Shelagh Donnelly Image
Shelagh Donnelly
Speaker, Trainer & Content Writer

Board of directors’ fiduciary duty to shareholders

March 20, 2019
0 min read
List of board of directors’ fiduciary duties

While they may not understand the nuances of your role as a corporate secretary or other governance professional, your colleagues and acquaintances likely do appreciate that your contributions are held to a particularly high standard. After all, the expectations people have of your performance are consistent with the evolution of governance practices ' and, therefore, with the expectations of individual directors and your board as a whole.

Just as your board will undertake succession planning with an eye to independence, integrity and ethics alongside expertise, diversity and commitment, your directors should have done their own due diligence before joining the board. One primary consideration? Director nominees need to understand their fiduciary duty to shareholders.

This is where a good governance professional plays a role in risk management that benefits the organization as well as individual directors and the board. It would be imprudent to assume that an incoming director is well versed in her or his fiduciary duty to shareholders. That will hopefully be the case, but the onus is on the organization (you) to ensure that such fiduciary duties are documented, discussed and understood.

For experienced directors, the need for discussion may be minimal, as fiduciary duties will ideally be well engrained and honored. You'll want to remember, though, that board recruitment trends are also changing ' even if ever so modestly. The 2018 United States Spencer Stuart Board Index, reported that 22% of S&P 500 boards added two or more new directors during the 2018 proxy year. A total of 428 new independent directors began serving on S&P 500 boards in 2018, and these directorships represent the first such public company board experience for a third of those individuals.

Only 35.5% of 2018's 428 new S&P 500 directors are active or retired CEOs, chairs, vice chairs, presidents or COOs. In fact, 17% of this 'class of 2018' were 50 years or younger upon selection and more than a third of them brought technology or telecommunications sector qualifications to their respective boardrooms. Spencer Stuart identified technology experience, digital experience and then social media as the three top skills or qualifications these younger directors brought to their new boards.

Spencer Stuart's findings serve as a reminder of the significance of effective onboarding practices. You need to ensure that your new directors understand governance and their fiduciary duty to shareholders. Ideally, this knowledge will be confirmed, acquired or honed as part of the recruitment process and not after the fact.

Board of Directors' Fiduciary Duty to Shareholders

How would you describe fiduciary duty to a novice nominee? In Canada, you might begin with a discussion of the Canada Business Corporations Act (CBCA). Incoming directors should take responsibility for familiarizing themselves with the legislation and its requirement that they conduct themselves with loyalty as they consistently monitor the corporation's business and affairs. Fiduciary duty requires that directors also conduct themselves in good faith and with honesty. Directors must set aside their personal interests in order to safeguard and act in the best interests of the corporation, and they are not to disclose or misuse confidential or 'inside' information.

Consistent with legislation in other countries, directors are not to appropriate or otherwise take advantage of opportunities associated with or belonging to the corporation. A director is expected to disclose any conflict of interest (professional or otherwise) that may arise, and then abstain from both discussion and voting on the matter under consideration.

The CBCA specifically charges directors with the duty to manage. Legislation states, 'Subject to any unanimous shareholder agreement, the directors shall manage, or supervise the management of, the business and affairs of a corporation.' The same legislation identifies some limitations on authority.

It's reasonable for shareholders to expect directors to understand and honor duty of care as a core governance principle. Legislation requires that every director and officer of a corporation 'exercise the care, diligence and skill that a reasonably prudent individual would exercise in comparable circumstances'. Canadian directors also need to be aware of expectations and regulations established by provincial and territorial securities regulators and their national body, the Canadian Securities Administrators (CSA).

If you're preparing to discuss fiduciary duty to shareholders with a novice nominee for the board of a U.S. corporation, the legislation and regulations will differ, but there are consistencies in terms of what's expected. Directors have a responsibility to familiarize themselves with relevant legislation and regulations, and legislation stipulates that directors have a fiduciary responsibility to oversee the business and affairs of a company. Directors are responsible for organizational oversight and must acquit themselves in a manner that meets expectations associated with their duties of loyalty, care and obedience.

Director's Responsibilities

Directors must act in good faith and in the best interests of their corporations. Duty of loyalty requires that a director prioritize the interests of the corporation and not only its shareholders, but also its stakeholders, over personal interests. There's also risk management.

In her 2014 remarks to the Twentieth Annual Stanford Directors' College at the Stanford University Rock Center for Corporate Governance, then-Chair of the Securities and Exchange Commission (SEC) Mary Jo White posited that a company's directors are its essential and most important gatekeepers. She spoke to directors' roles in oversight and in 'preventing, detecting, and stopping violations of the federal securities laws' at their companies, and responding to problems that occur.

Duty of care mandates that directors apply objectivity and reasonable standards of skill and care that any prudent person would exercise in the fulfillment of their responsibilities. Duty of obedience reflects compliance requirements. Directors are expected to ensure that not only their personal actions, but also those of the corporation, comply with regulations and with local, state and federal legislation.

Importance of Succession Planning

Effective succession planning supports another of your board's duties, that of building and maintaining an independent, qualified and diverse board.

Annual audit reports provide shareholders with transparent and accurate insights on the corporation's financial position, and it's the board's responsibility to ensure that such audits are completed by independent parties in a timely manner.

Some duties span borders. As a governance professional, and wherever you're based, you know that your board of directors has a duty to maintain the minutes of its meetings and make them accessible in a timely manner to directors ' and, as appropriate, to shareholders. Minutes serve as evidence of a meeting having been held, what was done and who was present.

Whatever your jurisdiction, your board can benefit from enterprise governance management (EGM), the application of technical tools and resources to meet your governance needs. Diligent Corporation's Governance Cloud provides an innovative range of governance software solutions that includes agenda package and minutes software, secure messaging, D&O questionnaires and more. You and your board can tap into an array of resources that support effective board operations ' and those tech-savvy Next-Gen directors your board wants to recruit will find your board all the more appealing for all the efficiencies and security Diligent affords your board.


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