What to do when you face a breach of fiduciary duty

A breach of fiduciary duty is serious business. Undoubtedly, your company works hard to maintain a reputation of trust, and such a breach threatens that reputation.

What is fiduciary duty?

Simply put, fiduciary duty is the legal obligation of one party to act in the best interest of another. When it comes to your business, your employees are required to act in the best interest of your customers and clients. Your company has a fiduciary duty to shareholders as well, and this duty must be aggressively maintained to preserve your company's integrity.

What is breach of fiduciary duty?

If one of your employees acts outside the best interests of your customers and clients, this is a breach of fiduciary duty. Specific instances of breach of fiduciary duty can vary depending on the specific type of business as well as the position of the employee, but any accusation of breach of fiduciary duty must be taken seriously.

Simon Nowak, CEO of 3 Credit Scores, advises acting quickly to protect your company. "The first step is to determine if there was a breach of fiduciary duty or if there was a breach of contract," he says. “There's a big difference between the two but, in either case, the next course of action is to seek legal representation as legal action would likely target the firm and not just the individual guilty of the breach."

Preventing breaches of fiduciary duty

The best way to prevent breaches of fiduciary duty is to have clear company policies.

According to JR Skrabanek, senior counsel with Jones Law Firm, P.C., "Breach of fiduciary duty claims are usually both serious and complex. The best way to prevent a breach of fiduciary duty is for the company to have a policy forbidding self-dealing," he says. "The best advice is to 'trust, but verify' the company's relationships with anyone suspected of not acting in the company, client or member's best interest."

Handling breach of fiduciary complaints

Due to the severity of such complaints, companies must act quickly to determine if a breach has occurred. The results of such a violation may be severe. "The consequences can be quite severe for the guilty party, as in a career-killer because a breach of fiduciary duty is grounds for someone to lose their professional license," says Nowak, who notes that financial loss may also arise. "There may be a judgment for compensatory damages in favor of the victim."

Skrabanek also warns of further financial loss. "A breach of fiduciary duty can result in the forfeiture of any proceeds the breaching party earned in any of the breaching transactions," he says.

Nowak recommends swift action against any member of the company found to have breached fiduciary duty. "The best approach is to terminate their employment and make it clear that a breach of fiduciary duty is intolerable behavior at your firm," he says. "Hopefully, the remaining employees recognize the serious consequences and value their position enough to avoid making the same mistake."

A company's trust is not easily gained, but it is easily lost should an employee violate the fiduciary duty between the company and a board member, fellow employee, customer or client. Preserving one's reputation as a trustworthy company means taking any accusations seriously and acting swiftly to send the message that such violations will not be tolerated.