Whither Fiduciary Accountability

The exposition of the law of fiduciary accountability has been negligently disintegrating for some time. I say negligently because the numerous departures from principle that presently agitate the jurisprudence and the literature have arisen through linguistic, conceptual or research weakness. Conventional principle has not been openly confronted and repudiated. Rather, the departures emerged negligently, and then lingered on without resolution of the distortions they introduced. As I recently explained in ‘The End of Fiduciary Accountability’, the departures collectively may signal the collapse of the conventional position. There is a need for superior courts to restate the accountability to either restore the clarity of its conventional function or identify what different or additional function it is to perform.

The unjustified departures from conventional principle conveniently may be illustrated by a number of developments in the corporate context. A first departure is the common supposition that shareholders are not fiduciaries to anyone. I have shown how that supposition is conceptually flawed. A corporation must express its will through the bodies or persons that are assigned the will definition function. The determination of corporate will usually is delegated partly to its board of directors and partly to its shareholders in general meeting. Those bodies (and their director and shareholder members) undertake their will definition function for the limited purpose of advancing the interests of the corporation. That in turn attracts fiduciary accountability (the duty of ‘loyalty’) for both directors and shareholders. Neither are free to entertain selective personal conflicts or benefits in the course of holding or exercising their will definition authority. 

A second departure, found primarily in American law, is the supposition that directors have a fiduciary duty to their corporation and to its shareholders. The true position is that the default status fiduciary duty of directors is owed solely to their corporation. Directors do not have a status fiduciary duty to shareholders. The corporation itself does not have a status fiduciary duty to its shareholders and, consequently, neither do its directors qua director. In earlier work I observed that shareholders, like other stakeholders, simply benefit indirectly or reflectively from the fiduciary duty that directors owe to their corporation.

A third departure is the supposition, again found primarily in American law, that the fiduciary duty of directors includes a duty of care along with the duty of loyalty. There is no proper basis for that assertion. While negligence and opportunism may partially overlap, they are substantively distinct mischiefs that require substantively distinct regulation. Directors do have a duty of care, but it is just the standard duty defined by the general law of negligence that governs everyone. There is no special or unique fiduciary duty of care.

A fourth departure is found in the idea that the fiduciary duty of directors shifts from the shareholders to the creditors of the corporation as it approaches insolvency. That is misconceived because normally there is no limited access (other-regarding) undertaking by a corporation to its creditors. The inputs (eg materials, capital, credit) that a corporation receives from its creditors are received on an open access basis, and therefore there can be no fiduciary accountability per se. The interests of creditors properly are considered by directors, but that occurs in the ordinary course of performing their nominate duty to determine the best interest of the corporation.

There are multiple other departures from conventional principle. In each case the analysis of their development indicates that they too are unjustified. They nevertheless may collectively suggest that there must be something defective about the conventional understanding of the accountability. That would be a mistaken supposition. The conventional regulation remains robust, but shaded by the presence of the nesting departures. Further, other reasons, only some of which I briefly note here, support the conventional position. First, the conventional accountability has never been credibly challenged. The recognized function of controlling opportunism remains undisputed. Second, many of the departures are attributable to the deficient efforts of scholars in misreading or misdescribing the jurisprudence. Third, the various departures will serve as new means for opportunistic fiduciaries to exploit their access. They will use the distortions created by the departures to shed their accountability. Fourth, the departures foster the ‘silo’ development of fiduciary accountability, leaching away its conventional generic content. Fifth, the cumulative effect of the departures that contract the accountability will eviscerate the strict operation of the regulation. Sixth, there is no accepted alternative analysis or theory to turn to if conventional principle is jettisoned. Lastly, the conventional regulation rationally integrates community and autonomy.

Judges need to understand that the coherence of the jurisdiction is crumbling, and that they ought to act decisively. This is not an occasion for instrumentally ambiguous speech, or for cushioning those who facilitated or authored unjustified departures. We need intellectual investment that is properly informed, not merely sunk. Clear purpose should determine our communal regulation. Everything hinges on the imperative identification of the mischief that fiduciary accountability is designed to address. That mischief should drive every aspect of the design of the regulation. If the mischief is performance compromised by opportunism, the conventional analysis should be affirmed, and the departures rejected. If judges believe there is a different or additional mischief, now is the time to make that clear to legal and lay communities.

Robert Flannigan is a Professor of Law at the University of Saskatchewan