Board Members Have a Fiduciary Duty to Avoid Conflicts of Interests

Board Members Have a Fiduciary Duty to Avoid Conflicts of Interests

Corporate Board Member’s Duties and Obligations

Fiduciary duty is the backbone in determining how a board member, officer, and director are expected and obligated to act. This theory arises from their relationship with the corporation and other shareholders, and the degree of expectations may vary depending on their particular role within the organization. Generally, the standards applied to managing directors are stricter than for directors. Nonetheless, the fiduciary duty officers and directors require that they act and exercise their powers strictly to benefit the corporation and its stockholders.

Interested Director Transactions or Self-Dealing

A transaction that may touch upon the fiduciary duties and present issues is interested director transactions or self-dealing. This refers to transactions where an “interested” director has entered into a contract with the corporation and has either:

  • Made a personal profit from the transaction; or
  • Usurps the corporate opportunity; or
  • Buys or sells assets of the corporation; or
  • Transacts business in their capacity as a director with another corporation that they either hold a significant position in, significantly financially associated with, or with a family member.

This type of transaction is problematic. It raises questions whether the director has breached its fiduciary duties, specifically whether the trade they had entered was conducted solely for the corporation’s best interest or the interested director’s gain.

Duty of Loyalty 

This fiduciary duty refers to the officers’ and directors’ obligation to put the corporation’s best interest before their personal and business interests. Under this fiduciary duty, an officer or director is obligated to act solely for the corporation’s best interest and its shareholders. This fiduciary means that conflicts of interest, efforts to compete with the corporation’s interest, or earning undisclosed profits from corporate business dealings should be avoided by the officers and directors at all costs.

Duty of Care

This fiduciary duty refers to the expectation of a shareholder and the corporations for the officers and director. Under this concept, the officers and directors are expected to use appropriate care and diligence when acting in their capacity. The officers and directors are expected to use their uncorrupted business judgment solely for the corporation’s advantage.

Duty of care is breached if the officer or director commits an overt act that constitutes mismanagement or their inaction amounts to a failure to direct. The actor may be liable to the corporation, to the shareholders, creditors, or other entities for losses they had incurred by the actor’s failure to exercise proper care.

The standard in determining whether this duty has been met may include the following factors:

  • The character of the corporation
  • Condition of its business
  • A typical method in which such corporations are managed
  • Any relevant facts that tend to show the question of the proper discharge of one’s duty as director

However, the “business judgment rule” theory protects an officer from an allegation of breach of duty of care. Under this rule, a corporate director does not violate their fiduciary duty of care if they act in good faith and without a corrupt motive.

Duty of Obedience

This fiduciary duty refers to the obligation of the officers and directors to focus on pursuing the organization’s goals within their delegated authority under the law and the applicable governing corporate documents. This means that officers and directors are expected to conduct their business decisions within the scope of the law and to govern corporation documents and not step beyond their delegated capacity.

Duty of Good Faith and Fair Dealing 

This fiduciary duty coincides with their other responsibilities discussed above, specifically care, loyalty, and obedience. This fiduciary duty focuses on the duty of the officers and directors to act with utmost honesty, good faith, and fairness when handling corporate matters in fulfilling their jobs daily.

Duty of Disclosure

This fiduciary duty refers to the importance of the officers and directors to disclose any potential conflict of interest or issues between their personal or business interests from their official capacity on behalf of the corporation.

This duty may also refer to the expectation of the complete disclosure of material facts to the shareholders.

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