What is the „duty of loyalty”?

We all have our own idea of an ideal director. Is there an adjective “loyal” in your version?

Definition

The duty of loyalty is a director’s formal obligation to take care of the best interest of the company in the first place. This is one of the two main fiduciary duties of directors. The second one is the duty of care. The duty of loyalty demands from a director to be entirely loyal to his company.

In general, it means that he/she cannot work for a company to make his personal profits in the first place or make use of his/her position to have some personal gains. Thus, this duty requires avoiding conflicts of interests and self-dealing. It is not only a matter of a director’s moral obligation, breaking this rule can end up in court and result in an order to pay fines or restitution.

More about the duty of loyalty

Apart from the responsibilities presented above, directors have to face more requirements which come from the duty of loyalty. They have to remain confidential and avoid revealing or using the information they get thanks to their position. It is unacceptable and incorrect to use confidential information to a director’s own personal purposes.

What is more, directors are obliged to communicate with the Board of Directors whenever there is a conflict of interest – no matter if it is potential, real or perceived only. Especially in a situation when it is not obvious whether the conflict really exists, they have to consult such cases with the Board so as to receive legal advice to make the issue clear. If there really is a conflict, a director’s role is to remain impartial and provide any significant and demanded information.

Fulfilling the duty of loyalty may seem to be overly demanding, but actually it is totally natural for directors who do not see anything unnatural or difficult in caring about their company’s interest.

Such requirements will pose problems for those who do not feel a need to be loyal to their company and those who put their own interests at the top position. However, companies need directors who want to be loyal and who are willing to pursue the communal success – the ones devoted to the firm that they are responsible for.