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What Is Fiduciary Duty

A fiduciary is a person or entity that is legally responsible for managing the assets of another person or group. Fiduciary duties are legal obligations that arise out of the willful choice to act as a fiduciary on behalf of a counterparty (often called a principal or a beneficiary, depending on the context); such a duty compels the fiduciary to act in good faith to pursue and protect the best interests of the counterparty. This arrangement provides certain protections to the counterparty, including the right to sue a fiduciary that fails to uphold its fiduciary duties.

In Texas, officers and directors of a corporation have fiduciary duties to the corporation and its stockholders. Broadly speaking, fiduciary duties fall into two categories: the duty of loyalty and the duty of care.

The duty of loyalty demands that a decision maker act for the benefit of the business rather than for personal gain. This duty is absolute and requires undivided loyalty. If you think this sounds extreme, you are right and the Texas Supreme Court wants it to be that way. In the words of the court, the duty of loyalty involves an “extreme measure of candor, unselfishness, and good faith”. These three components serve as guideposts in understanding the duty of loyalty. Candor means the fiduciary must avoid making self-benefiting transactions without board approval. Unselfishness means the fiduciary must not seize corporate opportunities for personal gain. And good faith means the fiduciary must maintain the company’s confidential information.

The duty of care, at its core, means a fiduciary has a duty to keep informed and to use ordinary care and prudence when making decisions for the company. This duty can also be divided into three fundamental components. First, a fiduciary should act in good faith, safeguarding corporate information. Second, a fiduciary should act with ordinary care, and refrain from making any patently risky or reckless decisions. Finally, a fiduciary must also act in a manner that he or she reasonably believes to be in the bests interests of the company.

While “ordinary care” and “reasonably believes to be in the best interests of the company” may sound somewhat vague, there are a few things you should never do as a fiduciary. You should never profit from your relationship with the corporation unless you first have the express informed consent of the corporation or stockholders. You also must avoid any conflicts of interest between yourself and the principals or between the principals and you other clients or business interests. This includes acts such as sharing or trading on insider information, directing company funds toward a business you own or hold stake in, and withholding or hiding information about a conflict of interest between your personal or outside business interests and a decision facing the company.


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