Soriano: 90% of directors unaware of their critical fiduciary duties

Inside Family Business
(Enrique Soriano)
(Enrique Soriano)

Here is a case involving a 35-year-old family member (identity withheld), concurrently serving as a shareholder and director, who was recently promoted to head of procurement. Shortly after assuming this role, reports emerged suggesting that he had initiated significant deals that disproportionately favored friends and relatives from his spouse's side. These actions undeniably compromised the integrity of the business. When confronted, he responded defensively, asserting his rights as a shareholder and director to award contracts at his discretion. Did he commit a grave offense?

Without question, his actions constituted a serious breach of ethical and professional conduct. By leveraging his position to benefit personal connections, he not only undermined the fairness and transparency of the procurement process but potentially violated fiduciary duties owed to the company. Such behavior erodes trust within the organization, tarnishes its reputation, and may even cause legal ramifications. He committed a grave offense.

Upon intervention to address the situation, he admitted ignorance regarding the severity of his actions and the potential consequences, including termination or expulsion from the board. It was obvious that he was unaware of his fiduciary duty. It was also clear that his appointment to a sensitive position and membership on the board was due to birthright. This case exemplifies the widespread lack of understanding among approximately nine out of 10 shareholders and directors I have dealt with, prevalent in family-owned businesses but also present in non-family organizations.

Duty of care and single-minded loyalty to the company

In the realm of family enterprises, where business and familial ties intertwine, a unique set of responsibilities rests upon the shoulders of family members who take on roles as shareholders and directors. Beyond the traditional duties associated with corporate governance, these individuals must also uphold a fiduciary duty—a duty of loyalty and care towards the company and its stakeholders. Embracing this duty is not only essential for the success and longevity of the enterprise but also for preserving harmony within the family.

At the core of fiduciary duty lies the obligation to act in the best interests of the company and its stakeholders at all times. This duty demands transparency, integrity, and prudence in decision-making, regardless of personal interests or familial relationships. When family members hold positions of power within the enterprise, they must prioritize the welfare of the business above all else.

One crucial aspect of fiduciary duty is the duty of loyalty. Family members must navigate potential conflicts of interest with utmost caution, ensuring that personal relationships do not unduly influence business decisions. Whether it involves matters of succession, resource allocation, or strategic planning, every action taken by family shareholders and directors must be guided by a commitment to the enterprise's long-term prosperity.

Moreover, the duty of care requires family members to exercise diligence and skill in their roles within the enterprise. This entails staying informed about the company's affairs, actively participating in board meetings, and seeking professional advice when necessary. By fulfilling this duty, family members contribute to effective governance and mitigate the risks associated with mismanagement or negligence.

While embracing fiduciary duty is paramount for all shareholders and directors, it carries particular significance within the context of family enterprises. The intricate dynamics of familial relationships can complicate decision-making processes and amplify the stakes involved. In such environments, conflicts of interest may arise more frequently, challenging family members to uphold their fiduciary obligations with unwavering commitment.

To be continued...


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