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What is the fiduciary duty of corporate board members?

Members of a corporate board of directors are fiduciaries with a duty to company shareholders. Generally, these duties encompass financial responsibilities but can also relate to fair employment practices, environmental concerns, and the corporation’s responsibilities to the community. The board of directors must manage corporate affairs in a manner that is in the best interest of the business and the shareholders. It is within their duty of care to guide the company toward a successful future using legal, ethical, and sound means.

What is a fiduciary?

Originating from the Latin word fudiciarius, the simple definition of a fiduciary is a person who acts on behalf of someone else, either a person or a company. A board of directors oversees financial matters, but this responsibility covers more than the bottom line. They must also make decisions that are in a corporation’s best interest, including the sustainability of the company’s future.

Fiduciary duty requires board members to maintain objectivity while directing responsibly, honestly, and efficiently. They must put the organization’s interests before any personal benefit. Decisions made by fiduciaries should be ethical and legal without undue risk to the corporation. They should question proposals or decisions they don’t understand or find fault with, always working to protect the corporation.

Duties of a fiduciary

Fiduciary responsibilities include financial matters, ethical considerations, legal requirements, and compliance with industry or municipal regulations. Essential fiduciary duties are covered under three main categories:

Duty of care

This duty describes the level of sound business judgment and competence expected of a board member. It is the obligation to provide a level of care expected from any reasonable person acting as a company steward. That does not mean that a fiduciary must be an expert in finance or other industry-related topics; however, they should be sufficiently knowledgeable, learning about specific areas where they lack expertise.

Duty of loyalty

This fiduciary duty primarily means that the board member should not benefit at the company’s expense. As a board director, the organization should come first, and decisions should not be made just for personal gain.

Duty of obedience

This duty relates to the power of board members to fulfill the company directives without breaking or disrespecting laws and regulations. Each board member should act in a way that is consistent with the corporation’s mission.

 Breach of duty

A breach of duty may occur if a board member commits an act that constitutes mismanagement or if they act in a way that violates their duties as fiduciary. A court will determine a breach of duty by looking at a number of factors, such as the condition of the business, how it has been managed or mismanaged, and any other acts that may constitute a breach of duty.