The five common law fiduciary duties are the duty of loyalty, the duty to act in good faith, the duty to act within powers, the duty to avoid conflicts of interest, and the duty not to make secret profits. These duties form the ethical and legal foundation of the fiduciary relationship, binding anyone who holds a position of trust over another’s interests. The sections below examine each duty in depth and address the most important questions boards and directors face in practice.
Who owes common law fiduciary duties?
A fiduciary duty is owed by any person who holds a position of trust and confidence over the interests of another. Common law recognises this relationship wherever one party is entrusted with the power to act on behalf of another and that other party is correspondingly vulnerable to how that power is exercised. The categories most frequently encountered in corporate governance include company directors, trustees, partners, agents, and senior executives.
The fiduciary relationship is not created by contract alone. Courts look at the substance of the relationship rather than its label. If one party relies on another to exercise judgment, discretion, or authority on their behalf, and that reliance creates vulnerability, the law is likely to impose fiduciary obligations. This is why directors owe fiduciary duties to the company as a whole, regardless of whether those duties are explicitly stated in a shareholders’ agreement or the articles of association.
In a corporate context, the company itself is the primary beneficiary of the director’s fiduciary duties, not individual shareholders. This distinction matters significantly when conflicts arise between the interests of controlling shareholders and the broader interests of the company.
What are the five common law fiduciary duties explained?
The five core common law fiduciary duties are the duty of loyalty, the duty to act in good faith, the duty to act within powers, the duty to avoid conflicts of interest, and the duty not to make secret profits. Together, they define the standard of conduct expected of anyone in a position of trust.
Duty of loyalty
The duty of loyalty requires the fiduciary to place the interests of the beneficiary above their own. A director must not allow personal interests to compete with or override their obligations to the company. This is the foundational duty from which most of the others derive their logic.
Duty to act in good faith
Acting in good faith means exercising judgment honestly and with genuine regard for the beneficiary’s interests. It is not sufficient to follow a lawful procedure if the underlying purpose is dishonest or self-serving. Good faith is a subjective standard, but courts will scrutinise the circumstances to assess whether the fiduciary genuinely believed they were acting in the beneficiary’s best interests.
Duty to act within powers
A fiduciary must act only within the scope of the authority they have been granted. For directors, this means exercising powers for the purposes for which they were conferred, not for collateral or improper objectives. Using a power for an unauthorised purpose, even if the outcome appears beneficial, constitutes a breach.
Duty to avoid conflicts of interest
The conflict of interest duty requires the fiduciary to avoid situations where their personal interests, or their duties to a third party, conflict or may conflict with the interests of the beneficiary. The standard is strict: the mere possibility of conflict is sufficient to trigger the duty, even if no actual harm results.
Duty not to make secret profits
A fiduciary must not use their position, or information obtained through it, to make a personal profit without the informed consent of the beneficiary. This duty operates independently of whether the fiduciary’s gain caused any loss to the company. The profit itself is the wrong, not the damage it produces.
How do fiduciary duties apply to company directors specifically?
Company directors are among the most clearly established categories of fiduciary. Their duties run to the company as a legal entity, and they are expected to act in the way they consider, in good faith, most likely to promote the success of the company for the benefit of its members as a whole. This standard applies to executive and non-executive directors equally.
For non-executive directors in particular, the fiduciary standard carries significant practical weight. A non-executive director cannot shelter behind limited involvement or deference to management. If they become aware of a conflict, a breach, or conduct that threatens the company’s interests, the fiduciary relationship requires them to act, not merely observe.
In practice, fiduciary duties shape how directors approach board decisions, related-party transactions, the disclosure of personal interests, and the handling of commercially sensitive information. Boards that take these obligations seriously tend to operate with greater cohesion and clearer accountability, precisely because the ethical framework is explicit and shared.
Rigorous board effectiveness evaluation can surface gaps in how individual directors understand and discharge their fiduciary responsibilities, providing the board with an honest assessment of where conduct and culture align with legal obligation and where they do not.
What is the difference between a fiduciary duty and a duty of care?
