Recalling Why Corporate Officers Are Fiduciaries
Johnson, Lyman P. Q., Millon, David, William and Mary Law Review
[T]o say that a man is a fiduciary only begins analysis; it gives direction to further inquiry. To whom is he a fiduciary? What obligations does he owe as a fiduciary? In what respect has he failed to discharge these obligations? And what are the consequences of his deviation from duty? (1)
TABLE OF CONTENTS INTRODUCTION I. CORPORATE OFFICERS AS AGENTS: THE ROLES OF LAW, INSTITUTIONAL REALITY, AND THEORY IN SHAPING DISCOURSE A. Officers in Corporate Governance B. Forgetting Why Officers Are Fiduciaries C. Officer Control Subdues the Legal Model D. Fiduciary Discourse Accommodates Reality E. Corporate Theory Blurs Fiduciary Duties II. AGENCY STATUS AND WHY IT MATTERS A. The Fiduciary Duties of Officers B. The Significance of Agency Status 1. The State Law Foundation 2. Fiduciary Duty 3. Officer Liability 4. The Business Judgment Rule C. Corporate Governance Implications 1. Officers' Duty to the Corporate Enterprise 2. Division of Governance Responsibilities 3. Board Composition and Selection CONCLUSION
Chief executive officers wield enormous power in the modern corporation. Such well-known names as Michael Eisner at the Walt Disney Company, Martha Stewart, formerly at Martha Stewart Living, Dick Grasso, formerly head of the New York Stock Exchange, and Dennis Kowzlowski, formerly at Tyco, embody the influence of the modern CEO. When they and other senior officers perform well, the enterprise and its stockholders are likely to flourish; when they misbehave--as many have in recent years (2)--the company, stockholders, creditors, employees, and others in society suffer significant loss. Recent concern about officer wrongdoing has resulted in numerous federal and state criminal charges, (3) the initiation of Securities and Exchange Commission (SEC) administrative proceedings, (4) and imposition of new federal responsibilities on officers through the Sarbanes-Oxley Act. (5) At the same time, Congress, (6) the SEC, (7) the New York Stock Exchange (NYSE), (8) and the Nasdaq (9) all have prescribed new functions for boards of directors and their committees. These initiatives, taken together, aim to improve the overall functioning of corporate governance in public corporations, at both the director level and the officer level. This is not only a response to the widespread rash of recent corporate scandals, but also the latest--and most dramatic--episode in a larger effort to restore a healthy governance relationship between corporate directors and corporate officers.
For all the renewed federal attention to regulating--and differentiating--corporate officer and director functions, however, a curious fact remains: state fiduciary duty law makes no distinction between the fiduciary duties of these two groups. Instead, courts and commentators routinely describe the duties of directors and officers together, and in identical terms. (10) To lump officers and directors together as generic "fiduciaries," with no distinction being made between them, suggests--as patently is not the case--that their institutional function and legal roles within the corporation are the same. Such a view, consequently, undermines efforts to distinguish more sharply, not blur, the governance responsibilities of these two groups.
Failure to differentiate the duties of officers, who daily manage corporate operations, from directors, who more remotely monitor corporate affairs, stems from a puzzling failure to address an even deeper issue in corporate law: What exactly is the theoretical and conceptual basis for the widespread claim that corporate officers owe fiduciary duties to a corporation and its stockholders? In other words, to Justice Frankfurter's list of good questions to ask about fiduciary status, we can add another: Why do corporate officers owe fiduciary duties? Hardly a week goes by without yet another Delaware decision addressing the subject of director duties. …