Fiduciary duties for directors A comprehensive guide

If you are becoming a director for the first time, it’s useful to have an understanding of these duties. The exact nature of fiduciary responsibilities can vary by jurisdiction, and are normally defined in national corporate law.

In this guide, we look at the main categories of fiduciary duties for directors one by one, along with common scenarios and real-life examples.

What are fiduciary duties and why do they matter to directors?

Fiduciary duties enable companies to define the conduct of their directors. By upholding statutory duties, directors are demonstrating a relationship of loyalty and care to the company and its stakeholders. A breach of a director’s fiduciary duty could form the basis for allegations of wrongdoing against the director by the company.

As a director, you are required to place the interests of the company first – above your own personal interests. As a fiduciary, you must treat all shareholders equally, despite varying sizes of shares, and to not make any unauthorised profits. Directors are required to act honestly and to not place themselves within a situation where they are subject to a conflict of interest.

Duty of loyalty

This duty refers to always acting in the best interests of the company or the well-being of stakeholders. Directors need to assess whether there’s a conflict of interest in relation to a course of action and to remove themselves if this is the case.

Duty of care

This duty is the responsibility of the director to ensure they are informed enough to exercise sound judgment in the interests of the company, based on the assessment of available information. A duty of care aims to protect the company’s interests through considered options and sensible decision making.

Duty of obedience

A director must ensure a company’s operations comply with legal requirements and financial reporting regulations. They should ensure the company acts according to its internal policies and core principles, and directors should not exceed the powers defined for them in the constitutional framework of the company.

Duty of good faith

As a fiduciary, directors have a duty to act within the confines of existing laws to progress the interests of the company and not their own interests or those of other entities. This ensures no actions are taken outside of relevant legal constraints and boundaries.

Duty of prudence

This duty requires directors to use the highest degree of professional skill and diligence to make decisions. It helps to ensure matters are managed with a critical awareness of risk.

Duty of confidentiality

As a fiduciary, directors must maintain full confidentiality when it comes to their company. This includes not using any information for personal gain, either in written or spoken form.

Duty of disclosure

This duty relates to the disclosure of all relevant information that the company is required to provide to shareholders and other stakeholders.

Real-world examples and common scenarios

The following are common examples of a company director’s fiduciary duties:

• A breach in the duty of confidentiality could lead to a lack of trust, resulting in the end of a professional relationship. This type of breach can occur when confidential client information is divulged to a supplier, which is then made apparent to a client. It can also relate to confidential or copyrighted information being disclosed to a competitor.
• Breaches in the duty of disclosure and loyalty can occur when a director has more than one company interest. A course of action might be deemed as being affected by a conflict of interest and failure to disclose this could have legal consequences.
• Mistakes can be made when a director decides on a course of action without examining all relevant information available to them. In this example, the fiduciary duties of care and prudence might not have been followed.
• If a business opportunity is taken in the best interests of a director, instead of the company, this could be a breach of fiduciary duties. Directors must act responsibly and in good faith when considering commercial opportunities.

How to proactively manage potential challenges and fulfil your fiduciary duties effectively ?

As a fiduciary, a director’s duties need to be managed carefully, especially in terms of compliance and when handling conflicts. In any type of business, there will be challenges, so it’s important to know how to deal with these effectively. It’s recommended that directors gain an understanding of their legal responsibilities under each fiduciary duty. You must avoid making any unauthorised profits and declare transactions relating to special interests.

Fiduciary relationships need to be understood and evaluated before decisions are made or an action is taken. Always disclose any information that could be perceived as a conflict of interest. In some instances, the company might approve a conflict of interest if it’s been disclosed. This will depend on the constitution of the company, its values and mission.

Directors need to always act in the best interests of their company with the appropriate level of care. All shareholders must be treated equally, even if they only hold a small number of shares compared to those with larger company shares.

What happens if you break your fiduciary duty?

When one or more fiduciary duties have been broken, a director could face wide-ranging consequences. Previous decisions could be invalidated. If the company has suffered damage or a loss, legal action could be taken against the director responsible by the company. You might be removed from office or taken to court. There are some instances where shareholders could start litigation proceedings against a director.

If you have failed in your duties as a fiduciary, costly court proceedings could result in bankruptcy or a loss of property.

Conclusion

Fiduciary duties are the legal responsibilities of a director in relation to the best interests of the company. By acting honestly and for the purpose they have been appointed, a director can fulfil their fiduciary duties.

You should uphold company standards, maintain a level of care, act cautiously, ensure risk management and use professional skills accordingly. If you want to avoid a breach of your fiduciary duties, do not exceed your remit or gain secret profits from your role as a director.

Ethical leadership is essential for directors and for the benefit of the company you represent. For more information, please see the IoD Code of Conduct for Directors.