Natural Law and the Fiduciary Duties of Business Managers
Johnston, Joseph F., Jr., Journal of Markets & Morality
Recent business scandals have focused attention on failures of corporate governance involving serious breaches of traditional legal and ethical standards on the part of those who manage corporate affairs. This article argues that the legal standards applicable to managerial behavior are traceable to deeply rooted moral standards that are the basis of the "fiduciary principle"; that the fiduciary principle is a principle of natural law that has been incorporated into the Anglo-American legal tradition; and that this principle underlies the duties of good faith, loyalty, and care that apply to corporate directors and officers. The fiduciary duties of corporate managers run to shareholders and not to creditors, employees, and other "stakeholders." This article further argues that corporate directors cannot eliminate their fiduciary obligation by contract. Enforcement by the courts of longstanding fiduciary standards of conduct is a better solution to problems of corporate governance than increased government regulation.
... the laws of commerce ... are the laws of nature, and consequently the laws of God.
--Edmund Burke (1795)
The news media in recent years have been filled with stories of business scandals involving massive failures of corporate governance. These failures reflect widespread deviation from traditional ethical and legal standards on the part of the directors and officers who manage corporate affairs. Investigations of the derelictions underlying recent corporate disasters have uncovered startling examples of fraud, self-dealing, and neglect.
These episodes have raised once again two fundamental questions: To what standards should managers be held? What are the historical and conceptual bases for these standards? In this article, I hope to show that the legal standards applicable to managerial behavior are traceable to deeply rooted moral standards, and that these fundamental moral standards are the basis of the fiduciary principle that underlies the duties of corporate managers. Further, I will argue that the fiduciary principle is a principle of natural law that has been incorporated into Anglo-American law through the common law tradition. I conclude that it is only by vigorous adherence to this tradition that abuses of trust can be prevented.
The Nature of Fiduciary Duty
Professor Austin Scott, who for many years was the leading American scholar in the field of trust law, wrote in 1949 an important article showing that the fiduciary principle extended far beyond the law of trusts to include many relationships including the duties of agent to principal, attorney to client, guardian to ward, and executor to legatee. As we will see, the fiduciary principle also includes duties of corporate managers to the corporation and its shareholders. Scott defined the term fiduciary to mean "a person who undertakes to act in the interest of another person." (1) In most fiduciary relationships, the fiduciary is given control over some aspect of the life or property of another (the beneficiary) with the expectation that the fiduciary will exercise that control for the benefit of the beneficiary. The salient elements of a fiduciary relationship are "the actual placing of trust and confidence in fact by one party in another and a great disparity of position and influence between the parties to the action." (2)
Underlying the fiduciary relationship is the element of trust, which is a necessary condition of social harmony and of the proper functioning of organizations. Indeed, trust can be regarded as a "precontractual" element in all social arrangements. In fiduciary relationships, because of the fiduciary's position of dominance and control over some aspect of the life or property of the beneficiary, the latter must necessarily trust the fiduciary to give proper consideration to the beneficiary's interest. The fiduciary relationship thus gives rise to an ethical obligation of loyalty on the part of the fiduciary. …