A Quick Guide to Fiduciary Duties

If you’re a member of a board of directors, have you ever wondered what you are supposed to be doing? Maybe you agreed to join the board because you felt some sort of obligation to the person that asked you to do it, or perhaps you thought it would be a good resume-building or networking opportunity. And now you’re unsure about what your role is or how to add value. Well, understanding your legal duties as a board member is a good place to start.

The law says that the directors and officers of a corporation are called fiduciaries of the corporation and that as fiduciaries they have certain duties.

What is a fiduciary?

A fiduciary is a person who watches over an item of value on another person’s behalf. A fiduciary is a trustee or caretaker.

Example: Let’s say you’re a person that travels a fair amount for work. Odds are high that someone who lives near your home has a spare key to your house in case you need your mail checked or something happens to your house while you’re traveling. That person is a fiduciary. He or she is watching over your house—an item of value—on your behalf.

What are a fiduciary’s duties?

Fiduciaries have three primary duties: the duty of obedience, the duty of care, and the duty of loyalty.

1. Duty of Obedience

Fiduciaries have a duty to make decisions that comply with the law and with an organization’s governing documents and mission.

Let’s continue using the example of your neighbor or friend keeping a key to your house. That person has a duty to comply with what they know—both explicitly and implicitly—about your wishes for your house. As a fiduciary, they don’t have the luxury of ignoring your wishes and doing what they please.

In the same way, board members cannot simply ignore the law or an organization’s articles of incorporation, charter, bylaws, parliamentary procedure rules, or policies. They cannot choose when they want to follow these documents and when they don’t. Of course, this assumes that board members have a basic knowledge of the governing documents that exist and their provisions, and it assumes that they know where to find the details when needed or applicable.

2. Duty of Care

Fiduciaries have a duty to make decisions with care. More specifically, they have to make choices with the amount of care that a reasonable person would have in a similar situation, and in a manner they reasonably believe to be in the best interests of the organization.

Back to our example again: The caretaker of your home has a duty to actually pay attention to what’s happening to your home while you’re away, and if she sees something that’s “off” or damaged, she can’t just shrug her shoulders and walk away thinking, “Well, it isn’t my home, so I don’t really need to worry about it.”

Similarly, members of a board don’t have the luxury of not knowing what’s going on in an organization or of turning their head when they don’t want to deal with difficult issues. At a foundational level, exercising a duty of care as a board member means that you attend board meetings and prep for them by reading materials in advance and coming ready to meaningfully engage. Care level needs to be high.

3. Duty of Loyalty

Fiduciaries have a duty to make decisions in the best interests of the organization, not in their own best interests. They have a duty to use the resources and information of the entity for the entity’s benefit, not their own benefit. This duty includes their responsibility to recuse themselves from discussion and votes on actions where they have a conflict of interest.

And again with the house example… A duty of loyalty means that your neighbor-caretaker can’t paint your house a different color while you’re gone simply because she’s never liked the color it is now. A duty of loyalty requires her to set aside her own interests and care for your house based on your direction.

When it comes to organizational decisions, board members have an obligation to view decisions through the lens of the organization as a whole, not considering what would benefit them personally or what might benefit their specific region or constituency.

Your Job

If you’re a board member, don’t get distracted from your basic fiduciary responsibilities of obedience, care, and loyalty. The best way you can serve your organization is by providing meaningful leadership that is in line with the group’s governing documents and purposes, that gives good attention to the progress of the group, and that works for the good of the entire group.