Warning! Directors’ fiduciary duties

Directors have a long list of duties most of which are of a fiduciary nature. These are obligations that have to be taken seriously by all directors including non executive directors.

One question that needs to be asked is: am I able to fulfil my duties as a director? This is necessary for one’s own personal protection but also for the sake of the shareholders and other stakeholders of the business.

Fiduciary duties come in different shapes and forms.  Directors have a duty to act in good faith and not to act contrary to the interests of the company; they have the duty to avoid conflicts of interest; the duty to retain discretion, and not to use their power for an improper purpose. Directors are expected to display a high standard of care, skill or diligence, and they have a duty to remain loyal to the company.

The largest share of corporate scandals finds their roots in the wrong understanding, misuse or abuse by directors of their duties. Examples include directors not having the adequate care and skill to exercise their duties, or acting outside their powers. They could make decisions or take judgements which are not independent and which do not take into consideration the good of their company or its shareholders.

The institution of board committees creates a system of checks and balances.  The constitution of nomination, remuneration and audit committees strengthen the company’s governance and risk management structure. All business involves risks. A strong internal control system helps manage and control risks adequately, and create the desired balance between risk and reward. It is in the interest of directors to ensure that the financial control function is properly resourced, and that the company has appropriate, robust and tested internal controls.

A continuous directors’ development programme ensures that they are constantly being made aware of their role, responsibilities and the nature of their fiduciary duties. An annual board self- assessment programme provides board members with insight into the way they set strategy, take decisions, perform their duties, and run their board and committee meetings. Their involvement in setting the business objectives, and conducting an annual SWOT analysis, makes them aware of their relevance in the structure of the company, and this also provides a warning signal for chronic weaknesses and impeding threats to their business.

An opportunity to stop to reflect on the business and their role as directors on an annual basis, which can take the form of corporate retreats and away-days helps in strengthening directors’ awareness of their own duties in the context of a changing and challenging business environment.

About the author(s)

Joseph F.X. Zahra is a Malta based economist with over thirty five years of corporate leadership and business consultancy experience.