Inherent Tensions in the Governance of Us Public Corporations: The Uses of Ambiguity in Fiduciary Law
Posted: 23 Sep 1998
Date Written: June 1997
This essay is written for an audience comprised importantly of European scholars with an interest in comparative corporation law and governance. It is written by an American whose work has not been that of a scholar, but that of a judge. As a judge I, if I may switch to a personal voice, specialized in the corporation law of the State of Delaware, the body of law that more than any other acts as the authoritative corporation law in the U.S.
Part I of this essay provides general background information on the history and structure of the corporate law of the U.S. This part lays the predicate for the assertions (1) that the nature of the large, publicly financed corporation -- which dominate the production of wealth in the U.S. economy -- taken together with the search for efficient systems of wealth production, inevitably dictate that, managerial actions will not be meaningfully constrained by a pre-existing legal rule (meaning constrained with reasonable specificity); (2) that in such an open-textured governance environment non-contractual forms of ex post constraint on discretion -- such as the judicially created fiduciary duties of care and loyalty -- provide one plausible means to attempt to resolve the resulting tensions; but (3) this effort is inevitably pragmatic and imperfect because of limitations of cognition and information, as well of fundamental value conflicts among human actors holding power to effect ex post resolution.
Part II considers the role of the fiduciary duty in American corporation law, specifically the directors' duty of care. After a brief exposition of the structural reasons why negotiated ex ante rules are of limited utility in the governance of publicly financed corporations, and after a brief description of fiduciary duties under U.S. law, the corporate directors' duty of care is discussed. The duty of care, especially with respect to the duty to monitor corporate activities that may violate law or constitute inappropriate risk, is much noted: from Salomon Brothers to Metallgesellschaft, to Barings Bank, the duty of corporate managers or directors to be informed -- and losses that result from a failure to be informed -- are much in the news.
The assertion made here is that the corporate directors duty of care is characteristic of U.S. corporation law "rules", in that it cannot -- consistently with efficient operation over an indefinite term -- be highly specified and that moreover even as a vague statement of principle to be construed ex post, it has problematic cross-cutting efficiency effects. The judicially created doctrine of the business rule is explained (in a note entirely conventional way) as a response to those cross-effects. A recent U.S. case is discussed. An hypothesis is offered to account for the posited utility of the ambiguous disjunction between directors legal standard of duty with respect to care and the protective standard of judicial review.
Note: Presented at the Max Planck Institute Conference on Comparative Corporate Governance, May 1997.
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