Abstract
Financial transactions and fiduciary obligations are simply intertwined. Fiduciaries are subject to the principle of fidelity. It appears, at times at least, public trust in fiduciary commitments is declining as a result of fiduciaries’ selective reporting of financial events and the existence of conflicts when fiduciaries have selfish motives: motives being not always to maximize the trusting party’s value. It is the agency problem. This work attempts to enunciate that commitments and fiduciary obligations emanating from initial financial transactions are not to be violated or ignored as a matter of policy or practice. The questions that arise are: Should a fiduciary be obliged to guarantee a certain outcome for the counter-party, and should a fiduciary be held accountable to a certain type of outcome? We examine what the guidelines are or should be put in place. Initially, under the garb of some socio-religions edicts-cum-dicta, and then under the well-known economic analytics, we make our points and move the view to the forefront.
Highlights
Governance encompassing ethical issues that entail a display of meaningful loyalty in all forms of political and corporate conducts has been a subject of intense debate over many years, and over the past decade, in particular, since Enron, WorldCom, Pharmalat, OneTel, Inforsys, Dubai World and other financial disasters
More than a century ago, equity gave a hospitable reception to that principle and the common law was not slow to follow in giving it recognition
In the second form of trust identified by Flannigan (1989) there is typically no deference or vulnerability involved and an example given is the kind of trust that employers have in their agents and servants
Summary
Governance encompassing ethical issues that entail a display of meaningful loyalty in all forms of political and corporate conducts has been a subject of intense debate over many years, and over the past decade, in particular, since Enron, WorldCom, Pharmalat, OneTel, Inforsys, Dubai World and other financial disasters. Less time and thought have been afforded to the concept of loyalty or fiduciary obligation, which is often associated with trust and trust-like relationships in which conflicts of interest and duty tend to arise (Flannigan, 1989) Consistent with these views, DeMott (1988) contends that it may very well be the lack of discussions about what fiduciary entails that have created the current investigations into several improprieties that relate public’s lack of faith in the reporting practices of corporations and the functioning of capital markets. Islamic scholars have undertaken a thorough examination of relevant verses from the Holy Qur’an and the Sunnah: Ariff and Iqbal (2011) They have established the basic principles that govern the rights and obligations of participants in the financial transactions. Good conscience requires one to act at all times in the interest of the trusting party
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