Fiduciary Duty — How the Duty of Care Differs from the Duty of Loyalty

A director is a fiduciary entrusted by the company with the conduct of an office. Hence two duties: the duty to exercise due care in carrying out that office, and the duty not to pursue private gain at the expense of the company's interest. The duty of care and the duty of loyalty — they look alike, yet they face in different directions. This piece returns to the text of the Companies Act to sort out the difference between the two, and how it rebounds onto the records of materials review.

01A Director Is a "Mandatary" — Article 330 of the Companies Act

The starting point is the relationship between the company and the director itself. Article 330 of the Companies Act provides that the provisions on mandate apply mutatis mutandis to that relationship. A person who accepts a mandate bears the duty of care under Article 644 of the Civil Code — the duty to handle the mandated affairs with the care of a good manager. A director is a mandatary who takes charge of and deploys the capital of others (the shareholders), and is held to a higher standard of care than when handling his own property.

The separation of oversight and execution we saw last time presupposes this structure of entrustment. Once an office is entrusted to someone, the checks cannot work unless one fixes how far the person entrusted is bound. Fiduciary duty is the foundation that makes separated governance hold together.

02The Two Duties Face Along Different Axes

The duties a fiduciary bears are not one. Beyond the duty of care grounded in the mandate of Article 330, the Companies Act places the duty of loyalty separately in Article 355. The two overlap in places, but the axis each looks along differs.

The difference becomes visible in a concrete case. When approving promotional material for a product, to pass it without sufficiently verifying the data is a matter of the duty of care. To pass it leniently on purpose, knowingly, for the sake of one's own or a close department's numbers, is a matter of the duty of loyalty. In materials review too, "Did you exhaust the procedure (care)?" and "Is there a conflict of interest (loyalty)?" are seen along separate axes. A single review is met by two yardsticks at once.

03The Business Judgment Rule — What Is Tested Is the Process, Not the Result

A breach of the duty of care is not result-based liability. It is measured not by the fact that a loss occurred, but by whether there was a marked unreasonableness in the process and the substance leading to that judgment. This is the business judgment rule. If a trace of gathering information, deliberating, and judging remains, the duty may be assessed as fulfilled even when the outcome is bad. Conversely, a blank in the process gives rise to an inference of breach of the duty of care.

So a fiduciary needs "a process that can be explained." This runs continuously into the duty to monitor, which a later installment takes up. A judgment for which no record remains loses the very means of later showing that "due care was exercised." Before the merits of the judgment, one becomes unable to prove the fact that a judgment was made at all.

04To the Materials-Review Floor — The Record Becomes the Watershed

How does all this connect to materials review? Each single review is itself the record of the process by which a fiduciary exercised due care. Why this expression was permitted, with which data it was substantiated, how concerns of conflict of interest were excluded. If that trace remains, then even if the expression becomes a problem in the end, it can be explained by the reasonableness of the process.

Conversely, a review settled orally with no record left creates a blank in the process. In the scene where the substance of the internal control system is put to the test, this means lacking the material to protect the organization. The records a reviewer leaves stand as evidence that fiduciary duty was discharged, and support even the duty of care of the directors above. The record is both a discipline of defense and the very role one plays on the front line of governance.