Fiduciary Responsibility of Directors: A-Z To-Do List

Fiduciary Responsibility : A company is an artificial person with a distinct legal personality from its members that exists solely for legal consideration. The directors have sometimes been referred to as agents, trustees, or representatives of the corporate body because they are charged with the governance and operation of the company and have a fiduciary duty to it. The Companies Act of 2013, in Section 166, gave a basic explanation of the duties of a director. 

A Fiduciary Responsibility: What Is It?

If you haven’t previously held a position that entails fiduciary duties, you might not be familiar with the phrase. What is meant by fiduciary responsibility?

The definition of fiduciary obligation that follows will make it more transparent. The Latin word for “faith” or “trust” is where the word “fiduciary” originates. The relationship between one party who must act in another party’s best interest is referred to as a fiduciary responsibility.

In its purest form, a fiduciary duty indicates that the bearer of this kind of obligation behaves above and beyond any legal requirements in terms of ethics. To put it plainly, a fiduciary duty requires someone to act morally regardless of the situation.

What fiduciary duties do directors of companies have?

Obligation to behave in the business’s best interests

This responsibility entails operating with the company’s overall performance in mind. Some examples of this would be, but are not restricted to:

• The standing of your business
• The impact of your choices on staff members
• The long-term consequences for the business
• Considering all shareholders equally, irrespective of their ownership stake

Obligation to operate within your authority

The rights vested in directors are outlined in the company’s Articles of Association, with the general understanding being that these powers are exercised for the benefit of the company as a whole, not for the benefit of any one person. The corporation may enter into resolutions and other constitutional agreements that outline its authority as a director.

Obligation to steer clear of conflicts of interest

When you have a personal stake in a deal that is now being completed, an agreement that the business intends to enter into, or both, you may have a “transactional” conflict of interest. There may also be “situational” conflicts of interest, such as when you serve as a director of a rival company. It is also your responsibility to decline benefits from outside sources.

Obligation to use independent judgment

Decisions must be made with the interests of all business members in mind rather than letting certain shareholders or groups of shareholders, for example, excessively influence you.

Obligation to use due diligence, skill, and care

Given your training and prior experience, you must act with the ability, care, and diligence that one could reasonably expect from you. An accountant for a firm, for instance, would possess particular skills and expertise in finance.

Prudent duty

The term “duty of prudence” describes the need to recognize dangers and make prudent decisions. Board members are supposed to act with a high level of professionalism, be responsible, and approve expenses sensibly.

Duty to Disclose

Board members are required by law to be honest in their speech and behavior. They must also disclose any information that could affect their decisions or the decisions of other board members.

Consequences for breaching your fiduciary obligations

If you, as a director, have violated your fiduciary duty, there are several possible consequences.

Fired from the workplace

If enough shareholders cast their votes in your favor, you could be fired from your position while an investigation is conducted. The process and guidelines for this course of action are outlined in your company’s constitution.

Interim injunction

An application for an interim injunction may be submitted to the court in order to stop detrimental behavior if a director is purposefully harming the firm, possibly by damaging its reputation.

Compensation

The business could sue you as a whole or a specific person who has lost money as a result of a fiduciary duty breach. This puts everything you own in danger, even your house, in the event that you wind up bankrupt.

Conclusion

In the past, directors were prohibited from conducting business with the company they worked for. Otherwise, it was believed that a director’s personal interests might clash with the corporation’s best interests. 

More recently, this regulation was changed to allow the director to participate in business transactions as long as they declare their interests and do not vote. Conflicts that are advantageous to the company are permitted under the revised guideline, and exploitation is guarded against.

Practical business considerations provide one justification for loosening the regulations: frequently, an officer or director is the best source for competitive pricing or supply for the company.