Beyond simply steering a company towards profitability, executives of publicly traded companies bear significant responsibilities, often referred to as fiduciary duties, towards their shareholders. As a crucial mechanism for accountability, these obligations form the foundation of corporate governance’s core.
These fiduciary responsibilities stem from two core duties: the duty of care and the duty of loyalty. By understanding these obligations, shareholders can better grasp the standards to which executives should be held, enabling a more transparent and ethical business environment.
The duty of care: A proactive approach towards decision-making
Executives’ duty of care stipulates that they must make decisions with diligence, prudence and foresight. Essentially, they must use the same level of care and judgment that any reasonable person would exercise in a similar position. This means conducting thorough research, seeking expert opinions and evaluating potential consequences before making decisions that will impact the company and its shareholders.
The duty of care ensures that the company complies with all applicable laws and regulations. Non-compliance not only exposes the company to legal repercussions but can also damage its reputation and profitability, causing potential harm to shareholders.
The duty of loyalty: Prioritizing shareholders’ interests
The duty of loyalty requires executives to always act in the best interest of the company and its shareholders. This means avoiding conflicts of interest, not using corporate opportunities for personal gain and not engaging in transactions that could harm the company or unduly benefit the executive at the expense of the shareholders.
Breaches of the duty of loyalty often involve self-dealing, insider trading or other forms of misconduct that lead to personal enrichment. Shareholders who suspect an executive has violated this duty can take legal action. If proven, the executive may be required to disgorge any personal profits gained from the misconduct.
The fiduciary responsibilities of executives in publicly traded companies serve as vital checks and balances in the corporate world. By adhering to their duties of care and loyalty, executives can maintain shareholder trust, protect their company’s reputation and better ensure its sustainable growth and profitability.