Roles & Responsibilities

Board of Directors’ Fiduciary Duty to Shareholders

Put simply, the board of directors’ fiduciary duties to directors doing all that is reasonably possible to advance the interests of the company and its shareholders. It’s easier to understand in the breach than in the observance. Imagine a judge asking you, if you voted for a board decision, every possible effort that made your decision was the right decision for the organization.

The judge wants to ask what efforts you made exactly? Will your answer be convincing? Did you leave something out?

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What Fiduciary Duty Means

In Australia, fiduciary duty is defined by the Corporations Act 2001 , and in New Zealand, a very similar definition is found in the Companies Act 1993 .

“The starting point is that a director has a good faith in the company. New Zealand law firm Lane Neave writes in a recent note : “What does a director do when he is in a position of responsibility?”

Directors must act in the best interests of the company. They can take prudent business risks, but they can not make rash business. This epitomises the conflict that a director can between his or her duty to the company, and to other stakeholders. While a company is solvent, it should be transacted with their interests in mind. “

In this regard, the fiduciary relationship is the highest level of care demanded by the law, equivalent to that expected of a doctor or a lawyer. Under Section 184 (1) of the Corporations Act, which seeks a criminal offense if the breach because the director or other officer of the corporation is reckless or intentionally dishonest. Directors may not delegate duties of care to others; whatever the circumstances, they are personally responsible for outcomes.

And, this definition, the definition of ‘reasonable degree of care’ becomes important. ‘Reasonable’ in this sense means the exercise in the same circumstances. Judges wants to use this paradigm when considering directors’ actions in court.

Any actions that place the director’s personal interests above those of the company are a breach of fiduciary duties. These include, taking advantage of a corporate transaction for personal gain. Taking actions that give gains to friends and relatives, including trying to get a job at the company, are thus clear breaches of fiduciary duties.

Fiduciary Duty to Shareholders

The interest of a shareholder in a company was conceived, for many years, as purely financial. If shareholders got the dividend they expected, and were able to sell their shares for a price that reflected the value of the company, then no one questions the actions of directors in terms of fiduciary duties.

Here is an example of the potential breach of fiduciary duties, in which Australian shareholders blame the directors for selling the company at a price that is too low:

“Under the terms of the transaction, Nortek shareholders will receive only $ 86.00 in cash for each share of Nortek stock they own. The Melrose is underpaying for the Company. The transaction may undervalue the Company and would result in either no loss or no gain for many Nortek shareholders. For example, Nortek stock traded at $ 89.99 per share on April 15, 2015 and traded at $ 86.78 per share on August 20, 2015. “

This view of fiduciary duties has changed, however, to both Australia and New Zealand. Directors must oversee the company in areas like Corporate Social Responsibility (CSR), Environmental and Social Governance (ESG), as well as in terms of maintaining relations with employees.

A report by Australian law firm Minter Ellison on fiduciary duties in Australia states ” failing to consider long-term investment value drivers, which include ESG issues, in investment practice is a failure of fiduciary duty. Integrating ESG issues into investment research and processes to make better investment decisions and to improve investment performance consistent with their fiduciary duties. “

CSR and ESG issues, with industry competition for responsible investment being a potential point of differentiation, suggests the industry association Principles for Responsible Investment. ESG issues – in particular, governance issues – are important and need to be accounted for in investment decision-making, the association notes. Above-benchmark returns to be responsible.

Diligent Governance Cloud supports directors in fulfilling fiduciary duties

Diligent Governance Cloud provides tools that help directors fulfill fiduciary duties. With support for secure communications, real-time access to all good practices, and diligent insights which provides the latest updates on governance and director responsibilities.

Governance leaders, executives and board directors rely on the industry-leading diligent platform for the most secure and intuitive solution to material management and collaboration. Diligent boards electronically stores a board’s agendas, documents, annotations and discussions within a secure board portal. Board secretaries and board chairs can use the portal to put together books in minutes. The portal has been designated virtual rooms for committee work. Administrators can use the portal to avoid unnecessary problems with confidentiality. The “Meetings Meetings” feature consolidates board directors’ contacts, calendars and the logistics of meetings. The program is a secure and intuitive solution for managing board materials and collaboration

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