a minor team that can get together at short notice and make decisions on behalf of the entire board. Acting as a kind of steering committee, the executive team may prioritise the issues the whole board should address.
A director’s duties
- A director should act for the purpose of which they were appointed and should not exceed their remit.
- They may not obtain a secret profit from their position and must account for any benefit received.
- They must provide a certain standard of skill and care in their dealings.
- The director must make it clear to third parties that they are acting as an agent of the company.
For many, such duties will be straightforward. However, for some directors, who are, for example, also shareholders at the same time, further clarification may be needed. Particularly in times of high pressure in the business, it is vital to ensure such duties and obligations are being followed and that all directors are compliant.
Duties concerning stakeholders
Avoiding the disclosure of sensitive company information is crucial, but directors must cover many duties and responsibilities when dealing with different stakeholders.
What are the benefits of upholding these duties?
By upholding these principal fiduciary duties, the directors reflect a relationship of trust between the company and its stakeholders.
When making decisions, a director should consider the long term consequences for the company and its reputation, the potential impact on employees, suppliers, customers, and the local community, and they should ensure that they are treating all shareholders with equal consideration, whether they hold a small or large amount of shares.
All potential conflicts of interest must be disclosed. It is still possible the conflict may be approved according to the company’s constitution, so long as it is adequately revealed. Likewise, any special interests should be declared before engaging in transactions or arrangements.
Where there has been loss or damage to the company or any of its stakeholders, they can personally take action against a director. A company can also pursue any directors who have failed in such duties. The director can be removed from office, and in some situations, shareholders can take individual litigation proceedings. The director can be pursued through the courts and suffer bankruptcy or loss of property.
In summary, the fiduciary duties of company directors are to:
- act in good faith
- act honestly and responsibly
- act under the company’s constitution
- not use the company’s information, property, or any opportunities regarding the company for their own or anyone else’s benefit, unless permitted by the company
Any conflict between directors duties to the company and their other interests must be avoided and should act in the interests of all stakeholders, taking appropriate care.