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Fiduciary duties: What every business director should know

Fiduciary duties are an intimidating concept for many in the business world — and understandably so. Directors and officers can be held personally liable for violating these duties. Knowing what they are — and how to comply with them — is thus crucial to fulfilling your role in a business.

 

The three core duties

In broad terms, a fiduciary is someone who holds a position of trust, acting on behalf of others to manage assets or property. Business officers and directors are fiduciaries because they’re managing the success of a business owned by shareholders (or members).

Texas law recognizes three key fiduciary duties in this context:

  1. Duty of obedience: Directors and officers must stay within the realm of their authority (as established by the business’s governing documents). Violations of this duty may involve illegal or unethical activities, or actions in direct contravention to the board’s wishes.
  2. Duty of loyalty: Directors and officers must place the interests of the business above their own personal interests. That means avoiding the use of business assets and opportunities for personal gain. It also means remaining vigilant about conflicts of interests. Conflicts that go undisclosed can potentially lead to personal liability for violating this duty.
  3. Duty of care: Directors and officers must use reasonable care and diligence in making business decisions. However, running a business isn’t easy, and the law recognizes that well-meaning business decisions can have less-than-favorable results. Directors and officers generally won’t be held liable for the poor outcomes of decisions that were made in the sound exercise of business judgment.

While these duties may seem straightforward, they aren’t always intuitive, and gray areas abound.

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