The term ‘fiduciary’ in law refers to the trust and relationship between a trustee (director) and beneficiary (shareholders). The word itself derives from the Latin word for trust, which is at the core of a director’s duties when running a business.
What do fiduciary duties mean for a director?
As a director of a company, your obligations to act within the best interests of the company and shareholders are known as your fiduciary duties. Failure to adhere to your fiduciary duties can result in termination from your role, or even personal financial repercussions. Understanding what your duties are as a director, and how to uphold them, is important to not only run a successful company, but being a successful director.
To ease any confusion, I’m going to clearly explain each aspect of the duties as laid out by UK government law and provide some real-world examples of when you need to consider them.
Your duties as a company director
The general term of ‘acting within the company’s best interests’ can be difficult to understand what these duties involve and what specifically to be aware of. Here are the main points to consider when acting as a director:
Act within your power
When you become the director of a business, your company will have a legal document called the articles of association. When a UK company is registered, it must file its articles of association with Companies House, whether they chose to write their own or use the default model articles provided by the government.
This document works as a rulebook for any company director, defining the boundaries and responsibilities of the company directors and how operations should be handled within the business. Acting outside of the articles of association can be a breach of fiduciary duties and be cause for serious consequences.
Acting within the best interests of the company
As investors in the business, shareholders have an interest in the company’s profits, reputation and long-term future. When making any decision, a director has the responsibility to ensure that the result of that decision is in the best interests of the shareholders as a whole, not a single individual or the directors themselves personally.
Under the Companies Act 2006, directors must consider the long-term consequences of their decisions, considering the interests of the employees and shareholders, along with the potential impact on the community and environment. Some examples of acting within these best interests include:
- Not choosing suppliers based on personal relationships.
- Not selling company assets for less than they are worth to someone you know.
- Not awarding yourself a high salary or bonus that impacts company profits.
Use independent judgement
As a director, your job is to consider all the information provided to you from all parties and use it to form an independent judgement on how best to act for the benefit of the company.
This may involve seeking professional advice or conversing with shareholders and other directors to gain a full understanding of the company’s activities. With this knowledge, it is then a director’s duty to make decisions based on independent judgement, without just following what other parties want. This may include challenging others in the company such as CEOs and other directors should you feel they are not acting in the company’s best interests.
Exercise reasonable care, skill and diligence
Directors are the decision-makers of a business. When appointed as such, it is generally understood by those working in the company that the director has the necessary knowledge, skill, and experience to carry out their duties.
When making important decisions, it’s expected that directors will draw upon and utilise their knowledge to act within the best interest of the company. Failure to apply that knowledge appropriately can be seen as a lack of care, skill and diligence. Poor decisions can carry serious reputational consequences for the business.
Disclose any conflicts of interest
If a director has a personal relationship with a third party that the company is considering doing business with, this must be disclosed. If it isn’t disclosed and a third party with a personal connection to the director is selected, this is a conflict of interest and the decision to appoint that person or company could be placed into question.
To avoid this, disclosing any personal relationships with third parties to shareholders and other directors is imperative. This transfers the decision to non-conflicted board members, allowing them to decide how to proceed. This not only maintains the integrity of the decision-making process, but also ensures the director is acting within their fiduciary responsibilities.
Reject personal benefits from third parties
Alongside disclosing any conflicts of interest involving other parties, directors must also disclose any instances where they have personal interest or could personally benefit from a decision.
This may include situations where a company has offered a director a personal gift, with the intention of influencing a future decision. Additionally, if a decision would result in a director benefiting more than other parties, this must also be disclosed. In such cases, the decision should be passed to other board members to consider before moving forward.
Keep records for future reference
Alongside your fiduciary duties, directors are also expected to keep records of company activities to demonstrate compliance. In the event someone questions the compliance with the fiduciary duties, a director must be able to provide evidence of the decision-making process. By law (as of the current Companies Act 2006), minutes of any meetings and discussions regarding company activities must be kept for a minimum of 10 years.
Keeping detailed and up to date records builds a clear picture of the decision-making process, which can be referred to in the future or used as evidence should a director’s conduct ever be called into question.
Consequences of breaching fiduciary duties
In the event a director is found to have breached their fiduciary duties, there are a number of potential consequences depending on the severity of the breach and the actions taken by the company.
Loss of trust and business reputation
If directors are found to have not acted within the best interests of the shareholders and business, this can result in loss of trust from them, making it harder to gain their support with future decisions.
Additionally, third parties (such as suppliers and customers) may associate the director’s actions with the company, resulting in a poorer business reputation and potentially loss of sales and consumer trust.
Removal as a director
Should shareholders wish, they can vote to formally strip a director of their role and responsibilities within the company. This vote requires more than 50% of the shareholders to agree to the removal, however the director must be given the opportunity to provide representation for themselves to defend their position.
In more serious cases, if a director is found to have acted in serious breach of their duties, they can be disqualified by a court, legally banning them from being a director for any other UK company for a set period of up to 15 years and potentially fining them for any legal costs incurred.
Financial repercussions
In cases where a director is found to have gained personally from a decision, the company may seek financial compensation to recover those gains. Unlike employees, directors can be held personally liable for any company losses as a result of their misconduct.
Personal liability is a significant consequence many directors are unaware of, so ensuring any potential conflicts of interest are disclosed is imperative to ensuring adherence to your fiduciary duties.
Being a director carries a significant amount of legal and ethical responsibilities. Ensure you regularly consider your company’s articles of association to ensure you are adhering to your duties and acting within the best interests of the company and shareholders. For further advice, speak to a member of our team at Revive Business Recovery.
