Fiduciary duties of compliance officers

June 3, 2014

Compliance by management begins with a return to the foundations of ethical behaviour – observance of fiduciary duties. Long thought to only apply to directors of a corporation, these duties often now extend to officers, corporate counsel, and other key members of company management. Furthermore, developing countries are beginning to embrace the concept of fiduciary duties, underscoring the importance for global companies to ensure their management understands and observes such duties.

What are fiduciary duties?

A fiduciary duty arises when a fiduciary relationship exists. This sort of relationship is present when one party places confidence and trust in another party to act for their benefit. For example, a corporation’s shareholders may place trust in a corporate director to act for their benefit. The obligation of the director to act in the shareholders’ best interests is formally known as a “fiduciary duty”. The most common fiduciary duties are the duty of care and the duty of loyalty.

The duty of care requires that directors discharge their duties with the care that a person in a similar position and under similar circumstances would exercise, and in a manner they reasonably believe to be in the best interests of the company and its shareholders. In other words, directors must make the best possible decisions for a company, and their decisions will be judged by considering what another person in the director’s position would have done.

A foundational example of the duty of care can be seen in an acquisitions context. If a company were looking to acquire another entity, the target company’s directors would be required to consult with financial experts when making a valuation of company shares. If the directors were to forego use of expert financial consultation or other available information in making their estimate and therefore arrived at an inaccurate proposal, they would likely be in violation of the duty of care – the inaccurate valuation of shares would not be in the shareholders’ best interests if the company was acquired.

The duty of loyalty requires directors to act on behalf of a corporation and refrain from self-dealing or wrongfully seizing corporate opportunity, or any other acts that may benefit them at the expense of the corporation. In other words, directors must not make decisions that benefit themselves at the cost of the corporation or its shareholders.

A simple example illustrating the duty of loyalty is when a director sits on the board of one corporation and is consequently barred from setting up any enterprises that would directly compete with that corporation.

In the United States, fiduciary duties spring from statute and common law. Most states have based their codifications of fiduciary duties on the Model Business Corporation Act (MBCA), while others derive authority to enforce these duties from case law originating in their respective jurisdiction. In Australia, the laws governing directors’ duties also come from case law and statutes, most notably section 180(1) of the Corporations Act 2001. In the United Kingdom, fiduciary duties have been set out in sections 171–177 of the Companies Act 2006.

To whom do fiduciary duties apply to?

The majority of law and commentary make it clear that fiduciary duties apply to directors of a company. The evolving notion is that these duties also extend to officers and other members of company management.

The rationale for charging officers with fiduciary duties mostly hinges on the fact that officers are the day-to-day managers of the corporation, and thus have the greatest intimacy with company affairs. While directors are the ones selected by shareholders to represent their interests, company officers are the individuals whose everyday activities will allow the corporation to meet shareholder demand. What corporate officers should take note of is the fact that they may have additional duties beyond the duties of care and loyalty.

Fiduciary duties and compliance officers

Directors, who are not normally involved in the day-to-day affairs of a business, are given certain protections when making decisions that affect the corporation. One of these protections is that directors may, in good faith, rely on information supplied by officers during their decision-making process. This protection inevitably charges officers with a duty to inform directors of any relevant information which would allow the directors to make prudent decisions for the company.

Officers are also likely to have a duty to disclose to the board any acts of fraud or wrongdoing that they know of. In one case, a CEO caused a corporation to repurchase stock to maintain the positions that he and other directors held within that company. The president of the company knew of these purchases and was therefore found to have violated his duty to disclose; he had the opportunity to call a directors’ meeting and this would have allowed the board to prevent or stymy the effects of these purchases.

I am a compliance officer or corporate counsel – do I have to follow these duties?

A company’s compliance officers and/or general counsel are normally charged with creating, implementing and driving that company’s corporate compliance programme. William R Spalding, partner at King & Spalding LLP, and John D Hopkins, partner at Taylor English Duma LLP, note in their article “General counsel, fiduciary duties under Delaware law”, that the roles of compliance officers and general counsel are expanding, with these individuals often doubling as the corporate secretary, risk manager, or gatekeeper to the securities market. As such, these officers must proactively work to become familiar with how the laws they act under shape the duties they owe to the corporation.

A recent Delaware court case found that under the Sarbanes-Oxley Act the duty of care requires counsel making filings with the Securities and Exchange Commission (SEC) to examine the truthfulness of those filings before submitting them. This ruling may have immediate practical implications beyond the Sarbanes-Oxley Act. Compliance officers and corporate counsel must now make SEC filings under the Dodd-Frank Act to warrant that their companies’ processes and products do not contain minerals sourced from the Democratic Republic of Congo or other nearby countries. Accordingly, the duty of care likely requires that these officers examine the filings to ensure they are completely accurate.

