What is Fiduciary Duty? - meaning and responsibilities

Meaning and Definition of Fiduciary Duty. A fiduciary is:
A person with a Fiduciary Duty is someone in whom another person has placed the utmost trust and confidence to manage and protect property or money. stakeholdermap.com

What is a Fiduciary Duty?

what is fidicuary duty?

A person with a Fiduciary Duty is someone in whom another person has placed the utmost trust and confidence to manage and protect property or money. The Fiduciary Relationship describes a relationship in which one person has an obligation to act for another's benefit.
Managers of a firm have a fiduciary duty to manage and protect the property or money of the shareholders.stakeholdermap.com
In other words, in a fiduciary relationship a manager's primary obligation or duty is to act towards the benefit of the shareholders.

A fiduciary has two duties: a duty of loyalty and a duty of care. Loyalty means avoiding conflicts of interest and always acting in the clients best interest. Care is a duty to act rationally, provide clarity and be objective. It doesn't necessarily mean never making bad business decisions, but that due process should be followed. See more on the duty of loyalty and duty of care.

Many business experts agree that the fiduciary duty extends to stakeholders. In this model the management's traditional fiduciary duty expands to include stakeholders on a broadly equal basis as shareholders (Bucholtz and Carroll, p. 70).
For more on stakeholders and fiduciary responsibilities see Stakeholder Theory.
Indeed, the courts have not defined which relationships have a fidicuary relationship, and they don't place any restrictions on when a fidicuary relationship can arise. That said, in addition to managers and shareholders some other relationships are widely regarded has having a fidicuary duty:

Relationships widely regarded as having a Fidicuary Duty

  • attorney and client
  • Broker and principal
  • principal and agent
  • managers/directors and shareholders
  • trustee and beneficiary
  • executor or administrator and heirs of an estate

Fiduciary Obligations in the Corporation

In the Corporation creating a Fiduciary obligation is beneficial because it limits the agency costs in separating ownership of a corporation from control of that corporation. Owners (shareholders) delegate authority of corporate assets to managers who have a fiduciary duty to act selflessly in managing those assets for the owners.

Duty of Loyalty

Duty of Care

What is it?

The Duty of Loyalty prohibits corporate managers and & directors from engaging in transactions or taking actions in which their personal financial interest conflicts with that of the corporation.

The Duty of Care expects that directors will make informed decisions that they reasonably and rationally believe are in the interests of the corporation.
What could be a breach?

A director dealing with the corporation themselves, without disclosure and approval.

Favouring relatives in granting contracts.

Taking a business opportunity from the corporation.

Not having reporting systems in place that would alert directors & management to problems.

Not responding to red flags from monitoring & reporting systems.

NB – poor business decisions are not seen in themselves as breaches unless there was some other significant failure of process.

Fiduciary relationships also arise in investments, pensions, 401k etc. The video below defines the term fiduciary in relations to investing.

Video - What is Fiduciary Duty?

Video transcript

You have recently invested in a corporation on Wall Street and your hearing terms that you are not familiar with, and one of these terms is fiduciary duty.

Another is a phrase "fiduciary duty owed the shareholders by the board of directors". Another is "the fiduciary duty owed the shareholders by the corporate officers."

What is a fiduciary duty? Hello, I am Robert Todd and I am here to answer the question "what is a fiduciary duty?"

Well, generally a fiduciary relationship creating a duty - is a service relationship whereby the individual that owns the duty or the trust, such as the board of directors, to the individual empowering the trust, such as the shareholder, performs a service, and, in performing that service, owes a duty to the person that provided them with the authority to perform that service.

The fiduciary relationship contemplates a duty of the empowered individual, in this case the board of directors, to carry out the services to the best of their ability on behalf of the individuals, empowering them with that authority.

And that is a fiduciary duty. I am Robert Todd and thank you for watching.

Further reading on Stakeholders and Fiduciary Duty

Stakeholder Paradox - what is the stakeholder paradox?

Stakeholder Theory - Watch a short video of Edward Freeman explaining Stakeholder Theory

Quotations about the term Fiduciary

Executives are hired to maximize profits; that is their responsibility to their company's shareholders. Even if executives wanted to forgo some profit to benefit society, they could expect to lose their jobs if they tried—and be replaced by managers who would restore profit as the top priority, Arneel Karnani, University of Michigan associate professor of strategy, Wall Street Journal, August 23, 2010.
Most people don't know what a fiduciary is... and that's a person that will make a plan for you, but the law says they will look after your interests not their own. Tony Robbins
It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own self-interest. Adam Smith, author of The Wealth of Nations.
A corporate executive is an employee of the owners of the business. He has direct responsibility to his employers. That responsibility is to conduct the business in accordance with their desires, which generally will be to make as much money as possible while conforming to the basic rules of the society. Milton Friedman, 1970

Tony Robbins explains fiduciary

Fiduciary Duty references

Bucholtz, A. K. and Carroll, A. B. 2012. Business and Society , Ethics and Stakeholder Management. 8th edition. South-Western. Cengage Learning. Latest edition

Farlex, The Free Dictionary, 2015. [online] The Free Dictionary By Farlex. Available through: https://legal-dictionary.thefreedictionary.com/Fiduciary+obligation [Accessed 28 March 2015].

(Almost) DailyBrett Blog, 2011. Fiduciary Responsibility vs. Corporate Social Responsibility. [online] Available at: https://almostdailybrett.wordpress.com/2011/12/13/fiduciary-responsibility-vs-corporate-social-responsibility/

Further reading

Goodpaster, K. 1991. Business Ethics and Stakeholder Analysis. Business Ethics Quarterly, [online] Available at: https://www.jstor.org/discover/10.2307/3857592?sid=21106271952373&uid=2&uid=4&uid=3738032 [Accessed 28 March 2015].

Daniel Palmer, 2015. Handbook of Research on Business Ethics and Corporate Responsibilities, IGI Global. Also available at Safari Books Online.