Board Membership 101: Fiduciary Duties

Board Membership 101: Fiduciary Duties

The foundation of a board member’s service is their fiduciary duty to shareholders. Before we jump into what kinds of duties are involved, let’s look more closely at the word “fiduciary:”

(adjective): involving trust, especially with regard to the relationship between a trustee and a beneficiary.

It’s a word that we hear a lot in the corporate world, but its basic meaning often gets overlooked. Simply put, the word fiduciary is all about trust, and that’s exactly what’s required of directors under corporate governance law.

The Three Types of Fiduciary Duties:

  1. The Duty of Care

According to Investopedia, the duty of care “applies to the way the board makes decisions that affect the future of the business. The board has the duty to fully investigate all possible decisions and how they may impact the business. Because a company’s board of directors is tasked with making very important decisions, it is necessary that each member takes each issue seriously and adequately considers all options.”

Directors and officers meet their duty of care if they act:

  • In good faith
  • With the care of a reasonable person in a like position
  • With reasonable belief their decisions are in the best interest of the corporation
  1. The Duty of Loyality

This fiduciary duty is all about ensuring that board members never allow any outside interests or personal affiliations or allegiances to interfere with their responsibility to shareholders. In other words, “Board members must refrain from personal or professional dealings that put their own self-interest or that of another person or business above the interest of the company.”

A corporate director can breach this duty of loyalty by:

  • Gaining secret profit belonging to the corporation
  • Competing with the corporation
  • Seizing corporate opportunity
  • Self-dealing with the corporation 
  1. The Duty of Good Faith

This duty insists that after board members have explored all of the options for a particular business decision, they must make the one that they believe best serves the interests of shareholders. According to Cornell Law School, “A violation of the duty of good faith may include an intentional derelict in the usual duties of a director or officer, intentionally acting for a purpose other than the benefit of the corporation, or intentionally violating the law.”

Business Judgment Rule

When a director is alleged to be in breach of one of these duties, the courts apply the “business judgment rule, which assumes a board of directors acts in the business’ best interest, unless proven otherwise.” The courts understand that there is an inherent risk in all business decision-making.

For that reason, a plaintiff who claims a board or board member has breached their fiduciary duties, must prove that they were neglectful in their decision making or purposefully failed to make the best choice for the company (for personal gain or for some other reason which would denote a breach of loyalty).

If a director chose to follow a path that they truly believed was the best option for the business, the law protects them from liability.

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Posted in Board Membership, Boardroom Ethics, General Board Topics and tagged , , , .