The directors of major corporations certainly have a lot on their plate. In order to successfully run some of these juggernauts, they need to surround themselves with the right people, manage them, and delegate as necessary. Of course, some tasks can’t be delegated. One important responsibility that no director can hand off is their fiduciary duty.
Directors of corporations aren’t the only ones with fiduciary duties. Just about anyone who is representing another party—by contract— has some type of fiduciary duty as well. It means they have a legal mandate to do right by the party they represent.
One example would be a doctor. A doctor can’t prescribe you a medication because they’ll be receiving a kickback for doing so. This would not represent your best interest.
Directors and Fiduciary Duties
When it comes to directors of corporations, they have fiduciary duties to the company itself. For the most part, this means they have to do right by the shareholders. A director’s fiduciary duties can best be explained in two ways:
The Duty of Care
This category essentially covers the prudent mindset a director must have when running their corporation. Behavior that would reflect someone who wasn’t thinking things through or seeing the big picture would be examples. Rash decisions—whether or not they have ulterior motives—would be jeopardizing a director’s duty of care. State governments generally enforce rules surrounding this category.
The Duty of Loyalty
This category covers a director’s responsibility to their corporation and its shareholders over their own self-interest. A director also can’t favor some other corporation or business they might have some interest in. This is where having fiduciary duties to two separate entities can be problematic.
For the directors of solvent corporations, this means they are obligated to act in good faith and with a prudent mind on behalf of their corporation’s best interest.
They can’t take part in self-dealing, receiving inappropriate personal benefits, or otherwise bypassing opportunities that would help their company grow.
If you’re overseeing an insolvent corporation, then you actually have fiduciary duties to your creditors. In fact, solvent corporations that soon may be insolvent often fall into this category too.
Because insolvency is not a hard-and-fast legal term, the definition is largely decided by the courts. Sufficed to say, though, if you think the corporation you’re the director of is soon to declare bankruptcy or otherwise be unable to pay its debts, now is not the time to play fast and loose with your obligations.
Directors of insolvent companies still can’t forget to think about their shareholders too.
There can be all kinds of ramifications for breaching fiduciary duties. Obviously, at any time, boards or controlling shareholders can remove a director if they believe they’re flirting with a fine line. However, as actual laws are involved, there are situations when the courts will step in. Sometimes, depending on the scenario, directors may even be liable for making restitutions.
If you have questions about your fiduciary duties or picking directors who will honor theirs, I have experience with both and would love to be of service.