🔍 The Three Masterful Practices That Boards Follow to Enforce Executive Fiduciary Duties

“A fiduciary standard means, basically, put the interests of the client first. No excuses. Period” - John C. Bogle [American investor & business magnate]

Introduction:

One critical aspect of safeguarding the interests of a company is ensuring the enforceability of fiduciary duties.  It is common to zero in on the fiduciary duties of directors.  However the case that follows underscores that when we fail to consider the fiduciary duties of executives, it can leave a company vulnerable to breaches of trust and costly legal disputes.

The case brought by Swift Maids Pte Ltd and Swift Maids Resources Pte Ltd in Singapore has much to teach us about the risks of assuming that executives owe a fiduciary duty to their employer.  The companies took legal action against the former general manager claiming “a breach of his employment contract, breach of confidentiality obligations, and breach of fiduciary duties”.  But they failed to successfully defend these claims.  Let me outline the scenario for you:

• The former GM purportedly assisted in setting up a company which was in the same line of business as a foreign domestic work employment agency.

• It was alleged that he also got assistance from other persons who worked for the plaintiffs.

• The then GM subsequently resigned from Swift Maids and continued to be involved with the new company.

• The aforementioned case was brought but was not upheld by the courts for several reasons related to insufficient evidence to support the plaintiffs’ case, inter-alia.

However the court also held that the GM “did not owe fiduciary duties to Swift Maids, as he did not have the ability to unilaterally exercise power or discretion to affect Swift Maids' legal or practical interests.” Read more here.

Say what?

The fiduciary duty of boards to act in the best interests of the company and its shareholders includes implementing effective governance practices to protect the company's assets, confidential information, and competitive advantage. It therefore stands to reason that if the board’s failure to implement robust mechanisms results in increased competition, it could be viewed as a lapse in board oversight.  It can therefore be argued that the Boards of Swift Maids Pet Ltd and Swift Maids Resources Pet Ltd, if they exist, would’ve erred in their oversight responsibilities.

So how can we learn from this …

Following is a deeper dive into the 3 masterful practices boards should take to strengthen the enforceability of executive fiduciary duties within their organizations: 👊🏾

1. Clarity in Contracts:

Begin by ensuring that employment contracts or agreements with executives clearly outline their fiduciary duties. These duties should be explicitly stated, leaving no room for ambiguity. Include provisions on loyalty, care, confidentiality, and avoidance of conflicts of interest.

Incorporate non-disclosure agreements (NDAs) and non-compete clauses into employment contracts to protect the company's confidential information and prevent competition. These clauses are crucial in safeguarding proprietary information and maintaining a competitive edge.

Involve legal counsel in drafting contracts and agreements to ensure they are legally enforceable and provide adequate protection for the company's interests. Legal experts can also advise on relevant laws and regulations governing fiduciary duties.

2. Robust Oversight Mechanisms:

Implement robust monitoring and oversight mechanisms to detect and prevent breaches of fiduciary duties. This could include internal controls, audits, and compliance programs designed to identify any potential misconduct early on.

Codify these in board resolutions or corporate governance documents so as to affirm and acknowledge the fiduciary duties of executives. This formal acknowledgment by the board reinforces the importance of these duties and underscores the company's commitment to upholding them.

3. Training and Education:

Invest in regular training and educational programs for executives regarding their fiduciary duties. Make sure they understand the implications of breaching these duties and stay updated on best practices and legal requirements.

Conclusion:

By prioritizing these measures, boards can significantly strengthen the enforceability of fiduciary duties within their organizations. This proactive approach not only mitigates the risk of legal challenges but also fosters a culture of trust, integrity, and accountability among executives and employees. Remember, protecting the company's interests is a collective responsibility that starts at the top.

When directors take proactive steps to reinforce fiduciary duties, boards can safeguard their organizations against potential pitfalls and position them for long-term success.  So my charge to you is: Stay vigilant, stay compliant, and uphold the fiduciary duties that are essential for the prosperity of the company.

Stay tuned for more enlightening discussions, gripping stories, and actionable insights. And if you haven't already, be sure to subscribe so you never miss a post. Together, we're set to build better boards and build boards better by reshaping the landscape of boardroom leadership, one director at a time.

🌐💼 #Fiduciary #fiduciaryresponsibility #CorporateGovernance #goodgovernance 🤝🔍

Know someone who might be interested in this blog? Please be sure to share it with them.

Also be sure to follow our boardVOX WhatsApp channel here. It is Especially for directors, c-suite leaders, corporate secretaries and all interested in good governance.