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Markkula Center for Applied Ethics

Fiduciary Duty vs. Shareholder Empowerment

Navigating a Central Tension of Corporate Governance

Miriam Schulman

Video interviews with Myron Steele, chief justice, Delaware Supreme Court, and Kirk Hanson, Ethics Center executive director
Core Concepts of Corporate Governance: Good Faith, Loyalty, and Care
The fiduciary duties of corporate boards
The Future of Corporate Governance: Critical Issues
Key concerns on the horizon in business ethics
The Role of the Delaware Courts in Corporate Law
History of the Delaware Courts' preeminence in corporate law

Fiduciary duty, the obligation of someone entrusted with another person's property or money to operate in that person's best interest, cannot be divorced from ethical values such as fairness, transparency, and integrity, according to Myron Steele, chief justice of the Delaware Supreme Court. In a corporation, the board of directors has a fiduciary duty to the shareholders, requiring the board to make decisions in the best interest of shareholders.

Steele, who spoke at a recent meeting of the Center's Business and Organizational Ethics Partnership, traced the origin of the concept of fiduciary duty to common law, stretching back to Roman times. The Delaware court, which is a primary source of corporate law in America, recognizes three components of fiduciary duty, he said: the duty of loyalty, the duty of independence, and the duty of care.

The duty of loyalty requires that the fiduciary be disinterested, that is, acting in the interest of the other, not in his or her own interest. The duty of independence requires that the fiduciary make an objective assessment and be able to establish that the decision making process reflects that objectivity. The duty of care requires the fiduciary to act prudently, as a reasonable person would act.

Steele pointed out that these fiduciary duties can, on occasion, conflict with shareholder empowerment. Shareholders may propose actions to the board of directors, but because shareholders are allowed to act in their own interests, they cannot be held accountable for those decisions in the same way that the board can. The current “Say on Pay” legislation is a prime example of more closely involving shareholders in the governance of the firm, but it remains to be seen if the outcomes will be more effective or efficient.

In conclusion, Chief Justice Steel strongly advocated that in a business landscape marked by various business entities, a moral approach to corporate fiduciary duties adequately protects the interest of shareholders who, because of the costliness of collective action and the lack of contractual rights to protect themselves, are vulnerable to mismanagement of their investments.

Miriam Schulman is the communications director of the Markkula Center for Applied Ethics.

Dec 1, 2011