Business Finance · Ethical responsibilities of owners and managers

Ethical Responsibilities of Managers and Directors

Updated 11 October 2026 · Fact-checked

Managers and directors owe fiduciary duties to the company. They must act in good faith in its best interests (loyalty), use reasonable care, skill and diligence (care), stay honest, and avoid or disclose conflicts of interest. In exams, identify the duty, apply it to the facts, then state the remedy or control.

Understand Ethical Responsibilities of Managers and Directors

A fiduciary is a person trusted to act for someone else. Directors and senior managers control assets that belong to the company and, through it, to its owners. Owners cannot watch every decision. So the law and ethics place duties on those in control.

There are two core duties. The duty of loyalty means you put the company's interests ahead of your own. You do not use company property, information or position for personal gain. The duty of care means you make decisions with the skill, care and diligence a reasonably prudent person in your role would show. You attend meetings, read papers, ask questions and seek advice where needed.

Honesty and good faith sit under both. Managers must not mislead the board, auditors, shareholders or regulators. They must keep confidential information confidential. They must not trade on unpublished price-sensitive information.

A conflict of interest arises when a personal interest could influence, or appear to influence, a business decision. Examples are a director's firm being the supplier, or a manager hiring a relative. Conflicts are not always wrong. The wrong lies in hiding them or acting on them. Good practice is to disclose early, leave the decision to disinterested members, and record it.

This links to the agency problem: managers act as agents of owners, and their own interests may differ. Ethical duties, together with boards, independent directors, audit and disclosure, reduce that gap. Remember that the duty is to the company, not only to the largest shareholder or to the person who appointed the director. Modern codes also expect regard for employees, the community and the environment.

Key rules to remember

Duty of loyalty: Act in good faith in the company's best interests; no personal gain from position; Covers use of property, information and opportunities.
Duty of care: Reasonable care, skill and diligence expected of a prudent person in that role; Judged by the role and the knowledge the person holds, not hindsight.
Conflict of interest handling: Identify → Disclose → Withdraw from decision → Independent approval → Record; Use this sequence for any conflict scenario.
Honesty and confidentiality: No misleading statements; no misuse of confidential or price-sensitive information; Insider dealing is a breach even if the company loses nothing.

How to solve Ethical Responsibilities of Managers and Directors questions

Use this method for any scenario or discussion question on duties of managers and directors.

1Identify who the person is: director, executive or manager, and to whom the duty is owed (the company).
2Pick out the facts that show a personal interest, a lack of care, or dishonesty.
3Name the duty engaged: loyalty, care, honesty or conflict avoidance.
4Apply the duty to the facts in one or two sentences. Say why it is or is not breached.
5State the consequences, such as loss of trust, legal liability, removal or reputational damage.
6Give controls or remedies: disclosure, independent directors, audit committee, codes of conduct, whistleblowing.
7Close with a short conclusion that answers the exact question asked.

Quickest way: Duty-Fact-Control in three lines

When to use it: Use for multiple-choice questions and short written parts with little time.

Ask: is the problem self-interest (loyalty or conflict) or carelessness (care)?
Match the facts to that duty and name it in your answer.
Add one control: disclose and abstain, or improve oversight and training.

Common mistakes in Ethical Responsibilities of Managers and Directors

Saying directors owe duties directly to the biggest shareholder or the person who appointed them.
Students confuse owners with the company.
Fix: State that the duty is owed to the company, acting in its best interests as a whole.
Treating every conflict of interest as a breach.
Students assume the existence of a conflict is the wrong.
Fix: Say a conflict becomes a breach when it is hidden or acted on to gain personally. Disclosure and independent approval manage it.
Mixing up care and loyalty.
Both are described as acting responsibly.
Fix: Link loyalty to self-interest and care to competence and diligence.
Judging care by whether the decision lost money.
Hindsight bias.
Fix: Judge the process: information gathered, advice taken, reasonable judgement. A bad outcome alone is not a breach.
Listing duties without applying them to the case.
Students memorise definitions only.
Fix: Quote a fact from the scenario after each duty and say what it shows.

Worked examples

Example 1

A director of a manufacturing company owns a firm that bids to supply raw materials to the company. The director takes part in the board vote that selects the supplier, and says nothing about the ownership. Identify the duties involved and explain what should have happened.

Show the solution

The director has a personal interest: ownership of the bidder. This is a conflict of interest.
The duty of loyalty is engaged because the director may favour personal gain over the company's best price and quality.
Honesty is also breached because the interest was not disclosed.
The correct process: disclose the interest to the board before the discussion, leave the discussion and vote, and let independent directors judge the bid on merit.
The decision and the disclosure should be recorded in the minutes.

Answer: The director breached the duty of loyalty and honesty by hiding the interest and voting. The director should have disclosed it, abstained, and left an independent decision to the other directors, with a record kept.

Example 2

The managing director of a company approves a large acquisition after reading only a one-page summary from the seller. She does not ask for due diligence, legal advice or board discussion. The acquisition later fails. Discuss whether her duty of care was breached.

Show the solution

The duty of care requires reasonable care, skill and diligence for a person in her role.
A large acquisition is a major decision, so a prudent person would gather detailed information, take financial and legal advice, and involve the board.
She relied on the seller's summary, which is an interested source, and skipped due diligence.
The failure is judged on the process she followed, not only on the later loss.
Controls that would help: mandatory due diligence, board approval limits, and review by the audit or investment committee.

Answer: Yes, the duty of care appears breached because her decision process was inadequate for a decision of that size. The breach comes from the lack of diligence, not merely from the failed outcome.

Exam tips

Always name the duty (loyalty, care, honesty, conflict) before discussing it.
Tie each point to a fact in the scenario. Generic lists score poorly.
In multiple-choice questions, remember the duty is to the company and disclosure alone does not remove all problems.
Finish written answers with controls: independent directors, audit committee, codes of conduct and whistleblowing.

Practice questions from Ethical responsibilities of owners and managers

Ethical Responsibilities of Managers and Directors in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Ethical Responsibilities of Managers and Directors: frequently asked questions

What is the difference between duty of care and duty of loyalty?

Duty of care is about competence: acting with reasonable skill and diligence. Duty of loyalty is about motive: putting the company's interests before your own. A careless director breaches care. A self-dealing director breaches loyalty.

How do you manage a conflict of interest in a company?

Identify it, disclose it to the board, step away from the discussion and vote, and let independent members decide. Record the process. Written policies and a register of interests help.

Who do directors owe fiduciary duties to?

They owe them to the company. They act in its best interests as a whole, which includes taking shareholders' long-term interests into account. They do not serve one shareholder or appointer alone.

Is a director liable for any decision that loses money?

No. Liability depends on whether the director acted honestly and with reasonable care. A well-informed, good-faith decision that turns out badly is not by itself a breach.