The duty of loyalty has two legal meanings: for board members, it means putting the interests of the organization first, while for employees, it means not engaging in activities harmful to their employers. Violations can result in civil suits and penalties from regulators. Board members have a fiduciary responsibility to manage funds responsibly and in a way that maximizes returns, while employees must avoid conflicts of interest and harmful actions.
The term “duty of loyalty” is used in two different legal meanings, both reflecting an obligation to act in the best interests of another party. In laws relating to board members of corporations and non-profit organizations, individuals are required to always put the interests of the organization first, exercising a duty of loyalty when making decisions. Under labor law in some regions, employees have a duty of loyalty to their employers and may not engage in activities known to be harmful to their employers. Violations in either case may be grounds for a civil suit.
In the case of board members, they are considered to have a fiduciary responsibility because they manage funds on behalf of other people. They have a duty of care, managing funds responsibly and in a manner designed to maximize returns on the funds. They also have a duty of obedience, managing the organization in a way that is in accord with the mission and goals. The duty of loyalty is a requirement to always think of the interests of the organization first.
If a conflict of interest arises, the duty of loyalty comes first and the board member must act fairly from the organization. While people can profit from their membership on boards of directors, they can’t do so at the expense of an organization. For example, a board member might make a decision that benefits the company, increasing profits and improving performance, and experience a corresponding increase in the value of personal investments. However, the adviser could not put the company at risk with a decision designed specifically to create personal profits.
Employees who have a duty of loyalty to their employers may not engage in activities that would be considered conflicts of interest and may not harm their employers by their actions. Consulting with a competitor and providing inside information would be one example, as would using company equipment for personal profit-making projects. Not all regions have a loyalty clause in their labor laws; in some cases, this type of obligation can be integrated into an employment contract.
Depending on the nature of the violation, in addition to being liable to a civil suit, individuals could also face penalties from government regulators. Members of a company’s board of directors, for example, can be fined and jailed for inside trading, a violation of their duty of loyalty.
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