Thursday, August 9, 2012

What are Fiduciary Duties of Directors as an Agent

Definition of Fiduciary Duties

Fiduciary duties are imposed on person having in position of trust. This situation arises when person having expert knowledge or skills due to which principal have no choice but to trust an agent.

Fiduciary duties are more stringent than duties under law of contract or law of tort.

Directors owe fiduciary duties toward shareholders.


Fiduciary Duties & Directors as an Agent

Some companies have grown in such size and complexity, which lead to large number of shareholders and as a result, specialist knowledge and skills are needed to run those companies. It is not possible that all the shareholders run the company. In addition, they may not have required knowledge and skill to run company of such size and complexity of operations. Therefore, board of directors (agents) are elected to manage the company on behalf of shareholders (principal). Therefore, they owe fiduciary duties towards shareholders those who rely on them.

Corporate governance codes extents accountability of fiduciary duties to all legitimate stakeholders rather than to shareholders according to law.


Fiduciary Duties

Following are the fiduciary duties.


1) Duty Of Responsibility For Power

Agent should exercise their power for proper purpose for which it is given.

Agents are allowed to exercise power for entering into transactions necessary to complete original task.


2) Duty To Avoid Conflict Of Interest

Agent should not accept commissions, gifts etc from third party for entering into transactions on behalf of the company.

In addition, agent should not put him/her in a position in which his/her own interest can compromise interest of the organization.

Conflict of interest should be considered from the eyes of the principal.


3) Duty Of Obedience

Agent is required to obey orders even if obedience results in losses to the principle.


4) Duty Of Reimbursement

Any profit made in the performance of his/her duties should be returned to the principle.

However, unpaid agent can hold assets of the principal if payment gets overdue and are not likely to be paid.

They can keep that profit after acquiring approval of principal.


5) Duty Of Confidentiality

Agent should not disclose any information obtained during his/her performance of duties as an agent to third party or use for personal advantage.

This duty applies equally to the period after employment or retirement.


6) Duty Of Skill & Performance

Agent should keep their knowledge and skill at a level necessary for performing his/her duties efficiently and effectively.

If agent possesses higher skills than expected for the performance of his/her duties, then he/she is expected to demonstrate performance of that level. However, lack of skills cannot be an excuse for bad performance.


7) Duty Of Provide Personal Services

Agent should not delegate his/her duties unless customary in the industry in which organization operates.

Agent is appointed in that position for his/her own personal qualities by the principal. Therefore, it is justified to provide personal service to the principal.