Understanding Fiduciary Duty

Directors and officers of corporations owe their shareholders and corporations a fiduciary duty. But what exactly does this mean? Find out what's included in fiduciary duty.

by Brette Sember, J.D.
updated May 02, 2022 ·  3min read

If you own a company or sit on the board of a corporation, you know that you have a fiduciary duty to your shareholders and stakeholders. This is an important responsibility, and yet it is also something that many people don't fully understand and just give lip service to.

Understanding Fiduciary Duty

Taking the time to understand what fiduciary duty actually means will help you protect both yourself and your company.

Basics of Fiduciary Duty

Fiduciary duty essentially means that you have the responsibility to act and do things to benefit someone else. The person who has fiduciary duty is known as the fiduciary. And the person or people they are responsible to are called the principal or the beneficiary.

In a corporation, the board of directors and the officers have a fiduciary duty to the shareholders and to the corporation itself. If you are part of a partnership, you and your partners have fiduciary duties to each other. When you form your business, it's important to understand exactly what your responsibilities are and to whom you owe them.

Elements of Fiduciary Duty

Each state has its own laws about exactly what kinds of fiduciary duty are required, but these are the three general areas of duty that are included:

  • Duty of care. The duty of care requires that you as a fiduciary use due diligence to get thorough information before making a decision that could impact your beneficiary. Reasonable prudence should be used in making all decisions and taking any action for the company. So, for example, if you are a director, before you vote on anything before the board, it's your responsibility to do your research about the matter that's up for a vote and become informed before you cast your vote. Being informed doesn't mean just passively accepting information handed to you, though. It requires critical thinking and independent consideration.

  • Duty of loyalty. This requirement means that you work in the interest of your beneficiary and not for your own gain. You should be able to approach all of your professional responsibilities without personal conflict. If you are the president of a corporation, it would be a violation of the duty of loyalty to push for a contract to be awarded to your spouse because, in doing so, you're acting in your own interest, and not in the best interests of the shareholders. Any such conflicts should be fully disclosed.

  • Duty of good faith. Any decision a fiduciary makes must be made in the best interest of the beneficiary. This could include a lot of things, such as keeping the company's information confidential, not taking actions that will benefit you instead of the corporation, and disclosing any conflicts of interest. If you serve on a nonprofit board, using assets of the nonprofit for your own for-profit business would be an example of a breach.

Breach of Fiduciary Duty

A breach of fiduciary duty happens when a fiduciary fails to uphold the duties of care, loyalty, or good faith in their role within the company. For example, if a board member leaked information about an upcoming deal to a friend and the deal fell through because of it, this would be a breach. The corporation can recover damages for any breach by a fiduciary through a lawsuit.

Fiduciary duty is a critical component of an officer's, director's, or partner's responsibilities in their role at the company. Fiduciary duties are meant to protect the company and its shareholders. Understanding and upholding fiduciary duties will give you peace of mind and ensure your company benefits.

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Brette Sember, J.D.

About the Author

Brette Sember, J.D.

Brette Sember, J.D., practiced law in New York, including divorce, mediation, family law, adoption, probate and estates,… Read more

This portion of the site is for informational purposes only. The content is not legal advice. The statements and opinions are the expression of the author, not LegalZoom, and have not been evaluated by LegalZoom for accuracy, completeness, or changes in the law.