Uphold a Fiduciary Duty
Directors and Officers of both for-profit and not-for-profit corporations owe their corporation a fiduciary duty. A fiduciary duty is an obligation that one party will act in the best interest of another party. In the case of corporate directors, the director holds the fiduciary duty to act in the best interest of the corporation. The law imposes this duty upon the officers or directors of corporations because they control and manage the corporation on behalf of its shareholders, and thus must manage the corporation with care. The concept of a fiduciary duty is a simple one: to act in the best interest of others, and thereby to define what actions uphold that interest or violate it. In order to be more specific about what a director must do or must not do, we often refer to the specific fiduciary duties as fitting into two categories: the Duty of Loyalty or the Duty of Care.
Steps
Uphold your Duty of Loyalty
Directors and Officers of a company must act in the best interest of the company.
- Avoid self-dealing. A self-dealing transaction in one in which a director enters into on behalf of the corporation that directly or indirectly benefits the director personally. For example, let us assume that the director represents a corporation that operates hotels. The hotel chain is looking to contract with a laundry company to clean the hotel’s linens. The director of the hotel company enters into a contract on behalf of the hotel with the director’s own laundry company at a price that is twice the cost of other laundry companies for the same services. In this situation, the director of the hotel company engaged in self-dealing because he entered into a contract on behalf of the hotel in order to unfairly benefit his own personal interests.
- Avoid conflicts of interest. A conflict of interest arises when the director of a corporation has an interest in both the corporation and some entity that the corporation is dealing with. This can take the form of the director being a shareholder of another company that the corporation is dealing with, the director having a competing business, or the director’s close family member standing to benefit from a contract that corporation intends to enter into.
If a director has a conflict of interest, he or she must disclose that conflict of interest to the board. Failure to disclose the conflict is a breach of the duty of loyalty. Simply having a conflict of interest does not preclude a director from serving on a board. The board should, however, limit that director’s involvement with the decision making on those matters in which the conflict arises. If the director must be involved in the decision-making of a deal in which he or she has a conflict of interest, other independent board members should sign off on the deal as well. - Avoid taking an opportunity away from the corporation. If an opportunity presents itself to a director or officer of a corporation that may be an opportunity for the corporation, the director or officer must present that opportunity to the corporation. The officer must not take the corporate opportunity for himself or herself to the detriment of the corporation. There is a high penalty placed upon the director for doing so: all the profits from the “stolen” transaction will be taken from the director and given to the corporation. An example of a violation of the corporate opportunity is if a director learns of the sale of a certain piece of property that could be of substantial value. If the company the director works for deals with real estate of the type that the director learns about, and the director purchases the property anyway, the director violated his or her fiduciary duties owed to the company.
Uphold your Duty of Care
Directors should act in good faith and make the types of decisions that a reasonable person in the same circumstance would make.
- Act in good faith. The concept of acting in good faith means the intention to act honestly and fairly. It also means that the director is not acting to defraud. A director should not have any ulterior motives for working with the corporation. An example of acting in bad faith is knowingly lying to other board members or shareholders or wrongfully withholding information. If an officer or director is proven to have acted in bad faith, the company may sue the officer or director for any damages caused to the company as a result of the director or officer’s bad faith.
- Make reasonable decisions. A director must act reasonably in making decisions on behalf of the company. This does not mean that the director has to make the right decision every time. Sometimes a director may use the utmost care in making a decision but the deal may not turn out well. That does not mean that the director violated his or her fiduciary duty of care. A violation of this duty may result from completely failing to oversee the board, or not reviewing a contract before entering into it. Upholding this duty means actively participating in the business of the company. Staying engaged in board meetings, seeking reports for committees that the director is not a member of, keeping good records and reviewing them often, and investigating any business transactions before they are entered into are all examples of upholding the duty of care.
References
- Minnesota Guide to Fiduciary Duties for Charities
- Corporate Opportunity Information
- Duty of Loyalty Information
