Over the past five to ten years there have been many leaders that have squandered money from others in some fashion. Sometimes those other people are investors, employees, stockholders, or stakeholders of some form or another. Many times the leaders are entrusted with large sums of money, but they are careless when making decisions. Other times, leaders just make risky investments without doing adequate research. So why do leaders make these types of decisions? There are probably many reasons, but they all stem from the fact that they don’t understand their fiduciary responsibility.
What is a fiduciary responsibility?
Wikipedia explains, “A fiduciary (from Latin fiduciarius, meaning “(holding) in trust”; from fides, meaning “faith”, and fiducia, meaning “trust”) is a legal or ethical relationship of trust between two or more parties. Typically, a fiduciary prudently takes care of money for another person. One party, for example a corporate trust company or the trust department of a bank, acts in a fiduciary capacity to the other one, who for example has funds entrusted to it for investment.” As a leader, you have a fiduciary responsibility to those who have entrusted you with their money.
Why should you take your fiduciary responsibility seriously?
Leaders that have a fiduciary responsibility, need to take their responsibility seriously because of many reasons. Some of those reasons include the following:
- In many cases there are legal responsibilities that go along with fiduciary responsibilities. It is not uncommon for fiduciary responsibilities to involve some type of legally binding contract. In these cases, leaders are responsible to spend the money of others wisely and if they don’t they can be held legally responsible.
- There is an ethical and moral responsibility to handle another persons money with care. You can do this by letting the person know what you are going to spend their money on and how much risk you anticipate. If your approach changes, you should let them know of the changes.
- If you want to be successful long term in business, you need to do a good job at what you do. If you are handling the money of others and do a bad job, you will gain a reputation and will lose your employability.
There are many other reasons for taking your fiduciary responsibility seriously. What are some other reasons you have seen?
What happens when leaders fail to understand their fiduciary responsibility?
When leaders fail to understand their fiduciary responsibility, they spend as much as they want without thought of the future ramifications. There are countless companies that have lived in the moment. They start to see success in what they do and they begin to spend all they make without thinking about planning for the future. This leads to overspending and extravagance in many cases. I have heard of CEO’s that go and spend significant portions of their profit on extravagant trips and pleasure that momentary in nature.
There is also a common thought that if there is plenty of revenue coming in “right now” that it will always be coming in at the same rate. Therefore, leaders think they can spend and even go into large debt NOW with the thought that they can pay everything off in the future when they continue to make high profits. Sometimes this thought process is successful, but many times it is not. When you have a fiduciary responsibility, it is important to understand the amount of risk you take on with this approach. You must also let all parties involved know the level of risk.
Conclusion
As a leader, it is important to understand the fiduciary responsibility that you have so you can act appropriately. It is also very important that you let people involved know what level of risk you will be taking on and how it will affect them.
Why is understanding your fiduciary responsibility important to you? Why should leaders take this responsibility seriously? Please share your thoughts in the comments section below!
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