Fiduciary Duty

The significance of the fiduciary duty is hidden behind the consequences emanating from the establishment of a fiduciary relationship. The word fiduciary originates from the Latin word fiduciarius, which means something inspiring trust?¹ Therefore, the importance of the fiduciary duty is traced to the relationship established between the fiduciary, the party who owns the duty, and the beneficiary, the party to whom the duty is owed (see McMeel 2013, for detailed discussion). The fiduciary has a legal responsibility to act in the interest of the beneficiary. Breach of the fiduciary duty can be legally enforced against the fiduciary. The fiduciary duty connotes that the fiduciary is obliged to act in a certain way that is for the benefit of the beneficiary.³³ For example, the fiduciary duty implies that there is duty of good faith, duty of loyalty, and duty of care. This is primarily because the fiduciary has the obligation and/or power to act on behalf of the beneficiary because the beneficiary has trusted him/her to do so. As their relationship is based on trust, the fiduciary has also the duty to avoid conflict of interest in transactions, where personal interest conflicts with the interest of the beneficiary.

Therefore, it is highly crucial that the fiduciary acts in a way that does not adversely affect the interest of the beneficiary. Such an obligation is depicted by various examples. A director owes the company a fiduciary duty, since the former is an agent of the latter, and thus “ ... it is of course the duty of those agents so to act as best to promote the interests of the corporation whose affairs they are conducting.”³⁴ The same applies to the relationship of a lawyer with his client and a trustee with a beneficiary.

Corporate directors and managers hold a trust relationship with the corporation; they are responsible for overseeing its operations, their actions must be in the best interest of the corporation, and they have a duty to avoid conducting business that injures it. A corporation’s board member has a fiduciary duty to the shareholders, a trustee has a fiduciary duty to the trust’s beneficiaries, and finally, an attorney has a fiduciary duty to a client. A director’s fiduciary duties generally fall into two categories: duty of care and duty of loyalty. The duty of care requires a director or officer of a corporation to perform his/her duties with reasonable diligence. The duty of loyalty requires a director or officer or employee of the corporation to act in good faith and in the best interests of the corporation. A director who fails to satisfy any of his fiduciary duties has committed a breach and can be subject to legal and civil penalties. In relation to the recent financial turmoil, there has been discussion on whether and/or how the financial advisors and bankers breached their fiduciary duty.³⁵

In the United States, the SEC has detailed its fiduciary duty standard of care to broker-dealers so that investment advisors and broker-dealers will operate under a harmonized, unified standard of care.³⁶ Miller and Tucker (2011) have pointed out that this uniform fiduciary standard would overlap with existing regulatory regimes, and they showed how it impacts investment advisers, broker-dealers, and insurance agents as far as their standard of care and their financial planning service covered by that standard of care are concerned.³⁷ Fiduciary duties extend over and above other existing requirements set out by statute and/or common law and cover allegations of breach of fiduciary duty,³⁸ negligence,³⁹ or fraud.⁴⁰

According to Liou (2013, 210), in “addition to greedy and unethical behavior,” managerial problems relating to financial management techniques, corporate accountability, and governance of financial institutions and corporations “weighed heavily in the financial crisis.” Liou indicated that these weaknesses included the following:

• • Questionable assumptions of risk-analysis models and tests and failure to adequately inform the board and senior levels of management;
• • Corporate executives receiving high remuneration because of their alleged superior abilities and heavy responsibilities but not in accordance with the long-term strategies and interests of the company;
• • The lack of accountability of corporate executives during the financial crisis who tended to focus on short-term gains at the expense of longterm risks (p. 210).

Let us therefore next take a close look at corporate governance as a way of underpinning regulation.