From Loyalty to Conflict: Addressing Fiduciary Duty at the Officer Level
University of Georgia Law School
Florida Law Review, Vol. 61, pp. 1-53, 2009
UGA Legal Studies Research Paper No. 09-001
Conflicts of interest are the quintessential agency cost-the constant, lurking danger that agents may seek their own personal gain, rather than the good of the corporation. Yet many corporate employees lack knowledge as to exactly what constitutes a conflict of interest. This ignorance facilitated the kind of fraud seen in Enron, WorldCom, and the options backdating scandals, and may help explain the out-sized payouts that many high-level corporate officers received even as the financial institutions they headed verged on self-destruction. Each case required not only affirmative fraudulent behavior on the part of a few, but also the tacit acceptance of individuals throughout the company.
Currently there are no solutions to the core agency problem of conflicts. Corporate law, in both theory and practice, focuses on conflicts of interest only at the board level via the duty of loyalty. It largely ignores the true corporate decision makers - the CEO, CFO, and other corporate officers. To the extent state corporate law does address conflicts at the officer level, it only discusses how to treat conflicts that have been voluntarily disclosed - it is silent about how to identify conflicts ex ante. Federal regulation has likewise failed to prevent rogue agents from taking from their principals. Neither the Organizational Sentencing Guidelines nor Department of Justice memoranda on entity-level prosecution focuses on incentivizing corporations to prevent conflicts. The Sarbanes-Oxley Act mandates disclosure of waivers of a corporation's code of ethics for senior officers, but this rule may have the perverse effect of encouraging corporations to weaken their codes, so that there are fewer waivers to disclose. This Article is the first to examine this question as an empirical problem, analyzing SEC filings and concluding that, indeed, this Sarbanes-Oxley requirement may not lead to any meaningful disclosure.
Because evidence suggests that part of the problem might be a lack of understanding of what constitutes a conflict, this Article advocates education as the best option, and explores implementation mechanisms such as conflicts training, licensing, or certification for high-level corporate officers.
Number of Pages in PDF File: 54
Keywords: Corporations, Sarbanes-Oxley
JEL Classification: K22
Date posted: January 31, 2009 ; Last revised: November 8, 2009
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