The Use and Misuse of Fiduciary Duties: Why Corporate Fiduciary Duties Aren’t Worth Fighting For

Abstract

This paper provides a crucial corrective to the “corporate social responsibility” debate, which concerns whether corporations have the obligation to protect or serve the interests of groups other than their shareholders, like employees or customers (often called “stakeholders”). Scholars on one side of the debate have repeatedly presumed that corporate directors’ fiduciary duties to shareholders play an important role in protecting shareholders from decisions that favor stakeholders at their expense. Scholars on the other side agree that fiduciary duties provide meaningful protection against unfavorable conduct, but argue that directors should also owe fiduciary duties to stakeholders so they may be similarly protected. I argue this shared premise is empirically mistaken: fiduciary duties in practice play almost no role in director decisions to favor one corporate group over another. I first explain that courts and scholars rarely note the difference between two distinct definitions of the duty of loyalty—one broad, one narrow—and argue that only the broader definition would allow this duty to have any impact on directors’ distribution of corporate resources. Under this narrow definition, fiduciary duties to shareholders prevent directors from acting in their own self-interest, but not from acting in the interests of stakeholders at shareholders' expense. I then argue that Delaware law enforces only the narrower definition of loyalty due to the triggering conditions of the judicial standards of review, which largely eliminates shareholders’ ability to protect themselves from directors’ decisions that favor stakeholders. Finally, given this is true for shareholders, I argue it would likewise be true for employees (or any stakeholders), were they to be owed fiduciary duties by directors. Because fiduciary duties do not protect against such unfavorable conduct, I conclude it is a mistake to debate to whom directors should owe fiduciary duties. Advocates for shareholder or stakeholder protection should therefore focus on other mechanisms to obtain it.