The Stakeholder Debate and Fiduciary Accountability

The ‘stakeholder debate’ currently riddles the corporate law literature. Frequently the discussion is framed as an issue of fiduciary accountability. The debate, in basic terms, is whether corporate managers are accountable as status fiduciaries to shareholders or to a more expansive collection of stakeholders. That framing, regrettably, is profoundly defective. There are a number of confusions. 

The utility of corporate status depends on community recognition of the distinct legal personality of corporations. The principled default position is that a corporation is a legal person in its own right, and not an agent or trustee for its shareholders. On that understanding, managers are fiduciaries to the corporation itself. They are not status fiduciaries to shareholders or to any other stakeholder class. The modern failure in some jurisdictions to recognize that legal conclusion is a first confusion.

A second confusion is the widespread failure to comprehend the narrow function of fiduciary accountability. The conventional function of the regulation is to constrain the opportunism of those who have access to the value associated with corporate assets. Managers undertake to serve their corporation, and therefore the access they acquire is explicitly or implicitly a limited access. Because there is a risk that they might exploit their limited access for personal advantage, and thereby compromise the performance of their undertaking, the law of fiduciary accountability proscribes all unauthorized conflicts and benefits that potentially are linked to their service. That narrow function (constraining opportunism) fully defines and fully exhausts the jurisdiction in the corporate context (and every other context).

A third related confusion is that today many writers describe the legal duty of managers to act in the best interest of their corporation as a (or the) ‘fiduciary’ duty. The best interest duty, it must be understood, is not congruent with fiduciary regulation. The duty springs from the physical undertakings of managers to serve their corporation. That undertaking to serve is elevated to a legal duty to promote or advance the best interest of the corporation. The performance of the duty involves considering what actions by the corporation and its workers are commercially advisable given the environments that define and surround the corporate business. The duty is defined and mandated as a matter of corporate law, and not as a matter of fiduciary law. Fiduciary accountability, as noted above, operates independently as a parallel regulation that seeks to prevent the opportunistic impulses of managers compromising the performance of their service.

In a recent article I examine the academic contribution to the historical development of these confusions (primarily the first confusion). The notion of a status fiduciary duty to shareholders circulated in the corporate law of the nineteenth century in both England and the United States. The notion eventually was confronted and rejected by the English courts. American courts, however, did not similarly explicitly confront the issue. The matter was still unresolved in the United States when, in the 1930s, certain prominent American writers assumed that managers were directly accountable as fiduciaries to shareholders.

In 1933 Adolf Berle and Gardiner Means published The Modern Corporation and Private Property. The main thesis of the book was that the separation of ownership and control in large public corporations had destroyed the foundation on which the economic order of the previous three centuries had rested. I spend some time explaining the serious flaws with that larger thesis in order to demonstrate how in the course of his distinct legal analysis (as opposed to the economic analysis of Means), Berle assumed that the law was settled that managers were accountable as fiduciaries directly to shareholders. At essentially the same moment, in the course of challenging shareholder primacy, Merrick Dodd also assumed that the law at the time was that shareholders were direct beneficiaries of the fiduciary duty of managers. The result was that, despite the actual unresolved American jurisprudence, two prominent scholars had accepted or assumed in the course of their analyses, without due investigation, that managers were status fiduciaries to shareholders. The effect of that was to strongly elevate that assumption in the United States, and thereby solidify the divergence between the English and American positions.

How then is the stakeholder debate connected to fiduciary accountability? As I explain in the article, the stakeholder debate in its standard form is irrelevant to the fiduciary accountability of directors. It simply is misguided to frame the question of the fiduciary duty of directors as a contest between shareholder and stakeholder interests. The control of opportunism is a concern that is quite different from the corporate law question of whose interests ought to be preferred by corporate managers on any given matter. The conventional law of fiduciary accountability independently determines its own application. It applies only to limited access undertakings, and its only purpose is to control the opportunism of parties that have such limited access. In the corporate context that means that, because directors, officers, agents and employees undertake to serve their corporate employer, they are status fiduciaries to the corporation, and are subject to the generic proscription that they not entertain unauthorised conflicts or benefits. None of those actors have a separate status fiduciary duty to any stakeholder (including shareholders). Accordingly, on that conventional analysis, the stakeholder question is answered. For the purposes of regulating opportunism, the stakeholder debate is irrelevant from the outset because there is no conventional uncertainty over the identity of the beneficiary of the status fiduciary duty of corporate managers. The corporation alone is the beneficiary of the duty. The argument that directors qua director have status fiduciary duties to any stakeholder in the corporate business simply evaporates.

Rob Flannigan is Professor at University of Saskatchewan College of Law.

Readers can contact the author to request the article via email (r.flannigan@usask.ca).