A fiduciary duty is a duty to act in the interests of another person or organisation where there is a special relationship of trust and responsibility.
A fiduciary may be trusted with money, property, decision-making powers or other important interests. The person who places that trust in the fiduciary is entitled to expect loyalty, honesty and proper care.
Table of Contents
- What does fiduciary duty mean?
- What responsibilities does a fiduciary have?
- Examples of fiduciary relationships
- Fiduciary duties of company directors
- Fiduciary duty and stakeholders
- Duty of loyalty and duty of care
- What can count as a breach of fiduciary duty?
- Why fiduciary duties matter
- Fiduciary duty FAQs
- Related stakeholder theory guides
What does fiduciary duty mean?
A fiduciary relationship exists when one party has been given power, responsibility or control over something that matters to another party. That could include money, investments, company assets, property or important decisions.
The fiduciary must use that position for its proper purpose. They should not secretly profit from it, misuse their authority or allow a personal interest to interfere with their responsibilities.
The exact duties depend on the relationship and the law that applies. Fiduciary law therefore cannot be reduced to one rule that applies identically in every country or every situation.
What responsibilities does a fiduciary have?
The precise legal duties vary, but fiduciary relationships commonly involve responsibilities such as:
- Acting loyally and putting the proper interests of the person or organisation represented first.
- Avoiding conflicts of interest or dealing with them openly and properly.
- Not making secret profits from the fiduciary position.
- Using powers for their proper purpose.
- Acting honestly and in good faith.
- Using appropriate care and skill where the role requires it.
Fiduciary duty does not mean that every decision must turn out well. A bad outcome is not automatically proof of a breach. What matters includes how the decision was made, what interests were considered and whether the fiduciary used their powers properly.
Examples of fiduciary relationships
Fiduciary relationships vary between legal systems, but commonly discussed examples include:
| Fiduciary | Person or organisation whose interests are protected | Example responsibility |
|---|---|---|
| Trustee | Beneficiary | Manage trust property for the purposes of the trust |
| Company director | The company | Use company powers properly and avoid conflicts of interest |
| Agent | Principal | Act loyally when carrying out the authority given by the principal |
| Executor | Estate and beneficiaries | Administer the estate properly |
| Certain professional advisers | Client | Avoid conflicts and misuse of the position of trust |
Fiduciary duties of company directors
Company directors are a useful example because they control assets and make decisions on behalf of a company without personally owning all of those assets.
In the UK, the Companies Act 2006 sets out seven general duties for directors. These include duties to:
- act within their powers;
- promote the success of the company;
- exercise independent judgement;
- exercise reasonable care, skill and diligence;
- avoid conflicts of interest;
- not accept improper benefits from third parties; and
- declare interests in proposed transactions or arrangements.
These duties are owed to the company. This is an important distinction. It is too simple to say that a UK director merely has a fiduciary duty to maximise returns for individual shareholders.
You can read the statutory duties in Chapter 2 of Part 10 of the Companies Act 2006 .
Fiduciary duty and stakeholders
This is where fiduciary duty becomes particularly interesting for stakeholder theory .
Traditional shareholder-centred theories of the firm place strong emphasis on the interests of shareholders. Stakeholder theory asks managers to recognise that a company also depends on employees, customers, suppliers, communities and other stakeholders .
But there is an important difference between saying that managers should consider stakeholders and saying that every stakeholder is owed the same legal fiduciary duty.
The UK position
Section 172 of the Companies Act 2006 requires a director to act in good faith to promote the success of the company for the benefit of its members as a whole.
In doing so, directors must have regard to matters including:
- the long-term consequences of decisions;
- employees' interests;
- relationships with suppliers, customers and others;
- the effect of the company's operations on the community and environment;
- the company's reputation for high standards of conduct; and
- fairness between members of the company.
So UK company law gives stakeholder interests an explicit place in directors' decision-making. It does not simply place all stakeholders on the same legal footing as shareholders.
This distinction sits at the heart of the debate between shareholder and stakeholder theories .
Duty of loyalty and duty of care
Discussions of fiduciary responsibility often use two broad ideas: loyalty and care.
| Loyalty | Care | |
|---|---|---|
| What does it mean? | Do not misuse the position for personal advantage or allow an improper conflict between personal interests and the interests you are responsible for protecting. | Make decisions with the level of care, skill and attention required by the role. |
| Possible problem | A director secretly takes a business opportunity that should properly have been considered by the company. | A director ignores important information or obvious warning signs when making a decision. |
| Does a bad result prove a breach? | No. The issue is usually the conflict, purpose or misuse of the position. | No. An unsuccessful decision can still have been made properly. |
Legal terminology differs between jurisdictions. UK company law, for example, sets out reasonable care, skill and diligence as a separate statutory duty.
What can count as a breach of fiduciary duty?
A breach may occur when someone uses a fiduciary position in a way that conflicts with the duties attached to it.
Examples could include:
- using entrusted property for an unauthorised personal purpose;
- making a secret profit from the position;
- failing to disclose a relevant conflict of interest;
- taking an opportunity that properly belongs to the company or beneficiary;
- using confidential information for personal gain; or
- using a power for a purpose for which it was not given.
The legal consequences depend on the type of relationship and the jurisdiction. Possible remedies can include compensation, repayment of profits or restoration of property.
Why fiduciary duties matter
Fiduciary duties deal with a simple problem: what happens when one person gives another person significant power over their interests?
Without some form of duty, the person holding that power may be tempted to use it for themselves.
In companies, shareholders and other investors provide capital while directors control much of the company's day-to-day decision-making. Fiduciary principles help limit the risk that people with control use corporate assets or opportunities for improper personal benefit.
The same basic problem can arise with trusts, agencies, estates, investments and other relationships built around delegated power.
Fiduciary duty FAQs
What is a fiduciary in simple terms?
A fiduciary is someone trusted to act for another person or organisation and who has legal duties because of that position.
What is the main purpose of fiduciary duty?
Its purpose is to stop a person who has been given power or control from improperly using that position for their own benefit.
Do company directors owe fiduciary duties directly to shareholders?
In UK company law, directors' statutory duties are owed to the company. Section 172 requires directors to promote the company's success for the benefit of members as a whole while considering a range of stakeholder interests.
Do directors have a fiduciary duty to all stakeholders?
Not simply because someone is a stakeholder. UK directors must consider several stakeholder interests when carrying out their statutory duties, but this does not mean every stakeholder is owed an identical fiduciary duty.
Is a bad business decision a breach of fiduciary duty?
Not automatically. Directors and other fiduciaries can make decisions that turn out badly without breaching their duties. The facts, decision-making process, conflicts of interest and applicable law all matter.
Video: What is fiduciary duty?
Related stakeholder theory guides
Stakeholder Theory
Learn why stakeholder theory challenges the idea that businesses should consider shareholders alone.
The Stakeholder Paradox
Explore the tension between fiduciary responsibility and wider responsibilities to stakeholders.
Shareholder vs Stakeholder Theory
Compare shareholder-centred and stakeholder-centred views of the purpose of a business.
Freeman's Stakeholder Theory
See how Edward Freeman explains the relationship between business and its stakeholders.
References and further reading
- Companies Act 2006, Part 10, Chapter 2: General duties of directors .
- Companies House, Being a company director .
- Buchholtz, A. K. and Carroll, A. B. Business and Society: Ethics and Stakeholder Management.
- Goodpaster, K. E. (1991). Business Ethics and Stakeholder Analysis. Business Ethics Quarterly.