According to UK law, a board director should serve the interests of the company or organization rather than their own or of other parties.
Such a board directors’ loyalty is specified in the directors’ fiduciary duties, and their breach can have severe consequences. For example, Andrew Tinkler, a former CEO of the Stobart Group, lost his post after allegedly breaching his fiduciary duties.
This article discusses the importance of fiduciary duties for corporate governance and lists the seven main directors’ fiduciary duties in the UK.
| What is a fiduciary duty? A fiduciary duty describes the relationship between the fiduciary and the principal. It involves a fiduciary taking actions in the best interests of the person or entity. |
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Visit WebsiteWhat is fiduciary duty of directors?
The directors’ fiduciary duties entail directors acting in the best interest of the company or organization. Above all, a fiduciary duty means loyalty to an organization.
A fiduciary duty covers the duty of confidence and trust between parties (an organization and director) and comes from common law duties of care, skill, and good faith.
Simply put, a fiduciary duty of board of directors imposes on directors to act in the company’s best interests and in a way that will benefit the company financially.
The importance of fiduciary duty in corporate governance is hard to overstate, as this is the key obligation of an individual (board director) to ensure the organization’s money is managed properly and in the best company’s interests.
Among other duties, board directors also owe the company statutory duties such as health and safety legislation, insolvency law, and anti-bribery law.
Legal framework for fiduciary duty of directors UK
In the United Kingdom, the fiduciary duty of directors is specified and controlled by the Companies Act 2006.
This is an Act of the Parliament of the United Kingdom that is a primary source of UK company law. It is an extensive code on how UK companies should build their operations and governance.
The Companies Act 2006 was implemented in a few stages, with the final provision being introduced on October 1, 2009.
List of the fiduciary duty of directors
The UK Companies Act 2006 lists the following seven directors’ fiduciary duties.
1. Act according to the company’s constitution
The main fiduciary duties of directors start with acting according to the company’s articles of association. This is the constitution of the company, with a set of rules that describe how the company and the board should operate.
For a company director, it’s essential to be familiar with the company’s constitution, as some of its articles may constrain their decision-making powers. Moreover, if any of the company directors exceeds their power, certain related decisions will be made, and they might even need to compensate the company for any financial losses due to their abuse of authority.
2. Promote the success of the company
Another major point on the list of directors’ duties is to promote the company’s success and follow the interests of the company.
This duty might seem obvious on the surface — a company director should act in good faith to best promote the success of the company for the benefit of its members.
However, it comes with various implications. For example, the ethical decision-making by directors can only be justified by the interests of the company and not by the interests of anyone else — executives or shareholders.
According to this statutory duty, a director should take the following into consideration when making decisions:
- Employees’ interests
- Need to act fairly between board members
- Company’s impact on the environment and the community
- Possible long-term consequences of any decision
- Necessity to foster the company’s relationship with suppliers and customers
3. Exercise independent judgment
It’s one of the major directors’ duties, which means directors must be able to develop their own view of the company’s activities.
A company director should not be just a delegate who obeys the commands of other directors or shareholders when making decisions. It’s a director’s duty to be able to form their own opinions, instead of relying on the knowledge and expertise of other directors or shareholders.
4. Exercise reasonable care, skill, and diligence
This duty implies that directors act according to their skills and knowledge. It means that having a famous name or reputation isn’t enough to become a board director. Company directors should have specific knowledge and expertise to perform their duties to align with the company’s business.
The benchmark is that a reasonably diligent person with general knowledge and skills should be expected to carry out the director’s functions. However, directors with specific expertise and knowledge are held to a higher standard in related issues compared to less qualified directors.
5. Avoid conflicts of interest
These include direct or indirect interests, as well as actual and potential “situational” and “transactional” conflicts.
A board director should avoid situations that involve conflicts of interest. Examples of where a conflict of interest can arise include situations when a board director has personal or business relationships with a person or entity affected by the company’s activities.
If a conflict of interest appears, a company director should disclose it to fellow board members. Then, they will decide how to manage this situation to preserve the integrity of the board’s decision-making.
6. Avoid personal benefits from third parties
Just like with the conflict of interests, a board director should avoid situations where they accept benefits from any third parties affecting or influencing the director’s objectivity.
Based on our observations, a “third party” is a person or group of people not directly or primarily involved in company business.
7. Declare interests in proposed or existing transactions
If a director has a direct or indirect interest in an existing or proposed transaction, they must clearly declare their interest.
An interest can be declared:
- At board meetings
- By a notice to the directors
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Fiduciary duty of directors to shareholders
Basically, the board of directors’ fiduciary duty to shareholders is the same as the duty to the company — to act in a way that benefits the interests of the company and its shareholders.
Additionally, as a part of the directors’ fiduciary duties UK, a board director should also:
- Maximize shareholder value. This means board directors have to make decisions with the shareholders’ best interests in mind — increasing and protecting shareholder value should be their main interest.
- Act in the best interest of shareholders. All decisions should be made in the best interest of shareholders.
- Provide accurate information. A board director should disclose all the information regarding any direct or indirect interest in an existing or planned transaction, as well as provide accurate information on the company’s current business.
- Avoid insider trading and market manipulation. A board director should not trade any company’s shares based on their access to confidential information or news not available to the general public.
- Ensure proper corporate disclosure. A board director should also be honest and execute full disclosure at all times.
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Consequences of fiduciary duty of directors breaches
When a board director breaches their duties, and the company, shareholders, or the company’s creditors suffer from the consequences, the following actions may be taken.
Director’s removal
If 50% of the board members vote for the director’s removal, they can be suspended or removed from the board temporarily or permanently. However, the director must be allowed to present their side of the case to representatives that will take part in meetings.
The way this process is conducted is described in the company’s constitution.
Interim injunction
This results from court proceedings and halts any ongoing actions in breach of the director’s duties. This is done to limit or avoid the probability of potential financial losses and damages to the company’s reputation.
Financial implications
If, due to the director’s breach of duties, the company experiences financial losses, the director then can be obliged to contribute to the company’s assets and repay those losses. It always implies a director losing his home and becoming bankrupt.
Shareholder proceedings
Sometimes, shareholders can sue the director(s) in court. This is a complex process that typically happens when shareholders fear that other directors are supporting the one(s) who breached their duties.
Transaction cancellation
According to the rules of transactional conflicts of interest, an existing transaction can be set aside until the company’s reputation is restored or financial losses have been reimbursed.
Key takeaways
A board director’s fiduciary duty UK compels them to act in the company’s best interests that might benefit an organization financially.
According to the Companies Act 2006, there are seven statutory duties of board directors in the UK:
- Act according to the company’s constitution
- Promote the company’s success
- Exercise independent judgment
- Exercise reasonable care, skill, and diligence
- Avoid conflicts of interest
- Avoid personal benefits from third parties
- Declare interests in proposed or existing transactions
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What happens if directors breach their fiduciary duties?
There are certain consequences for breaching fiduciary duties usually stated in a company’s constitution. A breach of the director’s fiduciary duties can result in the director’s removal, interim injunction, financial implications, shareholder proceedings, and translation’s cancellation.
How can directors fulfill their fiduciary duties?
To fulfill their fiduciary duties, the directors must act fairly, ethically, and responsibly by following the company’s constitution while always keeping the company’s best interests in mind.