22 Pages Posted: 26 Nov 2010
Date Written: November 23, 2010
Directors and officers of for-profit corporations are said to owe two duties to the corporation: care and loyalty. Not so long ago, they also owed a “duty of obedience.” This third duty, now largely forgotten, compelled corporate fiduciaries to abide by legal norms – both internal and external.
This essay argues for a revival of the “duty of obedience.” Explicit recognition of such a duty (as in non-profit organizations) would advance the legitimacy of the for-profit corporation in society. Moreover, such a duty recognizes that the duties of care and loyalty are incomplete. Corporate actions that violate legal norms, even when undertaken in ways that are diligent and selfless, are inconsistent with fundamental expectations of corporate conduct.
Recognition and development of an obedience duty would resolve much of the confusion surrounding the “duty of good faith.” It would offer a clearer vocabulary for those who counsel corporate fiduciaries about their duties to abide by legal norms. It would provide a principled basis for the judicial review of internal corporate controls and corporate illegality.
Keywords: fiduciary duties, care, loyalty, obedience, internal controls, judicial review, illegality
JEL Classification: K22, K42, G30, G34, G38, M14
Suggested Citation: Suggested Citation
Palmiter, Alan R., Duty of Obedience: The Forgotten Duty (November 23, 2010). New York Law School Law Review, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1713786