Rick Bond explores a critical aspect of governance law, and explains why board members need to be careful that they are always acting in the trusts best interests.
Fiduciary (fid-yewsh-ya-ree)
a person bound to act for someone elses benefit, as a trustee.
This is a simply jargon-busting article dedicated to explaining the meaning and implications of a single phrase, fiduciary duty. It may come in handy should you suspect that some of your trustees have ulterior motives for membership, such as being there to represent the interest of an external organisation, or believe that their involvement in the trust is only required to extend to matters concerning that organisation and no further. The fiduciary relationship is characterised by good faith, loyalty and trust, and the word itself originally comes from the Latin fides, meaning faith.
In practice
A fiduciary duty is an essential concept for trustees and managers to understand in ensuring the board does its job properly. The following anecdote illustrates its importance. Many years ago, and Im reaching an age where it is becoming a little scary to count exactly how many years it has been, I experienced the application of this phrase and its importance in a little affair that threatened to close the theatre I happened to be running at the time. Im going to have to change a few names here to protect all parties and places concerned. It all began one day at the beginning of March with a phone call from the Chief Executive of the local authority in which the theatre was based. It was one of those dream calls that do happen from time-to-time if youve nurtured appropriate relationships with stakeholders. Rick, we have an underspend which we have to correct before the end of the financial year. Could you use some additional funding in the region of £4050,000? On my desk at the time was a financial report showing a projected year-end deficit of around £40,000 which I had no idea how we would clear within the remaining few weeks of the financial year (atrocious weather in January having just cost us the profit from the pantomime). So, in a manner of words, and with controlled calm, I indicated that we could indeed make good use of the money and please could we have it! As a meeting of the theatres trustees was taking place that evening, I agreed to run a proposal past them prior to agreeing a grant with the Chief Executive the following morning. The trustees needless to say were enthusiastic and the following morning I made my way, suitably suited and booted, to the town hall only to be met by a somewhat embarrassed Chief Executive. Im sorry Rick, Dereks just been to see me. Derek was a Council Member and their nominated trustee on the Theatres board. Derek said that he had heard at the trustee meeting that the Council had an underspend and he wanted the funding to go towards a daycare centre being threatened with closure in his ward. The Chief Executive was very apologetic and went on to say that there was little he could do. I reported the conversation to my Chair and together we went to have a little chat with Derek. The conclusion resulted in him retracting his request. You see, Derek had forgotten his fiduciary duty. In all honesty, he probably didnt know about this duty in the first place, but that is by-the-by, ignorance being no excuse in the eyes of the law.
Informal suggestions
A fiduciary obligation exists whenever one person, in this case a trust which represents the interests of beneficiaries, places special trust and confidence in another person and relies upon that person (the fiduciary) to exercise his or her discretion or expertise in acting for the beneficiary. The fiduciary knowingly accepts that trust and confidence. A fiduciary duty is the highest standard of care imposed in law. A fiduciary is expected to be extremely loyal to the person to whom they owe the duty (the principal): they must not put their personal interests before the duty, and must not profit from their position as a fiduciary, unless the principal consents.
In Dereks case he had used information disclosed at a trustee meeting against the interests of the trust (to whom he owed a fiduciary duty). Even though he sat on the board of the daycare centre, and therefore acted in its best interests too, he had been made privy to the information at the theatre trustee meeting (the records for which are confidential) and was therefore bound to act only in the best interests of the theatre, which was to make damned sure it got its hands on the money or face potential closure. His actions could have caused the theatre to close, which potentially made him liable for any debts left by the trust. It would also require him to stand down from the Council. Luckily, in this case a collapse of stout party occurred once this was explained to him, the informal suggestion was retracted and ultimately the theatre received a timely £42,000 windfall.
A question of trust
Many boards have trustees who serve because they have been nominated by an agency named to do so under the terms of its Articles of Association. Some trustees interpret this as representing the interests of the nominating agency. For example, Ive witnessed instances of a trustee, nominated by a venues local user groups, campaign to have hire charges reduced principally to benefit those local users, regardless of the impact on the venues finances. Other trustees interpret it as an excuse not to assume responsibility for the wider affairs of the trust beyond those of the interests they represent. As part of their induction, all trustees must understand that they have a fiduciary duty to the trusts beneficiaries. This covers all the affairs of the trust not just those of interest to the organisation they believe they are representing.
If a stakeholder is permitted to nominate a trustee, such a trustee will obviously know the stakeholders affairs and/or interests. This can be useful. The trustee could explain why a proposed action by the arts organisation is likely to be unpopular with the stakeholder concerned. This allows the board of the arts organisation to come to a decision that takes into account the way that stakeholder might react. The trustee would almost certainly have to declare an interest. Nominated trustees must also take responsibility for defending the decision, explaining to their nominating organisation why the decision taken was in the best interests of the arts organisation. A fiduciary must not put themselves in a position where their interest and duty conflict. In other words, they must always serve the principals (i.e. the trusts) interests, subjugating their own preference or interests for those of the principal.
So, when it comes to a vote, they must support the outcome that is in the trusts best interests. And Derek, by the way, continued to serve on the Council for a lot more years than he also probably cares to remember.
Rick Bond is the Director of The Complete Works (UK) Ltd, specialising in facilitating management insights, solutions and training for arts and cultural organisations.
t: 01598 710698;
e: rick@thecompleteworks.org.uk;
w: http://www.thecompleteworks.org.uk