What it means
The relationship arises whenever one party places trust in another to act on their behalf and the second party accepts that responsibility. The classic examples are a company director acting for shareholders, a trustee acting for beneficiaries and a pension trustee acting for members.
What all of these share is an imbalance of information and control, which the law compensates for by imposing a higher standard than ordinary commercial dealing. Fiduciary duty is usually broken down into several strands.
The duty of loyalty means putting the beneficiary's interests ahead of your own; the duty of care means acting with the diligence a reasonably careful person would apply; and the duty to avoid conflicts means not placing yourself where personal gain and duty could pull in opposite directions. Directors also carry duties to act within their powers and to promote the success of the company.
In business conversation the phrase surfaces most often around conflicts of interest. A director who steers a contract towards a company owned by a relative, or an adviser who recommends the product paying the largest commission, is in fiduciary trouble regardless of whether the decision happened to work out well.
The test looks at the conflict itself, not just at the outcome. Disclosure and approval are the usual escape routes.
A director who declares an interest in advance and steps out of the vote can often proceed lawfully, because the beneficiaries have been given the information needed to judge for themselves. Silence is what turns an awkward situation into a breach.
Non-finance managers meet fiduciary duty most directly when they join a board, a charity committee or a pension trustee body. Accepting one of those roles means accepting personal legal responsibility that does not disappear because you were busy, unpaid or relying on somebody else's advice.
In practice
Real-world examples.
Example
A technology company's chief executive learns during a board meeting that a takeover approach is coming and buys shares the next morning. Beyond the insider dealing question, this is a breach of the duty of loyalty, because she used information belonging to the company for personal gain.
Example
A charity trustee suggests appointing his own consultancy to run a fundraising campaign. He declares the interest at the start of the meeting, leaves the room during the discussion, and the remaining trustees compare three quotes before deciding, which keeps the process clean.
Example
A financial adviser places a retired client's savings into a fund that pays him a 4% commission when a similar fund with a 0.2% charge was available. Even if the fund performs well, the adviser has failed the duty to act in the client's best interests.
Think of it
“Fiduciary duty is the legal obligation to put someone else's interests first-usually shareholders' interests.
Case study
Seen in the real world.
What follows is an illustrative and entirely fictional story. Pemberton Vale Logistics, an invented family owned haulage group, appointed a long standing operations director to its board, and within a year he had quietly awarded the group's tyre replacement contract to a business run by his brother in law. The prices were roughly in line with the market, so nobody noticed for three years.
When a new finance director ran a supplier review, the connection surfaced and the board had to decide what to do about a director who had never declared the relationship. The fact that the pricing was fair did not settle the matter, because the fiduciary breach was the undisclosed conflict rather than any overcharging, and the director was required to repay the profits attributable to the arrangement.
In this fictional case the board also changed its own procedures, introducing an annual register of interests signed by every director and a rule that any contract above $50,000 involving a connected party must go to the audit committee. The episode cost the company far more in legal fees and lost management time than the contract had ever been worth.
Watch out
Common mistakes.
- Believing that a good outcome cures a conflict of interest, when the breach happens at the point the conflict is concealed.
- Assuming fiduciary duty applies only to money, when it also covers information, opportunities and the honest use of position.
- Thinking that a non-executive or unpaid role carries lighter duties, when the legal standard is essentially the same as for a paid director.
Questions
People also ask.
Who exactly owes a fiduciary duty in a normal company?
Directors owe it to the company, and senior employees, trustees, partners and agents can owe it too depending on the trust placed in them.
What happens if someone breaches it?
Consequences range from repaying profits and compensating losses to disqualification from acting as a director, and in serious cases criminal charges may follow.
Does declaring a conflict make it acceptable?
Usually yes, provided the declaration is made before the decision, is complete, and the person steps back from the decision itself.
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