Fiduciary Duties of Directors

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‘The director of a company owes a fiduciary duty to the company’. Do you agree with this statement?

A company is a distinct legal entity created by statute. Companies have many of the same legal rights and obligations as do individuals. They can own and sell property, they can hold profits or acquire debts, they can enter into contracts and sue or be sued, and governments can tax them. Companies are advantageous primarily because they become legal entities that are separate and distinct from the individuals who own and control them. This separation is important because in most cases these individuals have limited or no legal liability for the company's wrongdoings. A company is governed by a board of individuals known as directors who are elected by the shareholders. Directors are persons employed as officers of a company and have a duty to execute the management tasks of the company. Directors control and direct a company in the interests of its owners (known as shareholders). They also have particular responsibilities under the law and the company's constitution. Directors may directly manage the company's affairs when the company is small, but when the company is large, directors primarily oversee the company's affairs and delegate the management activities to corporate officers. Directors usually receive a salary for their work on the corporate board, and directors have a fiduciary duty to act in the best interests of the company. These fiduciary duties require directors to act with care toward the company, to act with loyalty toward the company, and to act within the confines of the law. A director who breaches this fiduciary duty may be sued by the shareholders and held personally liable for damages to the company. The fiduciary duty held by directors requires them to act with due care, which means that the director must act reasonably to protect the company's best interests. Courts will find a breach of the fiduciary duty when a director engages in self-dealing or negligence. Self-dealing occurs when the director makes a decision on behalf of the company that simultaneously benefits the director's personal interests. For example, assume a director for a wholesale foods corporation also owns separately a grocery store. At a corporate board meeting, the director votes to reduce by fifty percent the cost of wholesale apples sold by the company to independent grocery stores. Such an act would likely benefit the director's grocery store and could hurt the company's profitability. Courts would likely determine such an act to be a breach of the director's fiduciary duty toward the company.

Directors are not in breach of their fiduciary duty merely because a decision they make on behalf of the company results in trouble for the company. Directors who base their decisions on reasonable information and who act rationally in making their decisions may not be held personally liable even if those decisions turn out to be poor ones. This legal emphasis on protecting a director's decision-making process is known as the business judgment rule.

The statement, “the director of a company owes a fiduciary duty to the company”, is beyond question. Directors are trustees or minders of the company’s assets and their duties reflect that responsible position. Executive as well as non-executive directors have the same duties. Directors do not have to do everything themselves. They may give appropriate tasks to company executives who will report back to the board. Nevertheless, directors have a fiduciary duty to act in the best interests of the company. Directors' duties are wide and diverse. Their duties arise primarily from two sources: statute and common law. Statutory Duties of Directors (the duties created by legislation) On their appointment, directors must give the company their name, address, date of birth, nationality and occupation. They must also give details of any shares or debentures (written...
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