What is a Board Member’s Fiduciary Duty?
For businesses, fiduciary duty is the legal and ethical responsibility of board members (known as the fiduciary) to act in the best interests of the business and its shareholders. It’s the most important and basic obligation required to ensure a strong legal and professional relationship between every board member and the organization.
There are many reasons why upholding fiduciary duties is important:
• Ensures legal and moral integrity are maintained
• Builds trust and confidence
• Protects the interests of both parties
• Ensures accountability
• Maintains fairness for all parties
What are the three main fiduciary duties?
The three core fiduciary duties of a board member are the duty of care, the duty of loyalty and the duty of obedience. These duties form the foundation of good corporate governance and guide board members in making decisions that are in the best interests of the corporation.
1. Duty of care: This duty requires board members to act with reasonable diligence and prudence. This translates to attending meetings, actively participating in discussions, reviewing relevant materials, and making informed decisions based on all available information. Board members should possess the necessary skills and qualifications to understand the complexities of the business and exercise sound judgment.
2. Duty of loyalty: This duty demands undivided loyalty to the corporation and its shareholders. Board members must avoid conflicts of interest and prioritize the company’s well-being above personal gain or the interests of any other entity. This includes refraining from using their position for personal advantage, taking corporate opportunities for themselves or engaging in self-dealing transactions.
3. Duty of obedience: This duty compels board members to act in accordance with the law and the company’s governing documents, such as the articles of incorporation and bylaws. This ensures the corporation operates within legal boundaries and adheres to established procedures.
While these are the three core duties, they’re certainly not where it ends. There are many more important fiduciary duties that ensure fairness, integrity, transparency and trust:
• Duty of good faith: All actions must be honest, and decisions must be made based on integrity. The success of the business is always the priority. These decisions must also align with the organization’s beliefs, goals and values.
• Duty of confidence: All board members must adhere to confidentiality and privacy agreements to protect the organization’s operations, finances and strategies.
• Duty of oversight: Board members must take an active role in overseeing every aspect of the business to ensure they can make informed and effective decisions.
• Duty of prudence: Decisions must be made carefully and cautiously, using information and data to ensure strong decision-making. Risks must be considered at all times to protect the business’ assets, resources and reputation.
• Duty of accountability: Board members must take ownership over their actions and decisions, ensuring complete transparency to stakeholders and members of the public.