What is a Board of Directors Fiduciary Duty?
Board of directors' fiduciary duty refers to the highest standard of care. Board members and officers must act with the utmost responsibility.3 min read
Board of directors' fiduciary duty refers to the highest standard of care. Board members and officers are fiduciaries, and by statutory and common law mandate, they must act with the utmost responsibility.
The term fiduciary refers to a person who has unique responsibilities related to monitoring, distribution, administration, and/or investment of property, such as public or charitable assets of the business, in addition to intangible assets, like the company's reputation and its role within the community.
What are the Fiduciary Duties of an Institution?
When referring to an educational institution, the fiduciary responsibility requires board members to make good-faith decisions that put the best interests of the institution in alignment with its charitable or public mission. This must be kept independent from undue influence by any person or any other financial interests. These are known as the fiduciary duties of care, loyalty, and obedience.
- With regard to the duty of care, these individuals must perform their responsibilities in a manner that is in line with the care, diligence, and skill of an ordinarily prudent person who would find themselves in a similar situation in a corresponding position.
- The duty of loyalty mandates board members and officers to behave in a manner that is in good faith and believed to put the interests of the institution before any personal interests or those of another person or organization. The fiduciary cannot act out of avarice or expedience either.
- Obedience is the duty board members have to ensure the university or college is operating in a manner that furthers its stated purpose and is always operating in compliance with all statutes and regulations.
Fiduciary Duties of Board of Directors in a Corporation
In a corporation, the board of directors is the governing body that assists with high-level direction and helps advance the corporation's objectives. In addition to these responsibilities, directors also have a fiduciary duty. A corporate director has to conduct themselves in a good faith manner that he or she believes is in the best interest of the business and is in line with how an ordinarily prudent person would behave.
Board of directors have a fiduciary duty to exercise due care in how they manage a corporation's affairs and also have the duty of loyalty and obedience to the corporation. A fiduciary duty means that both directors and officers handle their powers only for the collective benefit of the corporation and its stockholders.
Board Members' Roles and Responsibilities
A board member in a corporation is a person who is charged with directing the organization towards a more sustainable future through the adoption of ethical, legal, and sound management decisions and policies while ensuring the business has ample resources to carry out its mission statement. Businesses have to hire a responsible and talented Executive Director/CEO to handle the day-to-day management duties.
In a non-profit organization, board members are still called fiduciaries because they have a legal responsibility to properly manage the non-profit's assets. Board members in a non-profit must make numerous important decisions include appointing and recruiting new board members, hiring and firing managers and staff, conducting an annual audit, and monitoring financial reports. All of these activities fall under the three main duties — care, loyalty, and obedience.
Breach of Fiduciary Duty
All board members must understand their duties and how they fall into each category of fiduciary duties. Not understanding or being well-informed about fiduciary duties does not relieve members from their obligations or any subsequent liabilities they encounter by failing to fulfill these critical duties. A board director who diligently performs his or her fiduciary duties responsibly will help protect the organization's reputation, which also qualifies as a fiduciary duty.
When a court determines whether there has been a breach of fiduciary duty, they may consider a variety of factors:
- Business condition
- Character of corporation
- How the corporation is usually managed
- Other relevant facts
There are circumstances that make a director liable to the corporation, and sometimes to its creditors, shareholders, or other people, for any losses caused by his or her inability or failure to exercise due care. A director typically breaches his or her duty in one of two ways:
- He or she commits overt acts that constitute mismanagement
- No action can also be construed as a failure to direct
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