The term “duty of loyalty” is used in two different legal senses, both reflecting an obligation to act with the best interests of another party in mind. In laws pertaining to board members of corporations and nonprofit organizations, people are required to put the interests of the organization first at all times, exercising a duty of loyalty when making decisions. In employment law in some regions, employees have a duty of loyalty to their employers and may not engage in activities known to be harmful to their employers. Breaches in both cases can be grounds for a civil suit.
In the case of members of a board, they are considered to have a fiduciary responsibility because they are managing funds on behalf of other people. They owe a duty of care, handling the funds responsibly and in a way designed to maximize returns on the funds. They also have a duty of obedience, running the organization in a way that agrees with the mission statement and aims. The duty of loyalty is a requirement to always think about the interests of the organization first.
If a conflict of interest arises, the duty of loyalty comes first and the board member must do right by the organization. While people are allowed to profit from their membership on boards, they cannot do so at the expense of an organization. For example, a board member could make a decision that benefits the company, increasing profits and improving performance, and experience a corresponding rise in the value of personal investments. The board member could not, however, put the company at risk with a decision designed specifically to create personal profits.
Employees who owe a duty of loyalty to their employers cannot engage in activities that would be considered conflicts of interest, and cannot harm their employers with their actions. Consulting with a competitor and providing insider information would be an example, as would using company equipment for personal projects intended to create profits. Not all regions have a duty of loyalty clause in their employment laws; in some cases, this type of duty can be built into an employment contract.
Depending on the nature of the violation, in addition to being liable for a civil suit, people could also face penalties from government regulators. Members of the board of a corporation, for example, can be fined and jailed for insider trading, a breach of their duty of loyalty.