Corporate Fiduciary Duties: What Are They? Who Has Them?
Surprise! If you are the officer (like the CEO or President), director (member of the Board of Directors) or member (term for the owner of an LLC) of a company, you are also a fiduciary for that company. This means that you have ethical and legal obligations to act in the best interest of that company by ensuring that any decisions made on behalf of the company reflect the best interests of the company and its stakeholders rather than your own interests. The duties imposed on a corporate fiduciary are significant and, accordingly, often serve as the basis for litigation so it is important to know them and make all decisions as a fiduciary with these duties in mind.
Types of Corporate Fiduciary Duties
The Fiduciary Duty of Care
You have a responsibility to ensure that the decisions you make on behalf of the business are in the best interest of the business itself. Every decision made must prioritize the business’s interests ahead of your personal opinions or own financial gain.
The Fiduciary Duty of Loyalty
Similar to the fiduciary duty of care, you must never personally benefit in any way from a decision made for the company, unless it is in addition to being the best decision for the shareholders or other members. Any decision that benefits the company, but could also benefit you (either directly or indirectly through a relative or related business) needs approval of the disinterested officers or directors, shareholders, or members. Full disclosure of your other interests is paramount in order to ensure that any of your decisions were made for the benefit of the company rather than your own and can help protect you if that decision ends poorly.
The Fiduciary Duty of Good Faith
At the end of the day, you must always act in good faith. As an officer or director of a company, you have a responsibility to always operate in the best interest of the company and act in good faith at all times. In many ways, the duty of good faith includes a duty of allegiance to the company – for an officer or director to always ensure their decisions adhere to the business’s governing documents (Click here to learn why these documents matter) as well as promote the best interests of the company overall.
Breaches of Corporate Fiduciary Duty
The three basic categories of duties listed above are not concepts with clear boundaries; instead, they tend to touch on each other and often a breach of one duty is simultaneously a breach of another. Here are some common scenarios that may result in a breach or allegations of a breach, including:
- Using information gained from your status within the company to enhance your personal position rather than the business’s position;
- Sharing trade secrets of the business (even if you don’t personally benefit);
- Concealing important information from other stakeholders of the business;
- Failing to keep accurate accounting records of the business;
- Commingling funds of the business with personal funds or funds from separate businesses;
- Making decisions on behalf of the business without being reasonably informed of the consequences; or
- Working for or aiding another business that directly competes with the company.
Yikes! What Can I Do to Protect Myself?
Fortunately, there are many things that you can do to protect yourself including:
- Keep good records of company decisions and in particular, the approval of company decisions by stakeholders other than you;
- Maintain accurate and up-to-date accounting records;
- Take actions on an informed basis, in good faith by relying on the advice of qualified professionals (also known as the business judgment rule); and
- Purchase an insurance policy for officers and directors such as one described here;
Reach out to us anytime at (504) 584-7336 or firstname.lastname@example.org to learn more if you aren’t sure of your own duties or whether the fiduciaries of a company are following theirs.