Understanding the Fiduciary Responsibility of Those on the Board of Directors

At some point, many companies become so big that they take on a board of directors. For the most part, this is rightfully seen as both quite the accomplishment and a positive sign of things to come. However, it’s incumbent on individuals on the board of directors to understand what the role actually entails. Chief amongst these points is their fiduciary responsibilities.

What Are Fiduciary Responsibilities?

To put it simply, upholding fiduciary responsibilities essentially means playing on the level. It means that a member of the board of directors can’t work to deceive their fellow members or hurt the company.

However, it also refers to board members staying objective (e.g. not letting personal differences or biases affect decision making), honest, responsible, trustworthy and efficient. Their decisions and actions must reflect that they are putting the organization first. Members who act in ways that reflect poorly on the company—even if they do it in their personal time—may be said to be reneging on their fiduciary responsibilities.

Financial Acumen

Part of upholding one’s fiduciary responsibility means understanding the basics of finance. Not everyone is going to have an accounting background, of course, or even a strong one in financial matters. But given the stated purpose of a company, board members can’t serve if they don’t know how to read financial statements, for example. How else could they competently judge a matter and make a decision?

Keep in mind, too, that board members are tasked with reviewing and deciding on the budget. Giving that kind of responsibility to a financial novice would be calamitous.

Conflicts of Interest

One way to maintain an objective approach and exercise sound judgment is for board members to lack any conflicting interests. An example of a conflicting interest would be if a board member for Company A owned stock in competitor, Company B. Even if the board member meant to profit from a short sale, this could cloud their judgment enough to potentially put the company he serves in jeopardy.

Sometimes, it’s not as clear as all that which is where fiduciary responsibility can get murky and board members need to simply be honest. A member on Company A’s board of directors may own stock in Company E. Competitor Company B could be forming a partnership with Company C, which already has one with Company D. As it turns out, Company D is in the midst of buying Company E. Complicated matters like this make it important for every member to constantly check their motives and networks.

Bylaws

The above are general rules that apply to all board of director members. However, each board will have some of their own too. If you’re creating a board of directors for your company, certainly consider the above, but don’t forget about unique requirements too. Then hold people accountable if they break their fiduciary responsibility.

Fiduciary responsibility isn’t an overly complicated concept, but it can become one in short order when put into practice. Understand the above concepts, though, and you’ll be in a better place to clarify what they are for your organization and then enforce them.

Source:

http://www.bridgespan.org/Publications-and-Tools/Nonprofit-Boards/Nonprofit-Boards-101/Fiduciary-Responsibilities-Board-Members.aspx#.U6PLBbHQPbw