Anthony Knerr Managing Director Anthony Knerr & Associates

What It Means To Be a Fiduciary

A formula for meeting the expectations of the role is to be deeply informed, perpetually skeptical, and collegially independent. 

                                                       
"Fiduciary" is not a word one hears much in common usage these days. It has a certain Victorian ring to it -- an aura of vigorous rectitude out of touch with our contemporary world of moral relativism.

But "fiduciary" is at the heart of governance. Sitting on any governing board -- corporate, mutual fund, or nonprofit -- means first and foremost serving as a fiduciary. And that concept is as relevant today as it was 75 or 100 years ago when our grandparents learned the basics, if not more so.

At its root, "fiduciary" derives from the Latin fidere, to trust. A fiduciary is someone who holds something in trust for another. Its Anglo-Saxon synonym is "trust," derived from the Middle English traust, meaning trust, protection, or firmness. These two linguistic first cousins share a common concept of confidence in the integrity, veracity, and reliability of someone to act on another's behalf.

At the heart of being a fiduciary

The heart of being a fiduciary is acting as you would wish another to act on your own behalf. Representing the interests of the shareholder as a director of a company means putting yourself in the position of continually asking how you would wish to be treated if you were yourself a shareholder. Would you feel -- at all times and in all circumstances -- fully comfortable with the judgments, actions, and decisions you made as a director? Would you be prepared to entrust additional resources -- financial, intellectual, personal -- to such a person? Would you have confidence that such trust would be warranted, tomorrow morning as well as 10 years from now?

This view of being a fiduciary is, of course, but a restatement of the Golden Rule -- "Do unto others as you would have them do unto you" -- put into business terms. My own experience is that the Golden Rule provides clear, unambiguous, and straightforward guidance as to appropriate behavior, whether in the boardroom, the showroom, or the conference room.  

At its heart, the Golden Rule supplies a disarmingly direct way of assessing one's own conduct as well as that of others. It rests, in the final analysis, on a deceptively simple judgment, though one difficult to always follow and often one that is uncomfortable in application. It is hard to believe that board members of Adelphia, MCI, or Tyco were truly acting as they would wish to have been treated.

Essential characteristics

A true fiduciary -- one who constantly acts as he or she would wish to be treated by someone acting on his or her behalf -- has:

            -- the highest integrity,

            -- an instinctive curiosity,

            -- a skeptical and inquiring mind,

            -- sound business judgment,

            -- independence of thought,

            -- high energy,

            -- a strong interest in the business of the organization on whose board he or she sits, and

            -- a constant focus on the best interests of those whose stakeholdings he or she is representing.

Based on my experience and observation, these attributes boil down to three essential characteristics: being deeply informed, perpetually skeptical, and collegially independent. Each is important; each reflects a complementary perspective; and each allows for evolving complexity, new situations, and different demands.

Being deeply informed

Above all, a board member must be deeply knowledgeable about the business of the organization -- its purpose and mission; its strategic situation, aspirations, opportunities, and challenges; its operations, management structure, and finances; and its history, culture, and fundamental values -- so that he can effectively represent the interests of the shareholders or beneficiaries. A fiduciary must also have a keen understanding of the broader context within which the business or organization operates; a detailed knowledge of regulatory requirements and environment; and a crisp understanding of trends in the industry.

I recall one well-meaning director who never mastered the technical and legal aspects of the company -- operating in a highly regulated industry -- on whose board he had served for some 15 years, and seemed to assume blithely that management was fully on top of these matters. It is inconceivable to me that he could explain the policy and strategy decisions made by the board to a shareholder of the company -- reflecting an utter failure in carrying out his fiduciary responsibilities, for a director must be both well informed and able to explain cogently what he is doing.

Fiduciaries must continuously and fully satisfy themselves that they are knowledgeable about the various issues central to the business and industry; have tested, probed, and examined these issues; and have put management and their external advisers to the test -- at the governance level, of course, not the executive level.

This requires a sound education for the new director just joining a board, as well as a regular, "institutionalized" formal program of continuing education that will enable all board members to keep abreast of the industry, be alert to new trends and issues, and anticipate new developments and challenges.

