The Significance of the Effective Enforcement of Fiduciary Duties of Directors on Business Environment

Published: 2021-08-02
1309 words
5 pages
11 min to read
Wesleyan University
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Honk Kong is a leading International Financial Centre in the world; this study seeks to locate the importance of the fulfilment of fiduciary duties by directors and how this contributes to the enhancement of the business environment in Hong Kong. In this special subject, fiduciary duties reveal the duty of loyalty, since the duty of care, skill and diligence have been codified as part of the Companies Ordinance. The duty of loyalty remains in the scope of the common law, and can, therefore, be explored only through jurisprudence and the analysis of case law.

After the search of the literature on the fiduciary relationships, two frameworks are discovered and used for the analysis of breach of fiduciary duty cases. The first framework can be applied to all fiduciary relationships, while the second is applicable only to Hong Kong cases of breach of directors' fiduciary duty. The frameworks were applied to four cases in Hong Kong, which discovered the importance of fiduciary law in four specific cases: (1) it sets the criteria for determining liability resulting from a fiduciary relationship; (2) it protects loyal and honest directors from liability; (3) it imposes sanctions on dishonest intentions concealed behind pretentious acts, thereby protecting shareholders from harm; and (4) it develops clear doctrines to address complex situations.

CHAPTER ONE INTRODUCTION1.1 Background of the research

Entrepreneur understands business is risky but necessary to work; risky because it operates in an uncertain environment, necessary because the business activity produces the goods and services that people need to live and thrive. Business risk is not entirely disadvantageous because entrepreneur may able to earn substantial profits.

Businesses can only be a success under the trust system. Trust is implicit in the provision of credit, the extension of loans, and the investment of money each of these is made with the promise of future returns or compensation. Once the trust relationship is established, the involved parties will expect honesty and loyalty, particularly if the entitled rights and power are shared for achieving a specific purpose in another's name.

Fiduciary duty is premised on trust, loyalty, and honesty, in the context of business (Weakley & Magistrate, 2017). Business can only be successful where a team spirit of trust and loyalty is developed; however, trust and loyalty are attitudes that cannot be presumed for all the individuals who participated in the business. Therefore, to govern the relationships of trust and loyalty within the business, the law creates the regulatory structure to guide those individuals who may need to reply upon. The law also defines duties and obligations for persons with a fiduciary relationship with the business and its stakeholders. The law compels observance of fiduciary duties of certain people, such as the board of directors or relative to the corporations they serve.

Hong Kong is a principal financial centre of Asia and the world, to continue promoting the status of Hong Kong as a better international commercial centre. It follows that Hong Kong must operate within a robust legal structure whereby fiduciary relationships are enforced efficiently and maintained. Hong Kong would, therefore, provide a suitable context within which to study the practical pursuit of fiduciary duties among businesses and their directors.

1.2 Aim and research objectivesThis study, therefore, seeks to achieve the following aim: To determine the significance of the observance of fiduciary duties of directors on the business environment in Hong Kong.

The following are the objectives of the research:

To understand the nature of fiduciary duties and the philosophy behind them

To describe the core fiduciary duties of boards of directors, how they are met or breached in financial perspectives, and remedies by which they are addressed

To explore some cases with directors that involved in tax evasion, tax avoidance or fraudulent financial reporting to enhance the adaptability of legal practice and ethics in business environment in Hong Kong (Focus on duty of care)

1.2.1 Research QuestionsWhat are the nature of fiduciary duties and the philosophy behind them?

What are the core fiduciary duties of boards of directors?

How do fiduciary boards of directors encounter or breach the financial perspectives?

What ways do fiduciary directors address tax evasion, tax avoidance and fraudulent 1.3 Research HypothesisThe fiduciary duty level in Hong Kong companies is equal or lower than average. That is; Null Hypothesis, Ho: s3

Alternative Hypothesis, H1: s3

The fiduciary duty level within Hong Kong companies is equal or lower than average. That is; Null Hypothesis, Ho: s3

Alternative Hypothesis, s3

There is no definite significance relation between fiduciary duty level and business performance level.

Null Hypothesis, Ho, r+0.5

1.3.1 Overall research approachThis study is fact-finding in its path, as it intends to delve into elements that exist at present and in the past and to reach a sense of their significance. In this case, this dissertation seeks to establish the importance of fiduciary duties to the success of the business and to explain the rationale behind this concern. An online desktop search will be suitable as there is a wealth of information over the internet regarding the laws and their application.

1.3.2 Structure and content of the dissertationThis dissertation will be broken down into chapters one which deals with the introduction that comprises background of the research that identifies the research problem, the aim of the study, study objectives and study questions. Chapter two is a literature review, chapter three deals with research methods, chapter four deals with data description, chapter five data analysis and finally chapter six conclusion and recommendations.


The literature review chapter is the process of searching and learning from past research and articles in academic and professional journals. Its purpose is to describe the theoretical foundation for the current research which is being undertaken and to develop the conceptual framework that it may adopt moving forward. The background discussion leads to a treatment of the core fiduciary duties, and identification of a framework by which to analyze fiduciary principles.

2.2 Background discussion

The fiduciary law in different countries tend to vary in scope, substance, and application; however, the basic premise is the same: that there are relationships wherein the entitled power holder authorized the power and rights to individuals. Therefore requires the vested individuals, or fiduciaries, to act by a duty of loyalty and care to those whose power they exercise. The relationship this dissertation focuses on is that between corporate directors and shareholders, but before the scope can be narrowed, it is vital to get a sense of the general philosophy and taxonomy of the core fiduciary principles as legal theorists have envisioned it. To support a subsequent comparison between legal systems, and enable analysis of case law.

2.3 Definition of remunerations management and accounting fraudAccounting fraud is different from other types of frauds since it is mainly done by management with the target to mislead financial statement managers though embezzlement of assets committed against an entity, mainly the workforce (Roy, and Debnath, 2015). Accounting fraud is a deliberate physical misstatement of monetary reports (Apostolou, Dorminey, Hassell, and Watson, 2013). To categorise an action as fraudulent, it depends on the motive behind the act (Li, 2010). (Sharma, and Panigrahi, 2013), argue out that accounting fraud does not begin with deceit, but it can start with pressure to attain financial objectives and the panic that failure to attain these objectives shall be looked at as unpardonable. Alternatively, the agent of fraud can be obsessed by personal gains like protection of bonuses and lying, and not pressure from the company. Such actions echo Cressey's fraud triangle that points out three features: contextual opportunities to undertake fraud, personal incentives, as well as the capability to justify fraud. Fraud may start small (Ngai, Hu, Wong, Chen, and Sun, 2011), in departments that allow substitute ways to record the procedures of a unit. For example, a devaluation method that scientifically and logically assigns the cost of a resource against its good life is acceptable by accounting standards. The organization can exploit such elasti...

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