A “fiduciary duty” is required of a person who manages money, investments, or other property on behalf of another person. When the situation involves a board of directors managing a corporation, the fiduciary duty the board has to the corporation’s shareholders and investors is known as a “business duty.” A person who has a fiduciary or business duty is known as a “fiduciary.”
A fiduciary duty requires more than the ordinary reasonable care that appears in most personal injury and tort cases. Fiduciary duties are generally split into two categories: the duty of loyalty and the duty of care. In some cases, board members may also have a duty to disclose information. They also have a duty to avoid conflicts of interest.
The duty of loyalty requires the person who has it to handle money with the best interests of its owner in mind. The fiduciary must put the owner’s interests before his or her own and may not profit from managing the owner’s assets without the owner’s consent.
In a business situation, the duty of loyalty requires the board of directors to run the corporation in the best interests of the shareholders. Directors have a duty not to let their personal interests conflict with those of the corporation.
For instance, suppose a director of a corporation also owns his own printing business. Rather than seeking bids for the corporation’s printing needs, the director who owns the printing business merely assigns all of the corporation’s printing needs to his own business. This director may be violating the duty of loyalty in two ways: first, by failing to get the best possible price for the corporation’s printings; and second, by allowing his personal interest (to get business for his print shop) to conflict with the corporation’s best interest (to get the best price on printing).
Fiduciaries, including corporate directors, also have a duty of care. The duty of care can be summed up by the business judgment rule, which states that a fiduciary acting on someone else’s behalf must do the following:
- act in good faith, or on an honest intention or belief (even if it is mistaken);
- act with the same care a reasonable person would use under similar circumstances; and
- act in a way that the fiduciary reasonably believes is in the best interests of the corporation or owner of the assets the fiduciary is managing.
The duty of care may be summed up as the duty to “look before you leap.” It requires fiduciaries, including corporate directors, to do their homework before making new investments, merging with or acquiring other businesses, or launching a new business venture, service, or product.
The duty of care and the duty of loyalty are the two classic elements required in meeting a fiduciary duty or business duty. In certain situations, a corporate director or other fiduciary may also have a duty to disclose certain information. In a conflict of interest situation, for instance, the fiduciary who has a conflict has a duty to explain the nature of the conflict of interest. Corporate directors also have a duty to disclose information to shareholders who are voting. The directors must provide enough information so that the shareholders may cast a reasonably informed vote.
The duty to disclose is related to the duties of loyalty and care. For instance, a fiduciary who does not disclose a conflict of interest violates his duty of loyalty by allowing himself to get into a situation where he may be unwilling or unable to put the shareholder’s needs first. Similarly, neither directors nor shareholders can make reasonable, good-faith business decisions unless they have a full picture of the issues and possible consequences involved.