Fiduciary Duties of Corporate Directors

Directors’ fiduciary duties are the cornerstone of good governance, establishing the ethical and legal framework for trust-based relationships. A fiduciary is an individual who acts on behalf of another person or entity and has legal and ethical obligations to act in their best interests.

Under normal circumstances (except for situations of economic distress or controlling ownership, as described later), fiduciary duties are typically considered to be owed to the corporation through its owners—the individuals and institutions that hold its shares. This viewpoint is known as “shareholder primacy.” In contrast, the philosophy “stakeholder theory” argues that shareholders are just one of many constituencies that boards should serve (e.g., customers, employees, communities). The Business Roundtable made headlines in August 2019 when it championed stakeholder theory, although subsequent statements appeared to support shareholder primacy after all.

Fiduciary duties begin in the legal context but have a broad application beyond it. Understanding how fiduciary duties play out in decisions can help directors and members of management understand the benchmarks and best practices in corporate governance, improve their performance and practices, and prevent them from experiencing undue liability exposure.

Fiduciary Duties Arise from Equity Law

Regardless of guiding philosophy, the two main fiduciary duties under the laws of all 50 states are loyalty and care. That is, courts expect corporate fiduciaries to act with loyalty to the corporation and to demonstrate care concerning it.