A fiduciary duty governs loyalty and the proper use of power, while a duty of care governs the standard of competence and diligence with which a role is performed. These are distinct legal obligations that operate alongside each other, but they address fundamentally different aspects of conduct.
The fiduciary duty asks: was the director acting honestly, in the right interests, and without personal gain? The duty of care asks: did the director exercise reasonable skill, care, and diligence in carrying out their responsibilities? A director can breach one without breaching the other. A highly competent director who diverts a corporate opportunity to themselves breaches their fiduciary duty but may have exercised considerable skill in doing so. Conversely, a wholly loyal director who makes a negligent business decision may breach their duty of care without any dishonesty involved.
The consequences also differ. Fiduciary breaches tend to attract remedies focused on disgorgement of profits and an account of gains. Breaches of the duty of care typically lead to compensation for the loss caused by the negligent conduct. Both standards apply to directors, and both must be understood as part of any serious approach to board governance.
What happens when a fiduciary duty is breached?
When a fiduciary duty is breached, the law provides several remedies designed to restore the position of the beneficiary and remove any improper advantage gained by the fiduciary. The primary remedies include an account of profits, equitable compensation, rescission of contracts, and constructive trust over assets improperly obtained.
An account of profits requires the fiduciary to surrender any gain made as a result of the breach, regardless of whether the company suffered a corresponding loss. This remedy reflects the law’s insistence that a fiduciary should not profit from their position without consent. Equitable compensation, by contrast, addresses situations where the company has suffered a loss attributable to the breach.
Rescission allows the company to unwind transactions entered into in breach of fiduciary duty, provided that third parties have not acquired rights in good faith. Where assets have been acquired using the company’s property or information, a constructive trust may be imposed, requiring the fiduciary to hold those assets on behalf of the company.
Beyond legal remedies, a breach of fiduciary duty carries serious reputational and governance consequences. It undermines board cohesion, erodes stakeholder confidence, and can trigger regulatory scrutiny. Boards that identify and address conduct risks early, through honest internal evaluation and clear governance structures, are far better positioned to prevent breaches from occurring in the first place.
Can fiduciary duties be modified or waived?
Fiduciary duties can be modified or waived in specific circumstances, but only with the informed consent of the beneficiary. The key requirement is full disclosure: the fiduciary must make the beneficiary aware of all material facts before any waiver or modification can be considered valid. Consent obtained without adequate disclosure is ineffective.
In a corporate context, shareholders can ratify certain breaches of fiduciary duty, or the company’s constitution may modify the default duties in defined ways. Directors who have a conflict of interest can, in many jurisdictions, disclose that conflict to the board and seek authorisation to proceed, provided the relevant governance rules permit this and the decision is made by disinterested directors.
However, the core duty of good faith cannot be entirely excluded. Courts will not enforce a provision that purports to permit a fiduciary to act dishonestly or in bad faith toward the beneficiary. The boundaries of permissible modification reflect a fundamental principle: the fiduciary relationship exists to protect the vulnerable party, and the law will not allow that protection to be stripped away entirely.
Boards should approach any attempt to modify fiduciary obligations with care and with proper legal advice. What appears to be a practical arrangement can, if improperly structured, leave directors personally exposed.
How The Board Practice helps boards understand and uphold fiduciary duties
Fiduciary duties are not abstract legal concepts. They shape every significant board decision, every conflict of interest disclosure, and every governance structure a board puts in place. When a board does not have a clear and shared understanding of these obligations, the risks, legal, reputational, and strategic, are significant.
The Board Practice works with boards to ensure that governance standards reflect both legal obligation and genuine leadership excellence. Through its Board Effectiveness Evaluation, the firm provides:
- An honest, independent assessment of how individual directors understand and discharge their fiduciary responsibilities
- Identification of structural or relational dynamics that create conflict of interest risk
- Forward-looking development plans that strengthen board cohesion and ethical clarity over a two to three year horizon
- Benchmarking across industries and geographies, drawing on more than 120 board effectiveness assignments internationally
- A process designed around the specific context of each board, not a standardised checklist
Boards that take fiduciary responsibility seriously deserve an evaluation partner who brings the same standard of rigour. To explore how The Board Practice can support your board, get in touch with our team.
