Breach of Fiduciary Duty: Are Your Business and Board at Risk?

From making key business decisions to safeguarding shareholders’ interests, the fiduciary duty of a board of directors is to act in the best interests of others.

For a fiduciary duty to exist, there must be a significant relationship of trust between a board member and the business. When that established trust is broken, a breach of fiduciary duty occurs and shareholders can file a lawsuit against the business in order to protect their interests.

According to Miller Law, a leading commercial litigation firm, breaches of fiduciary duty can involve the following:

• Mismanaging, comingling, or failing to account for company funds or assets.
• Exposing the partnership to liability through negligence.
• Damaging the goodwill of the company through illegal or wrongful behavior.
• Concealing important information from shareholders.
• Failing to disclose conflicts of interest.
• Self-dealing for the board member’s own individual benefit.

Five of the most common breaches of fiduciary duty by a company’s board of directors include:

1. Preventing shareholders from exercising their voting rights.
2. Denying shareholders access to records.
3. Refusing to pay dividends.
4. Voting for unreasonable compensation for themselves.
5. Taking wrongful actions to force out minority shareholders.

A breach of duty lawsuit can have a financial and reputational impact on a business, and a board member who is found to be personally liable can face steep fines and even jail time. It is essential for companies to take steps to prevent breach of duty offenses from occurring in the first place.

Proactive due diligence actions that businesses can take to help lessen the chance of a fiduciary breach include:

• Maintaining a record of all board resolutions – especially those made by the board of directors or shareholders on behalf of the company.
• Ensuring that the board has a firm understanding of its fiduciary duty and what is expected of it.
• Conducting internal or external third-party audits at different periods of the year to ensure compliance.
• Implementing checks and balances to allow oversight by other key players in the company, so board members are aware that their decisions and actions may be reviewed by a peer.

Conclusion

The sooner you can identify a breach of fiduciary duty, the sooner you can correct the issue and prevent or mitigate financial and reputational damage to your company. Of course, not every exposure can be avoided. In the event of a claim, a directors and officers liability policy can help you better mitigate the damage.

If your business needs D&O insurance, contact the experts at Oakwood D&O. We have over 15 years of experience specializing in all aspects of management liability, with a focus on D&O insurance.

To learn more, get in touch! Email Eli Solomon, CEO, at eli@oakwooddno.com or call 323-686-7519. You can also follow us on LinkedIn.