Corporate Governance part 3 Fiduciary Duties Corporate Governance part 3 Fiduciary duties, October 26, 2015

DEFINITION of 'Fiduciary‘ A person legally appointed and authorized to hold assets in trust for another person. The fiduciary manages the assets for the benefit of the other person rather than for his or her own profit. A loan made on trust rather than against some security or asset. 3. Children or elderly people typically need a fiduciary. The person who looks after the assets on the other's behalf is expected to act in the best interests of the person whose assets they are in charge of. This is known as "fiduciary duty". Fiduciary duties, October 26, 2015

Fiduciary duty A fiduciary duty is a legal duty to act solely in another party's interests. Parties owing this duty are called fiduciaries. The individuals to whom they owe a duty are called principals. Fiduciaries may not profit from their relationship with their principals unless they have the principals' express informed consent. They also have a duty to avoid any conflicts of interest between themselves and their principals or between their principals and the fiduciaries' other clients. A fiduciary duty is the strictest duty of care recognized by the US legal system. Fiduciary duties, October 26, 2015

Fiduciary Person or a legal entity (firm, bank) holding assets (cash, property, securities) or information as an agent-in-trust- for a principal (stockholder, customer, member) . A fiduciary owes (among other obligations the duty of loyalty, the duty, full disclosure, obedience, diligence, and of accounting for all monies handed over, to the principal. A fiduciary must not exploit his or her position of trust and confidence for personal gain at the expense of the principal. Law demands a fiduciary to exercise highest degree of care and utmost good faith in maintenance and preservation of the principal`s assets and rights, and imposes compensatory as well as punitive damages on the erring fiduciary. Fiduciary duties, October 26, 2015

US legislation based on “Revised Model Business Corporation Act” (RMBCA) and Principles of Corporate Governance (PCG) of OECD Chapter 9 Domestication and Conversion Chapter 10 Amendment of Articles of Incorporation and Bylaws Chapter 11 Mergers and Share Exchanges Chapter 12 Disposition of Assets Chapter 13 Appraisal Rights Chapter 14 Dissolution Chapter 15 Foreign Corporations Chapter 16 Records and Reports Chapter 17 Transition Provisions TABLE OF CONTENTS Chapter 1 General Provisions Chapter 2 Incorporation Chapter 3 Purposes and Powers Chapter 4 Name Chapter 5 Office and Agent Chapter 6 Shares and Distributions Chapter 7 Shareholders Chapter 8 Directors and Officers Fiduciary duties, October 26, 2015

Agent / Principal Party that has express (oral or written) or implied authority to act for another (the principal) so as to bring the principal into contractual relationship with other parties. An agent is under the control (is obligated to) the principal, and (when acting within the scope of authority delegated by the principal). A party who designates another (the agent ) to act on his or her behalf. Fiduciary duties, October 26, 2015

Principal-Agent problem or Principal-Agency Problem A conflict arising when people (the agents) entrusted to look after the interests of others (the principals) use the authority or power for their own benefit instead. It is a pervasive problem and exists in practically every organization whether a business, church, club, or government. Organizations try to solve it by instituting measures such as tough screening processes, incentives for good behavior and punishments for bad behavior, watchdog bodies, and so on but no organization can remedy it completely because the costs of doing so sooner or later outweigh the worth of the results. Also called principal-agent problem or principal-agency problem. Fiduciary duties, October 26, 2015

Problem solving between managers (agents) and shareholders (principals) Why fiduciary duties? Management is usually more competent, has bigger space for different kind of expropriations and has more information Management tools to solve the problems: Social Contract Code of Rules Guidelines and Regulations Fiduciary duties, October 26, 2015

Duty of Care The responsibility or the legal obligation of a person or organization to avoid acts or omissions (which can be reasonably foreseen) to be likely to cause harm to others. Duty of care is owed by an accountant in correctly preparing a company`s accounts, by an auditor in confirming an company's financial statements correctly present its financial positions, by a director to shareholders in husbanding the enterprise`s resources, by a manufacturer to customers for the safety of product ,and by every party to a contract to the other contracting parties. Fiduciary duties, October 26, 2015

Duty of Loyalty A corporate law term used to describe a corporate fiduciary`s fidelity to the company`s interests. A breach of a fiduciary's duty of loyalty occurs when the entrusted fiduciaries, such as the CFO of the business for example, divert corporate assets or information and opportunities for their own personal benefit. Fiduciary duties, October 26, 2015