Fiduciary Responsibility and Corporations
Officers, directors, and occasionally even stockholders have fiduciary responsibilities, or trust obligations.
By incorporating your business or nonprofit, you create fiduciary responsibilities, or trust obligations. Corporate directors and officers have traditionally owed fiduciary duties to the corporation and its stockholders. Boards of directors establish corporate policies and appoint and delegate specific responsibilities to corporate officers. Corporate officers, such as a chief executive officer or president, a chief financial officer or treasurer, and a corporate secretary, manage your for-profit or nonprofit corporation’s daily operations.
Fiduciary duties may also apply in certain circumstances to controlling stockholders who own a majority of the company or exercise control over its business activities, but not to other ordinary shareholders. A breach of a fiduciary duty may subject the director, officer, or controlling shareholder to personal legal liability. State statutes, court decisions, and corporate articles of incorporation and bylaws may all have an effect on a person’s fiduciary obligations to a corporation.
The following are the primary fiduciary obligations owed by a corporation to its stockholders.
Obedience to Fiduciary Duty
The fiduciary duty of obedience recognizes the distinct responsibilities of officers and directors in a corporation. Officers and directors must carry out their responsibilities within the scope of their delegated authority under applicable law and corporate governing documents.
This obligation may be especially pertinent for nonprofit corporations whose officers and directors are charged with carrying out their responsibilities in accordance with the charitable purposes of their organization. For instance, an office or director may violate their duty of obedience by failing to adhere to donor-imposed pledge restrictions or by allowing nonprofit resources to be used for non-charitable purposes.
Loyalty as a Fiduciary
To a corporation and its shareholders, officers and directors owe a duty of loyalty. They are expected to prioritize the corporation’s welfare and best interests over their own personal or other business interests. Disloyalty manifests itself in a variety of ways. Conflicts of interest, attempts to compete with the corporation, and secret profits from corporate business dealings are all common examples. Under the corporate opportunity doctrine, officers and directors are prohibited from secretly diverting or exploiting business opportunities for personal gain.
For instance, officers and directors may learn about a lucrative development opportunity being offered to their real estate corporation in a confidential manner. Officers and directors must not profit secretly from this situation or act in a manner that is detrimental to the corporation’s interests. In some states, officers or directors may take advantage of certain opportunities if the corporation has waived its interest in such dealings in its bylaws or if the board of directors has received appropriate prior disclosures. Violations of this obligation may result in officers and directors being sued and ordered to turn over their hidden profits to the corporation.
Fiduciary Obligation of Care
Both officers and directors are expected to exercise reasonable care and diligence when acting on behalf of their corporation in a corporate environment. They should exercise reasonable caution in carrying out their responsibilities in order to advance the corporation’s best interests. Personal liability may be imposed on an officer or director for failing to exercise reasonable or ordinary care in the circumstances. For instance, a lack of due care may be demonstrated when an officer or director fails to conduct a reasonable review of a corporate matter, to attend board meetings on a regular basis, or to adequately supervise staff, resulting in the corporation’s detriment.
Under the business judgment rule, an officer or director is immune from liability for business decisions made in good faith and with reasonable care that prove to be detrimental to the corporation’s interests. Courts will defer to incorrect business judgments if the officers or directors did not demonstrate gross negligence during the review and decision-making process. Without this rule, many individuals would be unwilling to serve as officers or directors, and businesspeople may be hesitant to take commercial risks that could benefit the corporation in the long run.
Good Faith and Fair Dealing Fiduciary Obligation
This fiduciary obligation is inextricably linked to the obligations of care, loyalty, and obedience. Officers and directors are required to act with integrity, good faith, and fairness when managing corporate obligations. This ongoing obligation pervades their daily tasks and the corporation’s operations.
Disclosure Obligation as a Fiduciary
It is critical for officers, directors, and shareholders to be candid in business discussions so that they can assess material risks and make informed decisions. Before seeking board or stockholder approval for significant corporate business transactions, such as mergers with or acquisitions of other companies, complete and fair disclosure of material facts is critical. Officers and directors should also disclose any potential conflict of interest that may arise between their personal interests and those of the corporation as part of their duty of loyalty and care.
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