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Why Are Corporate Executives Subject to Fiduciary Duties?

What are fiduciary duties and why are they different from the basic rules of everyday business transactions? Professor Robert Miller discusses how “fiduciary duties” describe a particular relationship between directors and shareholders. Directors are held to a higher standard of behavior above and beyond the usual rules of the marketplace because they act on behalf of the shareholders. https://youtube.com/watch?v=mF1dTfpBn1Q


The major problem in corporate law is that there are certain people, the directors and officers, who have control over the assets, and there are other people, the shareholders, for whose benefit they're supposed to be using that control. Following the economist, we corporate lawyers call that an agency problem. You have one person, the directors and officers, whose job it is to act for the benefit of other people, the shareholders, and the problem is obvious. It could very well be that the directors and officers have incentives to benefit themselves at the expense of the shareholders. We deal with that in corporate law by imposing strict duties on directors and officers, and those duties are called fiduciary duties. It's easiest to understand fiduciary duties in contradistinction from the duties you face in the marketplace when you just meet someone and you're doing a business deal with them. In the marketplace, you must be honest. You may not commit fraud. You may not lie to the people you are doing business with. If you lie to them in order to extract value from them, that's what we call fraud. And it's certainly a civil wrong and in many cases, it's a crime. When you enter into a contract with someone to do a business deal, you have to live up to your contract. And if you violate those contractual obligations, you will be liable. But that's all you owe them. Keep your promises and be honest. That's the morality of the marketplace. When you become someone's fiduciary, however you owe them a great deal more, you owe them a duty of unremitting honesty. You are required to act for their benefit, not your own. So for example, in a normal business setting, you may not commit fraud. You may not lie. In a fiduciary setting, the fiduciary when dealing with the person to whom the fiduciary duty runs, the beneficiary, the fiduciary is required not to lie, for sure, but more than that, to tell his beneficiary all the material information that the fiduciary is in possession of. In a very famous case, Chief Justice Cardozo said that a fiduciary, "...must observe a punctilio of an honor, the most sensitive" much more than he said than the morality of the marketplace. Those are the type of duties we impose on directors. They have to in every instance in which they're making a business decision, use their honest judgment to say what's best for the shareholders. And that's what they're required to do in each case. This is called in corporate law, the duty of good faith, but it's much more than good faith in the marketplace. It is a punctilio of honor, the most sensitive.

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