Corporate Directors as Purpose Fiduciaries: Reclaiming the Corporate Law We Need

Abstract

Much of the debate over corporate governance centers on whether directors have fiduciary duties to stockholders alone, or to stakeholders more broadly. I argue instead that, certainly historically and arguably still today, directors have a fiduciary duty not to specific persons, but to the corporate entity and its authorized purposes. Drawing on the distinction advanced by Miller and Gold between “service fiduciaries” (i.e. personal fiduciaries) and “governance fiduciaries” (i.e. purpose fiduciaries), the first section makes a series of analytical arguments in defense of the position that corporate directors are purpose fiduciaries, based on the legal structure of corporations. The second section backs this up with historical argumentation. The corporate bodies of the medieval Catholic Church were clear purpose fiduciaries, and monasteries in particular were the laboratory for charters with purpose clauses. These practices passed over to civil corporations, including merchant guilds. Drawing on the previously unutilized evidence offered by corporate oaths of office, I show that the corporate boards of merchant guilds also began as clear purpose fiduciaries. However, circumstances surrounding the emergence of the business corporation in England, from out of the merchant guild, resulted in this new type of corporation being described in the vocabulary of the joint stock company (a variety of partnership), or alternatively, in the vocabulary of the English trust. Each suggested that stockholders were the “owners” and legal beneficiaries of the corporation, and that the board’s fiduciary duty was to them rather than to purposes. Transformations in corporate enterprise at the end of the 19th century finally made these legal conceits untenable, and recognition of the underlying purpose fiduciarity of directors began to emerge in progressive era legal thought. However, beginning in the 1970s, Chicago neoliberals successfully reasserted the partnership conceit with its implication of “shareholder primacy.” This has caused much intellectual confusion and policy mischief, as it has shaped the norms and laws under which business corporations are governed, with the consequence that corporate managers have turned their firms away from corporate mission and long-term growth and towards the short-term stockholder’s interest in high dividends and stock price, with all of the dysfunctions this entails. But the core of corporate law continues to reveal directors to be purpose fiduciaries, and the courts, while significantly swayed by Chicago conceits, have not fully abandoned a purpose interpretation, although they have narrowed and misconstrued it. The paper concludes with recommendations for strengthening the purpose fiduciarity of directors, with the potential to significantly improve the performance of corporate firms.