Under the duty to disclose, compliance offers will more often than not have the duty to reveal to the board of directors any conflict of interest violations that have occurred within the business. If a whistleblower were to make a confidential report to corporate counsel regarding an alleged conflict of interest, the corporate counsel would probably have to apprise company directors of the report (if the board had empowered them to evaluate conflict of interest reports in the first place). If directors are considering expansion of the business into emerging markets with high risk profiles, compliance officers and corporate counsel will, under the duty to inform, have to carefully advise these directors on whether the company’s in-house compliance protocols are robust enough to ensure the transparent conduct of business in these areas.

What can I do to prepare?

To prepare to meet fiduciary duties, compliance officers and corporate counsel should do the following:

  • Insist that corporate documentation make clear the scope of authority and specific duties of officers

Corporate documentation, such as company by-laws, normally contain clauses to protect directors from personal liability for violations of fiduciary duties in the absence of gross negligence. Standard corporate documentation does not normally offer such protection to officers, even though they are likely subject to fiduciary duties. Accordingly, officers should insist that corporate documentation at least clarify the scope of their authority, what their responsibilities are, and the expected level of performance for the carrying out of those activities. This way, all levels of management can be on the same page when it comes to understanding the roles, responsibilities and limitations that apply to officers.

  • Clearly understand what activities or circumstances come under the board of directors’ jurisdiction so that they can apprise directors of any related occurrences under the duty to inform

The board and officers should clearly discuss which activities directors are empowering officers to undertake. Because a principal–agent relationship exists when a director empowers an officer to carry out conduct on behalf of the corporation, officers have a duty to inform their principal directors of any occurrences relating to those activities in a timely manner. For example, if the board authorises a newly appointed compliance officer to create an in-house compliance programme, the compliance officer will immediately know that they must notify the board of any occurrences relating to the development of that programme, as mandated by the duty to inform. If there are business units that show apprehension towards the programme and unduly delay provision of buy-in, the compliance officer or corporate counsel will need to inform the board of these occurrences as soon as possible.

  • Pay close attention to any statutory duties imposed upon them by laws they are acting under

Compliance officers and corporate counsel should pay close to attention to whether any statutes they are acting under require fulfilment of any duties when carrying out their responsibilities. As touched on earlier, officers and counsel making filings under the Sarbanes-Oxley Act are required under the duty of care to ensure that those filings are accurate. Because rolling out a compliance programme is often a response to regulatory requirements, compliance officers and general counsel should consult with legal experts to discover whether these regulations impose any heightened duties upon the company and its managers. This becomes increasingly important when a corporation expands into new areas subject to lesser known laws. In this situation, the corporation would be wise to consult with local legal experts who can apprise officers and corporate counsel on what actions they may need to take as a precaution or precondition to conducting business in that region.

The company I work for is not in a country with these explicit statutory requirements – why should I care?

Directors and officers of corporations around the globe should be aware that they may still owe fiduciary duties to their organisations. Several countries are now recognising fiduciary duties or similar obligations through statutes and other means. While fiduciary duties are usually only a settled legal concept in more developed jurisdictions, the fact that they are a developing theme means that these requirements could be taking root in countries that have not traditionally recognised them. The following section will look at how fiduciary duties or similar obligations are now being recognised and enforced in developing jurisdictions.


In China, obligations very similar to common-law fiduciary duties have been encoded in the Company Law of the PRC. This law declares that directors bear the obligations of “fidelity and diligence” to the company. The obligation of fidelity is likely akin to the duty of loyalty, as the Company Law states that any income a director gains in violation of the duty of fidelity will belong to the company, not the director. The obligation of diligence is similar to the duty of care; the law notes that if a director violates any laws or regulations in the performance of his duties and the company suffers loss as a result of those actions, the director must compensate the company.


In Mexico, the Corporate Business Act holds that a director with a conflict of interest must disclose the potential conflict and refrain from voting on or adopting any resolution that involves such interests. Directors cannot sell or purchase shares or other securities from the company they oversee if that sale or purchase involves the use of privileged information. This language echoes the duty of loyalty, and touches on preventing conflicts of interest and insider trading.


Brazilian corporate law provides that directors and officers have an obligation similar to the duty of care. Directors and officers can only enter into contracts under reasonable and fair terms that are in line with prevailing market standards or that follow the principles that the company has set. Contracts that directors enter into which violate these rules may require the officer to disgorge any benefits they received as a result of such actions.


Compliance officers and corporate counsel have the unique and essential responsibility of guiding their organisations and the individuals that are members of their organisations through the heavily regulated modern day business environment. Officers can approach this important task with confidence and optimism by embracing the ethical obligations that start with them. While some individuals may be disheartened to know that they must take extra precautions to comply with these duties, a better perspective would be for corporate officers to realise their own importance. Compliance officers keep their corporations moving forward, have the greatest visibility amongst the employee base, and have the influence to drive and shape the future of their businesses. With great power often comes great responsibility, and fiduciary duties form the basis of that accountability.



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