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What are the Fiduciary Duties of a Director?

5 minute read | Apr 10, 2020
management, finance

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A Director is a person generally appointed by a company’s shareholders to attend, participate and vote in Board meetings and oversee the role and function of a Board.

5 Basic Fiduciary Duties of a Director

A Director has a ‘fiduciary relationship’ with a company which is a duty of fidelity and trust to always act in the best interests of the company as a whole and not oneself or a third party.

In performing their role, a Director is subject to five key duties and obligations under corporation law, and the company’s constitution:

  1. ✅Good Faith & Best Interests
  2. ✅Act for Proper Purpose
  3. ✅Avoid Conflicts of Interest
  4. ✅No Misuse of Position or Information
  5. ✅Exercise Care & Diligence

Acting with Loyalty and Good Faith

The first four fiduciary duties relate to acting with loyalty and good faith. Below is a summary with breach examples:

Fiduciary Duty Description Breach Example
1. Good Faith & Best Interests Decision making on behalf of the best interests of the company as a whole ❌ Vote influenced by an appointee or major shareholder
2. Act for Proper Purpose Doing things for their intended purpose in the interests of the company as a whole rather than a collateral benefit ❌ Issuing shares to dilute a shareholder vs raising proceeds for a valid purpose
3. Avoid Conflicts of Interest Must not place oneself in actual or potential possibility of conflict ❌Not disclosing material interests in a takeover company or competitor
4. No Misuse of Position or Information Must not misuse position to gain an advantage for oneself or someone else or to cause detriment to the company ❌Insider trading. Setting up a competing company. Phoenix activities

Exercising Care and Diligence

Simply acting with loyalty and good faith is not a sufficient liability defence. A Director must also act with skill, care and diligence in overseeing strategy, risk and management of a company.

At a minimum a Director should exercise care and diligence across these four areas:

  1. ✅Familiarity with business
  2. ✅Read Board papers
  3. ✅Make enquiries
  4. ✅Board approvals
Care & Diligence Description Breach Example
Familiar with business Become and stay on top of the business and financials ❌Not understanding how business operates. Insufficient accounting knowledge.
Read Board papers Request and read all Board papers in advance, carefully review Board minutes ❌Relying on opinions of other Directors. Disputing minutes in hindsight.
Make enquiries Question management and seek external advice on issues that have significant potential to harm company ❌Relying on management reports. Lack of reported risks
Board approval Important strategic decisions, contracts and announcements should be brought to Board ❌No risk appetite framework. Not reviewing material market announcements

Statutory Duties & Liabilities

In addition a Director faces statutory duties and liabilities dependent on the legal jurisdiction:

Statutory Duty/ Liability Breach Example
Insolvent Trading ❌Incurring further debts of any kind if a company is unable to pay all its debts as and when they become due and payable (including employee pay)
Continuous Disclosure ❌For listed companies not immediately disclosing a material contract loss
Tax Laws ❌Un-remitted employee withholding tax or retirement contributions
Competition & Consumer Law ❌Cartel behaviour. Truth in advertising
Work Health & Safety Law ❌Breach of work health and safety regulation (face imprisonment for reckless breaches)
Anti-Discrimination Law ❌Discrimination in relation to age, disability, union, race, sex etc
Environmental Law ❌Federal and state environment protection legislation

What are the Consequences of Breach of Directors’ Duties and Laws?

Criminal sanctions 👮

Imprisonment dependent on the severity of the outcome and if directors found to have acted dishonestly or recklessly in failing to comply with duties. Not protected under insurance and indemnification

Civil sanctions/ Disqualification ⚖️

Liable for civil penalties including fines, class action lawsuits and disqualification as a director for long periods of time

Commercial/ Brand damage 📰

Reputational damage can damage the company as a whole well beyond the penalties imposed on its directors

How can Directors Best Protect Themselves Against Liability?

A Director should at a minimum follow these seven steps:

  • ✅Always act in good faith and best interests of the company as a whole and for proper purpose
  • ✅Avoid/ disclose conflicts of interest
  • ✅Exercise care and diligence by reading Board papers, making proper enquiries and staying up to date with the business and industry
  • ✅Engage external advice where required but always make independent assessments
  • ✅Avoid insolvent trading
  • ✅Be familiar with the laws of your industry
  • ✅Obtain insurance and indemnification

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