Divided Loyalties: Using Fiduciary Law to Show Institutional Corruption

19 Pages Posted: 20 Aug 2013

See all articles by Michael Pierce

Michael Pierce

affiliation not provided to SSRN

Date Written: August 22, 2013

Abstract

What exactly is institutional corruption? There is consensus on the general idea: this type of corruption is generally permitted by law, and involves structural and systematic forces as opposed to individual rogue actors. However, there is no such agreement on its precise contours. There are an abundance of definitions for institutional corruption, many of them complicated and bloodless, or requiring divisive normative judgments about what exactly constitutes a given institution’s socially optimal mission.

Professor Lawrence Lessig developed a shortcut around this analytically difficult road, coining the methodology of “dependence corruption,” which he used to show that Congress is corrupt due to the current system of campaign finance. Lessig has met with some success, largely due to the parsimonious nature of his dependence corruption analysis, which lends itself to a straightforward narrative, and his method’s rejection of substantive distortion - he does not need to point to a particular “bad” bill being passed (or a “good” bill being buried in committee). However, “dependence corruption” analysis, at least of the kind Lessig applied to Congress, requires historical evidence regarding the nature and purpose of an institution, which limits reformers’ ability to extend the analysis to other institutions.

This Article aims to provide reformers with another analytical shortcut, one that captures the same benefits as Lessig’s analysis (without requiring historical analysis) and enables reformers to produce simple, powerful examinations of certain institutions - namely, those occupying positions of trust (fiduciaries) which use delegated power to act in the interests of those who entrusted them with that power (entrustors). Fiduciary duty and its exclusive benefit principle demand undivided loyalty from a fiduciary to its entrustor; the exclusive benefit principle thus provides a normative baseline from which to judge deviations corrupt.

Courts have developed legal doctrines to enforce this duty. This Article explicates the duty of loyalty inquiry from corporate law, which has direct relevance to reformers focused on institutional corruption. The doctrine provides a stark exception to courts’ usual reluctance to second-guess business decisions made by a board of directors: if a plaintiff provides evidence of a conflict of interest, the burden of proof shifts to the defendant, who must rebut what is essentially a presumption of unfairness. Reformers should invoke this doctrine and use it to guide their inquiries; this will focus their efforts on unearthing conflicts of interest and then declaring institutions (in a fiduciary-like position) presumptively corrupt, without delving into whether the substantive outcomes the institution is producing are “good” for society or not.

Keywords: Institutional Corruption, Dependence Corruption, Fiduciary, Conflict of Interest, Corporate Law, Exclusive Benefit

Suggested Citation

Pierce, Michael, Divided Loyalties: Using Fiduciary Law to Show Institutional Corruption (August 22, 2013). Edmond J. Safra Working Papers, No. 19. Available at SSRN: https://ssrn.com/abstract=2313321 or http://dx.doi.org/10.2139/ssrn.2313321

Michael Pierce (Contact Author)

affiliation not provided to SSRN

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