What does fiduciary duty mean?

What does fiduciary duty mean?

The basic premise is that fiduciary duty is the collection of responsibilities that come with managing someone else’s property on their behalf. For board members, fiduciary responsibility takes on a unique meaning that is fundamental to the mechanics of corporate governance.

Fiduciary duty is quite a simple concept. It means being bound to put someone else’s interests ahead of your own.

Wherever it applies, the person making the decisions is called the fiduciary, and the person on whose behalf the decision is being made is called the beneficiary, principal or client.

In corporate governance, the fiduciaries are the board members, and the clients are the shareholders. If the company is not publicly traded and thus doesn’t have shareholders, then the clients are whoever owns it, or whoever is a key stakeholder (i.e. investors for private companies/start-ups, families for family-owned companies, the government for state-run companies).

As a board member, your fiduciary responsibility is to act in the best interests of the company and the shareholders you serve.

The primary fiduciary duties of company directors are set out in the various acts governing corporate regulation in different states and countries. Although written independently, they often boil down to the same conclusion as far as fiduciary duty is concerned.

The conclusion is that fiduciary duty carries a set of core “sub-duties” – each one as important as the others:

1. The duty of care: Ensuring you approach boardroom decision-making with the same caution, diligence and responsibility as you would decisions that affect your personal life.
2. The duty of loyalty: Ensuring you make company decisions in the best interest of that company, and never in your own best interests.
3. The duty of obedience: Ensuring you and the company you work with adhere to its own mission statement, code of conduct, as well as the corporate laws of the land you work in.

Yes. Fiduciary duty is a concept that is often laid out in detail in corporate law, no matter what country or region you’re in.

Therefore, if you breach fiduciary duty, you will likely face some kind of legal penalty. The size and scope of such penalties will vary depending on the nature of the breach (for example, deliberate wrongdoing will likely earn you a tougher punishment than a breach found to be due to lax controls). However, common ramifications include:

• Financial penalties
• Exclusion from your current board role and even from future board opportunities that may arise
• Reputational penalties from journalistic investigations to industry-wide knowledge of your actions (or inaction) while in a board role.

While fiduciary can have an endless list of meanings depending on individual situations, here are ten common ways the concept will impact your work on a board:

1. You must always disclose any personal or familial interests related to an upcoming corporate decision and remove yourself from the decision-making process if they cause a conflict.
2. You must never let information acquired through internal board meetings benefit your personal business dealings outside the company.
3. You must always prepare for board meetings, including reading and understanding your board packs, asking questions, and getting to the bottom of anything that doesn’t make sense.
4. You must never “rubber-stamp” a decision made by the CEO and management without examining it first.
5. You must never let your own morals trump the company’s established mission statement and bylaws when making decisions (while this is hard for a lot of people, moral conflicts are often a sign that your values don’t align with the company’s. Instances like this should always be openly addressed).
6. You must follow the right procedures if you uncover flaws or legal wrongdoing within the board or executive team.
7. You must voice your dissent in the proper manner if you don’t agree with a decision the board is taking.
8. You must never accept unapproved gifts, perks or other benefits in any way that’s designed to influence your decision-making.
9. You must treat all boardroom discussions as confidential unless you have official approval to do otherwise.
10. You must treat every financial transaction with equal importance, and ensure it is for the benefit of the company.

• Understanding Fiduciary Duty: Core Principles and Responsibilities in Corporate Governance
• Diploma in Corporate Governance
• Board of Directors: Fiduciary Duties and Balancing Risk, Reputation, and Long-Term Value
• Why boards end up rubber-stamping decisions