Possible components of such a program of continuing education include insisting that management brief the board fully and regularly on all industry-wide matters relevant to the company; bringing in outside speakers to talk about particular matters of interest and concern; and encouraging board members to be active in outside activities that provide opportunities for networking and informal discussion. The continuing-education initiatives should be reviewed annually, as part of a regular yearly evaluation of the performance of the board as a whole and each individual member.

Without being well-informed, a fiduciary does not have the knowledge base from which to make sound decisions, evaluate alternatives, and represent the best interests of the shareholders.

Being perpetually skeptical

Secondly, the board as a whole and each member on it should be a skeptic at heart, always and unrelentingly probing, asking, exploring -- "Why this?" "What about that?" "Have you thought of ...?" -- both at the macro or policy level and in the details.

Nothing should be off the table. There can never be too many questions; the answers should always be tested:

            -- "How do our shareholders benefit from this proposal?"

            -- "What are the alternatives that have been discarded, and why?"

            -- "How does this proposal enable the organization to realize its longer-term strategic objectives and therefore benefit our shareholders in the future?"

            -- "What does the number in the second paragraph on page 39 mean?"

            -- "What is the CEO worrying about at night, and why?"

            -- "What should the board be discussing a year from now, and why?"

            -- "What questions should we as directors be raising but are not?"

And so on.... These and a thousand other questions indicate more than curiosity or diligence. They reflect a relentlessly skeptical mind that seeks continually to ascertain whether the actions being proposed are, in fact, in the best interests of the parties for whom the director serves as a fiduciary. The director's questioning should convey a serious but benign "show me" attitude. The director should be as skeptical as an intelligent shareholder would be in asking questions about the actions of the board or the decisions of the organization. The director should welcome exactly that same kind of skepticism from the parties she represents.

A positive, while skeptical, posture demonstrates to management the seriousness with which the director is taking her responsibilities. It creates a healthy tension between management and board, clarifying their quite different responsibilities and roles. It enables the director to satisfy herself that she has been watchful. It meets the fundamental test -- or at least an essential aspect of it -- about whether the shareholders' interests are being thoughtfully, responsibly, and prudently fulfilled.

Being collegially independent

Thirdly, a fiduciary must be altogether independent -- of management, fellow board members, and any fiercely partisan shareholder constituencies.

The tough-minded fiduciary understands that independence of thought and action is essential to representing well the interests of another party. He can simultaneously be actively engaged in the work of the organization while having the objectivity of an interested and well-informed bystander. While in the boardroom -- subject to the culture, rhythms, needs, and challenges of the organization’s governance -- the fiduciary must separate out competing matters and make decisions that are in the best interests of the shareholder.

I once observed the chairman of the finance committee of a major institution single-handedly argue against disposing of a major asset that everyone else on the board was prepared to sell. The board’s thinking was that the asset sale would buy a few years of continued solvency. His independence, and his long-term view, ultimately carried the day and the board held tight. That asset is now worth five times the price being considered at the time, and the institution has never been financially stronger.

Someone who has the requisite integrity, clear-headedness, and tough mindedness will have the necessary ingredients to act and be comfortably firm (to recall one of the meanings of traust) while respecting differences of opinion and perspective, even when the issues are particularly complex, the ultimate best interests of shareholders are illusive, pressures to act one way or another are vigorous, and time is running out.

Certainly there should be a fundamental and mutual relationship of respect, cooperation, collegiality, and trust between the director and management -- just as there should be between the director and his fellow board members. The question always is whether those with responsibility are carrying out their responsibilities with integrity, competence, and care -- whether they be operational, executive, or governance responsibilities. If so, one should have a high, or relatively high, comfort level; if not, then one should act to change it.

But at the end of the day, being independent means exactly that: never going along with anyone when it does not seem right, does not feel right, or is not right.

A well-informed, constitutionally skeptical, and collegially independent director or trustee who always focuses on the best interests of shareholders will surely act like a fiduciary -- and thus be a fiduciary -- in matters both large and small. Such a fiduciary will be able to sleep well at night, as will the shareholders, donors, and beneficiaries of the organization on whose board he or she sits.