When Board Members Breach Their Duties They Harm Shareholders and Impede Corporation Governance

For many shareholders, the decision to invest hard-earned assets with publicly traded corporations involves more than a mere reasoned commitment.

Indeed, it equates to a leap of faith.

After all, even after accounting for pre-investment due diligence and self-education efforts, shareholders are still on the outside looking in. Ultimately, they must posit good faith in the company fiduciaries tasked with managing their investments.

But, should they do so?

Theoretically, shareholders’ rights must be recognized and affirmed by company directors and hired executives at the helm of operations. After all, one legal overview of vitally important corporate governance notes, “people who buy the company’s stock fund its operations.”

Ownership should logically tie to management’s absolute ethical commitment to shareholders in every important matter. A never-compromised responsibility to those who fund and keep afloat a public company must arguably be the guiding mantra for every director and top-tier employee.

While most company fiduciaries take their responsibilities seriously and genuinely value shareholders and their financial contribution to the company, there will always be the bad apples, the directors and company executives who take advantage of their positions and in turn harm the company and its shareholders.

Fiduciary duties: What exactly are they?

The sheer trust factor a shareholder must place in corporate fiduciaries renders it imperative that they have some assurance that corporate fiduciaries will always act in an ethical manner. Relevant financial laws term this responsibility as “fiduciary duties” that, if not complied with, can open the door to a shareholder derivative action. The Legal Information Institute at Cornell Law School points centrally to these duties:

• Duty of care (assurance that a financial decision proceeds only after a reasonably diligent assessment of all key information)
• Duty of loyalty (conflict-avoidance; a director/officer’s actions must be made with utmost regard for shareholders’ well-being and not based upon personal entitlements or profit)
• Duty of good faith measured by adherence to legal requirements
• Duty of disclosure (shareholders must be kept duly informed of facts/data relevant to a director’s decision)
• Duty of confidentiality (no corporate information divulged for personal benefit)

When these duties are not properly satisfied, there tends to be a break down in the relationship between shareholders and management.  Nothing is more important than a company’s good-faith interactions and linked management behaviors demonstrating absolute loyalty to shareholders.

Breaches of Fiduciary Duties Impede Corporate Governance Policies

A breach of these fiduciary duties undermines the delicate balance of the relationship between the company's board and its shareholders and can signal an alarm identifying other issues confronting the board, such as poor corporate governance policies.

As noted in the above-cited article authored by the Corporate Finance Institute, instances of failed corporate governance can both undermine shareholders’ key prerogatives and materially harm the entity centrally relying upon them to stay viable and profitable.

Poor corporate governance results from multiple and diverse factors, including these lapses:

• Diminished board/executive recognition of shareholders’ primacy
• Lack of transparency, both to equity funders and to the general public
• Inadequate security (e.g., ranging from authentication safeguards to protection of trade secrets and proprietary data)
• Break in the corporate chain of accountability (for example, cover-up behaviors regarding finances and accounting that are purposefully hidden to escape the due scrutiny of shareholders)

When fiduciaries do not properly govern, it not only harms shareholders financially, but it also harms the company's integrity and reliability in the eyes of the shareholders and general public. If investors become weary of the organization's management, it can lead to difficulty in raising capital. Additionally, a company with a reputation for lack of adherence to implementing corporate governance policies can draw increased attention from governmental agencies looking to verify the company is complying with the law.

Harmed shareholders are materially empowered – not powerless – when seeking to take meaningful action against board members and company officers whose breaches of fiduciary duty and other unlawful actions have spawned shareholder detriment. One often-achieved result of a forceful response is the attainment of material corporate governance reforms.

The proven and aggressive shareholder rights national legal team of Robbins LLP can seek remedies for breaches of fiduciary duties and the implementation of corporate governance reforms to ensure proper and profitable conduct by the directors and officers.