Fiduciary Responsibility of Board Members

Of all the responsibilities board members need to juggle, their fiduciary ones may be the most important. The fiduciary responsibility of board members covers their duty to the company itself and is regulated by the government.

What Board Members Owe Their Company

A lot is expected of board members in terms of the role they play within their organization. Like normal employees, they are expected to perform certain tasks and meet certain standards. Those that don’t could eventually find themselves ousted.

However, one thing each board member has in common, in terms of their role, is their fiduciary duty. This means they must serve in the best interest of the company and put its goals and progress ahead of their own.

Board members are expected to be objective in their roles, meaning they have to leave personal interests, and even differences, aside when deciding on the future of the company. This means they must be honest as well and act prudently. Rash decisions by a board member or even white lies could be seen as violating their fiduciary duty. Essentially, any decision they make that puts the organization at risk could be called into question.

Business Insight

A good example of fiduciary duties is that each board member needs to have some understanding of how business works. They’re not allowed to hide behind the idea that a financial matter was simply something they didn’t know enough about. In such a situation, it would be on them to disclose this to the rest of the board.

The same can be said for providing general oversight. A board member couldn’t claim they were unaware of a company’s dealings (unless it was something underhanded or that fell outside of their “jurisdiction”). Their job is to help steer the ship, after all.

Shareholders

Part of a board member’s fiduciary duties means thinking of the shareholders. At the end of the day, they’re part of the corporation too. So a board member couldn’t make a decision they’d benefit from if they knew it would hurt the shareholders.

Legal Ramifications

While there may be many expectations held by the company for their board, not all of them carry legal ramifications. The fiduciary responsibility of board members does though. That means the law could actually step in if they thought a board member was acting rashly and hurting their own company.

That being said, fiduciary duties are often hard to pin down in a legal sense. Some categories are controlled by the state government while others are a federal matter. On many occasions, courts from both have offered differing views.

For example, if a company is insolvent, most courts agree the board members now have a fiduciary responsibility on behalf of the creditors (not all have seen it this way though). However, what if the company is solvent but still up to its eyes in debt? Technically, board members could act in a way that would help the shareholders, but eventually hurt creditors should they become insolvent. This is a prime example of where courts haven’t always seen eye to eye.

That’s why picking board members is so important. In my practice, I’ve helped numerous companies pick nominees that would steer clear of any risks involving fiduciary responsibilities.