Fiduciary Responsibility to Shareholders

When it comes to a corporation, fiduciary responsibilities are a huge deal. They’re how you know the board of directors is always acting in the best interest of the organization and not letting personal interests or other matters cloud their vision. So it should come as no surprise that corporate officers also have a fiduciary responsibility to their shareholders.

What Does Fiduciary Mean?

Fiduciary is just a fancy word that means you are legally required to do right by someone. It’s not always used in a business setting though. You can have a fiduciary responsibility toward your ward. Lawyers and doctors have fiduciary responsibilities to their clients they must honor. A lawyer, for example, could never sell a client’s information because of attorney-client privilege.

In the context of a corporation, though, it means that a director owes their loyalty to the organization. They can’t hurt it, for example, in order to profit. However, they also can’t use information they’ve gleaned from being a director to gain profits off to the side.

Shareholders are members of the corporation too, though. So directors also have a fiduciary responsibility to them as well.

Legal Ramifications

From state to state, the actual definition of fiduciary responsibilities differs some and this includes how it relates to shareholders. However, each state has some law on the books that covers this principle. Essentially, any state that allows shareholder derivative suits is implicitly honoring a responsibility directors have to those who buy shares. Otherwise, these lawsuits would be thrown out as frivolous.

Fiduciary Responsibilities of Shareholders

Interestingly enough, shareholders can sometimes have fiduciary responsibilities themselves. Most do not, of course. Your average shareholder is actually relatively powerless to control any aspect of a corporation in the first place. Their control, for the most part, is limited to electing members of the board of directors. Of course, sometimes they can also remove directors, adopt bylaws or modify them and approve fundamental shifts in the corporation’s structure.

Usually, though, it’s the majority shareholders (or control shareholders) that need to ensure they’re always acting in the best interest of the company. For example, there have been times when majority shareholders have voted their shares in an attempt to defraud a fellow shareholder. Obviously, that’s breaking their fiduciary responsibility and wouldn’t be legal.

Like the board of directors, majority shareholders have a fiduciary duty to those with a smaller lot. If a majority shareholder wishes to enter into a transaction with the corporation that would result in them profiting, they must show that whatever the deal, they are doing it in fairness.

Running a corporation is never easy, but fiduciary responsibilities ensure that it’s illegal to try to do it unfairly. Believe it or not, there are times when a board member may be tempted to act against the corporation’s best interest because, somehow, it would serve to profit them. In doing so, though, the corporation wouldn’t just be hurt. All the shareholders who have money tied up in it would be sacrificed too.