Fiduciary responsibility

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A fiduciary is a person or organisation that acts on behalf of another person or persons, putting their clients’ interests ahead of their own, with a duty to preserve good faith and trust. Being a fiduciary thus requires being bound both legally and ethically to act in the other’s best interests. For investors, fiduciary duty has been widely interpreted as the obligation of trustees and other fiduciaries to maximise investment returns.

It is now commonly recognised that the pursuit of maximum investment returns requires the integration of environmental, social, and governance considerations, including the impacts on society and the environment, in making investment decisions. / a duty on the part of one party (the fiduciary) to act in the best interests of another party (the principal or beneficiary).

In some cases, if the fiduciary does not fulfill its duty, it may be held financially responsible for any losses on the part of the beneficiary. Common examples of Fiduciary Duties include an attorney’s duty to their client, a board member’s duty to shareholders, and a trustee’s duty to the beneficiaries of a trust.

The board of directors’ duty to the company has been interpreted as an obligation to the shareholders and includes duties of care, loyalty, and candor. Under state corporate law, the board of directors has a legal obligation to act in the “interest of the corporation.” In legal terminology, this is referred to as a fiduciary duty to the corporation.

Although somewhat ambiguous — since a corporation is simply a legal construct that cannot have its own interests — the courts have interpreted this phrase to mean that a director is expected to act in the interest of shareholders and sometimes other stakeholders (See: Freshfields Paper).

Court decisions often refer to a fiduciary duty to “the corporation and the shareholders” or even just to the shareholders. The fiduciary duty of the board includes three components: a duty of care, a duty of loyalty, and a duty of candor.

Links

PRI: What is fiduciary duty and why is it important?