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CORPORATE DIRECTORS – AN OVERVIEW OF FIDUCIARY RESPONSIBILITIES

AN OVERVIEW OF FIDUCIARY RESPONSIBILITIES

Corporate directors1 have a fiduciary relationship with the corporation2 that requires the utmost trust and confidence. The directors must always act in good faith, use their best judgment, and do their utmost to promote the corporation’s interests. Some states’ corporation statutes may not allude to or define the director’s relationship as that of a fiduciary, but a director’s dealings with a corporation have been and continue to be the subject to “rigorous” judicial scrutiny. Where state statutes do not address the relationship or delineate the fiduciary duties owed by a director to the corporation, case law fills the gap.

The fiduciary responsibilities apply to all corporate transactions or events, regardless of whether they are mundane or extraordinary. Indeed, the fiduciary duties may be heightened in more unusual or important circumstances. Even figurehead directors who have no discernible responsibilities must uphold their fiduciary duties to the corporation. De facto directors who have not been formally bestowed with the title but who function fully as corporate directors also have a fiduciary relationship with the corporation.

The scope of the fiduciary relationship is limited, however. The fiduciary duty can terminate upon resignation or removal. The director does not have a fiduciary duty to employees or other directors or officers. A director’s fiduciary duty extends to all shareholders collectively, not to any individual shareholders.

There is no uniformity amongst the states as to the liability of directors and officers. Generally, states acknowledge that directors and officers owe the corporation the duty of loyalty, the duty of care, and the duty of obedience. The duty of loyalty precludes self-dealing and requires the director to act in the corporation’s best interest. The duty of care (also referred to as the duty of diligence) requires the director to carry out his duties as would any ordinarily prudent person in similar circumstances, in good faith, and with the reasonable belief that the corporation’s best interest is being served. The duty of obedience requires directors and officers to act within the scope of the powers bestowed upon them by the corporate articles of incorporation, bylaws, statutes, and regulations. These fiduciary duties are discussed in greater detail in separate articles.

1 Although this article refers to directors only, many courts recognize that the fiduciary relationship and fiduciary duties extend to corporate officers.

 

2 Delaware takes the view that directors have a fiduciary relationship with the corporation and the shareholders.

 

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