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2.10 Directors' Duties: Loyalty and Good Faith.
The directors' fiduciary duty is often referred to as a duty of loyalty and good faith. In law people in a fiduciary position should behave honestly, fairly and should not abuse their position. In the case of companies, directors owe their fiduciary duty to 'the company as a whole'. This has been taken to include, variously, the legal entity of the company (although one might question how an abstract legal entity can be in a relationship of trust with anybody), the present and future shareholders of the company, the creditors, and the 'interests of the employees in general'. Notes 16 The interests of these groups often conflict and the law does not give clear guidance in dealing with such conflicts. There is too little space here to go into the complexities of the legal debate.
One area of contention is whether the directors owe any duties to other groups who have a stake in the company. These 'stakeholders' may include the consumers, the suppliers, the community in which the company operates, and the environment. A common response of directors to appeals on behalf of these stakeholders, is that the directors are not allowed to respond stakeholder concerns. This, they argue, is because the directors have an over-riding duty to shareholders, to increase the value of shares. This is a bit too simple: the duty is to the company as a whole, of which the present shareholders only form a part. But in a sense the directors are right, the law is quite clear that directors' fiduciary responsibilities do not extend to the other stakeholder groups. Whether or not the law should take this position is open to debate.
In any case, as L.C.B.Gower says, 'as long as the company remains a going concern the members' interests will normally be served by having regard to the other [stake-holder] interests; rebellious staff, hostile trades unions, dissatisfied customers and an aggrieved public...are not conducive to the future prosperity of the company.' Notes 17 So there is usually a good case to be made for directors paying out to charity and to protect the environment, on the grounds that it is good for long term profitability - so good for the company as a whole. Another similar argument why directors should appear to be behaving responsibly in areas of public concern, is in order to avert any new, tougher legislation, which would other wise be imposed. However while it may be prudent for the directors to act in the interests of other stake-holders, it is not their legal duty to do so.
There are several specific obligations directors have as a result of their fiduciary duties. Among these are the requirements that they must act in the best interests of the company; they must only use the powers which the company has conferred upon them, without exceeding them, even if they think it is in the best interests of the company to do so; and they must not put themselves in a position where there is potential conflict between the interests of the company and their own interests.
One possible exception to the general rule that directors must act solely in the best interests of the company is in the case of nominee directors. Nominee directors are appointed by special interest groups on the company like large shareholders, banks with large loans to the company, or even, potentially, shareholder activists. Such nominees are obviously nominated to look after the interests of the person who nominated them. However the law expects all directors to act in the best interests of the company, not a specific group. So the law will not allow directors to be puppets of any interest group. However, if this is taken too strongly, it makes it pointless to appoint nominee directors to look after particular interests. This question remains unresolved by the law. |
