A Corporation’s Duty to Shareholders

Corporations come in all shapes and sizes and operate across every industry. If there is money to be made, you can bet there are a handful of corporations out there profiting from it. However, despite this diverse collection of businesses, there are some unifying principles. One of them is that corporations have a duty to their shareholders.

Fiduciary Duty Explained

This responsibility is often described as a fiduciary duty. Fiduciary simply refers to a mandate to do the right thing by someone and not take advantage of them for profit. Your doctor, for example, has a fiduciary duty to you. They can’t tell your boss about a health concern you’re having because there was money to be made. Lawyers and others fall into this same category.

Fiduciary Duties and Corporations

Often, you’ll hear about fiduciary duties when talking about corporations and their board of directors. Much like with your doctor, a director can’t tell the competition about a new business plan just because he’s getting paid or otherwise wants to. As a director, they have a fiduciary duty to the corporation they serve and this would obviously be breaching it.

Shareholders

However, a corporation is made up of many people, shareholders chief amongst them. So, the corporation—by way of its board of directors—also owes these shareholders a fiduciary duty. They can’t operate for their own good if it means hurting those who own shares.

One example of this would be if a director decided to offer into a financial transaction with the actual corporation. Perhaps, they had some land to sell. As a director, they might have an opportunity to make sure they got more than what the land would otherwise be valued at. This would be a breach of the fiduciary duty. In situations like this, the director needs to be operating in a sense of fairness. They would have to prove, to go back to our example, that the price they were receiving was a fair one and that the purchase was in the best interest of the corporation.

Shareholder to Shareholder

Some shareholders actually owe a fiduciary duty to other shareholders too. After all, it’s not a democracy. Those with more shares—controlling shareholders—have more influence over the ones who have fewer. This means controlling shareholders could also partake in decisions that benefit them to the detriment of the other shareholders or the corporation as a whole.

Legal Consequences

The definition may differ amongst the states, but each one essentially recognizes that corporations have fiduciary duties toward their shareholders. So if a violation of this was to occur, that would mean breaking the law and shareholders could sue the responsible parties directly.

No one likes to think that any officer on a corporation’s board of directors would knowingly hurt their own shareholders, but it does happen, unfortunately. That’s why my nominee director services are so popular. With my knowledge and experience, I can help ensure your board is populated by the type of men and women who will take pride in their responsibility to the shareholders.