In this article, we explain fiduciary duties and their purpose in business. We answer the questions “what is a fiduciary duty?”, “who has fiduciary duties in a corporation?”, “why are fiduciary duties important in business?”, “what are the fiduciary duties directors and corporate officers take on?”, “what is the business judgement rule?” and “when does the business judgement rule apply?”.
A fiduciary duty is a type of law applied to individuals who act on behalf of and in the best interests of someone or something else. Essentially, it is an obligation of trust from the person acting on behalf of another (aka “fiduciary”) to the one for whom they are acting. In terms of businesses and corporations, a fiduciary duty is an obligation to act in good faith, with the care of a reasonable person in a similar position and the belief that their decisions are in the best interests of the company and its shareholders.
Corporate officers and directors have fiduciary duties to their company and all of the people they represent. Directors are typically responsible for overseeing the company, attending board meetings, and promoting the best interests of the company. Corporate officers, including the President, Vice President, Secretary and Treasurer, manage the day-to-day operations of the company. All of the aforementioned executive positions have massive control over the corporation, and therefore take on fiduciary duties to lawfully declare their obligation of trust and fidelity to the corporation.
Collectively, executive positions, such as president or director, are in charge of major decision-making on behalf of the corporation. Fiduciary duties help to protect the company from individuals that would act in their own self-interest as opposed to the best interests of the corporation. Conversely, fiduciary duties also protect individuals from being blamed by the corporation in case he or she makes a decision that negatively impacts the success of the company.
There are many fiduciary duties, but most states maintain three basic fiduciary duties: Duty of Care, Duty of Loyalty, and Duty of Good Faith.
When you run a business, there is always going to be some risk involved on the path to success. Calculating risk to turn a profit is essentially what maintaining a profitable business is all about. Some of the calculated risks may not turn out as they were intended. The business judgement rule is a presumption that directors and corporate officers make their decisions in good faith, and honestly believe their actions are in the corporation’s and shareholders’ best interests.
If a corporate officer or director is accused of violating at least one fiduciary duty, the plaintiff must prove that the respondent was self-dealing, disloyal or grossly negligent under the business judgement rule. Without the business judgement rule in place to protect corporations and their directors and corporate officers, it may be difficult to fill executive positions because the executive staff is blamed for everything that ever goes wrong with the company.