Every executive working for a corporation, regardless of the corporation’s size, has a fiduciary duty to their company. This duty is not merely some high-minded principle about company loyalty. It is a legal responsibility that can invite serious problems if an executive is not careful and violates it. But what exactly is the fiduciary duty, and how might an executive violate it?
Defining the Fiduciary Duty
In simple terms, a fiduciary duty is a legal responsibility to act in someone else’s best interests. For example, a lawyer has a fiduciary duty to prioritize the interests of their clients, and to follow their directives within the scope of the law. A doctor, likewise, has a duty to their patients to ensure they receive a proper standard of care. And an executive has a duty to their company to do what they believe is best for their company.
Breaking It Down
The fiduciary duty of an executive breaks down into several components:
- The Duty of Loyalty: Every executive must remain loyal to the company, placing their company’s interests over their own.
- The Duty of Good Faith: Every executive must do what they genuinely believe to be in the best interests of the company, and not act duplicitously or with ulterior motives.
- The Duty of Care: Every executive must perform due diligence to ensure they are making well-informed decisions on behalf of their company.
- The Duty to Disclose: When an executive’s fiduciary duty conflicts with other interests, such as their personal investments, they must disclose as such to the board of directors, and do whatever is necessary to cure that conflict.
Why Violating A Fiduciary Duty is Such a Big Deal
When an executive violates their fiduciary duty, they have placed their own personal interests over that of their company. Executives are empowered to make important decisions on behalf of the company, and by breaching that duty, they show their decision making is colored by something other than their sound business judgment. This can potentially cost the company a substantial amount of money, and incur significant legal liability for the company. This can be especially problematic if the executive in question was personally enriched by the breach of duty.
What To Do When Someone Violates Their Duty
When an executive violates their fiduciary duty, there are a few steps that can be taken. The board of directors may have the executive suspended or removed from their position. In addition, shareholders may sue to have the breaching executive held legally accountable, if the board refuses to take action. However, the best thing you can do is try to identify potential breaches of fiduciary duty before they occur, such as potential conflicts of interest, and for that, you will need the guidance of lawyers with knowledge of corporate law.
The business law attorneys at Blodnick, Fazio & Clark are skilled and knowledgeable in the areas of business law and commercial transactions. With offices conveniently located in Garden City, Nassau County, and Babylon, Suffolk County, the firm provides high-quality legal care at reasonable prices. If you require legal assistance concerning business startups, formation, corporate acquisitions and mergers, corporate restructuring, or another business matter, call (516) 280-7105 or fill out our contact form for a free consultation.