Glossary term
Duty of Loyalty
Subject: Governance, Corporate Governance
Also known as: Duty of Good Faith
The duty of loyalty requires directors to act in good faith and in the company's interest, putting it ahead of their own, and to avoid or disclose conflicts and personal gains from their position.
Explanation
It is the basis of most conflict rules. Directors must not take company opportunities for themselves, trade on confidential information, accept secret benefits or vote on deals in which they have a personal stake. When a conflict exists they disclose it, usually step out of the discussion and let disinterested directors decide, often with an independent valuation. The duty is stricter than a general expectation of good behaviour, because the temptation is built into the role. Good faith means acting sincerely and for a proper purpose, not merely avoiding illegality. Remedies include returning profits, setting aside the transaction and removal from the board. Related-party deals draw extra scrutiny for this reason: self-interest takes over most easily there.
Example
A director learns that the company plans to buy a warehouse. Before the announcement, she arranges for a company she controls to buy it and then sells it to her own firm at a markup. The board finds out, treats this as a breach of loyalty, requires her to hand over the profit and asks her to resign.
Not to be confused with
- Duty of Care
- Care is about competence and diligence. Loyalty is about putting the company's interests ahead of personal ones.