The Deterioration of Corporate Fiduciary Duties and Managerial Accountability

Abstract

The accountability of corporate managers for their mismanagement and under management is declining. A major contributing factor to this decline in accountability is the deterioration in the fiduciary standards by which we measure the propriety of corporate managerial conduct. In this paper I look at two rules offered from influential quarters, rules that - especially when considered together - significantly reduce the accountability of corporate managers for actions that are not in the best interests of the corporation and its shareholders. The first of the proffered rules is that corporate managers should not be accountable for a lack of due care in their decisions. Advocates for this rule justify it as providing an incentive for managers to take value creating risks. The second rule is that managers should be free to allocate and re-allocate corporate wealth among various privileged corporate constituencies. Advocates for this rule justify it as providing an incentive for the investment of efficient levels of firm specific capital by those who provide monetary and human capital to corporations. These two proffered rules generate no material disagreement on matters of principle, at least, certainly, not from me. Indeed, the principles on which the rules are based - that it is good to encourage corporate managers to take value creating risks and that it is good to encourage efficient levels of investment of firm specific capital - are at the very heart of economic efficiency and fairness in the relationship between a corporation and its managers.My polemic, therefore, is not about principles but, instead, about facts - about the vast factual expanse between the proffered rules and the principles used to support the rules. The multiple and essential factual assumptions necessary to connect the principles to the rules not only are unproven empirically but also are counter intuitive and seem to get only more factually improbable when unpacked and analyzed closely. In short, the factual assumptions offered in support of the two rules amount to a thin reed and do not meet what should be a heavy burden required of those who propose a reduction in corporate managerial accountability. A strong version of corporate fiduciary duties promotes efficient and fair outcomes. Accountability on the part of corporate managers for their actions and decisions is integral to achieving these good results. Without a regime that includes strong fiduciary duties and accountability for the full value of the economic loss that results from managers' decisions, achieving efficiency and fairness is less likely.