Lift not the Painted Veil! To Whom are Directors’ Duties Really Owed?

Martin Gelter

Fordham University School of Law; European Corporate Governance Institute (ECGI)

Geneviève Helleringer

ESSEC Business School; University of Oxford - Institute of European and Comparative Law

April 2, 2014

University of Illinois Law Review, Forthcoming
European Corporate Governance Institute (ECGI) - Law Working Paper No. 255/2014
Fordham Law Legal Studies Research Paper No. 2419591

In this article, we identify a fundamental contradiction in the law of fiduciary duty of corporate directors across jurisdictions, namely the tension between the uniformity of directors’ duties and the heterogeneity of directors themselves. American scholars tend to think of the board as a group of individuals elected by shareholders, even though it is widely acknowledged (and criticized) that the board is often a largely self-perpetuating body whose inside members dominate the selection of their future colleagues and eventual successors. However, this characterization is far from universally true internationally, and it tends to be increasingly less true even in the United States. Directors are often formally or informally selected by specific shareholders (such as a venture capitalist or an important shareholder) or other stakeholders of the corporation (such as creditors or employees), or they are elected to represent specific types of shareholders (e.g. minority investors). The law thus sometimes facilitates the nomination of what has been called “constituency” directors. Once in office, legal rules tend nevertheless to treat directors as a homogeneous group that is expected to pursue a uniform goal. We explore this tension and suggest that it almost seems to rise to the level of hypocrisy: Why do some jurisdictions require employee representatives that are then seemingly not allowed to strongly advocate employee interests? Why can a director representing a specific shareholder not advance this shareholder’s interests on the board?

Behavioral research indicates that directors are likely beholden to those who appointed them and will seek to pursue their interests in order to maintain their position in office. We argue that for many decision-making processes, it does not matter all that much what specific interest directors are expected to pursue by the law, given that across jurisdictions, enforcement of the corporate purpose is highly curtailed.

Number of Pages in PDF File: 63

Keywords: constituency directors, codetermination, venture capital, fiduciary duties, corporate theory, theory of the firm, board of directors, behavioral theory

JEL Classification: K22, L20

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Date posted: April 4, 2014 ; Last revised: April 15, 2014

Suggested Citation

Gelter, Martin and Helleringer, Geneviève, Lift not the Painted Veil! To Whom are Directors’ Duties Really Owed? (April 2, 2014). University of Illinois Law Review, Forthcoming; European Corporate Governance Institute (ECGI) - Law Working Paper No. 255/2014; Fordham Law Legal Studies Research Paper No. 2419591. Available at SSRN: https://ssrn.com/abstract=2419591 or http://dx.doi.org/10.2139/ssrn.2419591

Contact Information

Martin Gelter (Contact Author)
Fordham University School of Law ( email )
150 West 62nd Street
New York, NY 10023
United States
646-312-8752 (Phone)
HOME PAGE: http://www.fordham.edu/info/23135/martin_gelter
European Corporate Governance Institute (ECGI)
Brussels, B-1050
HOME PAGE: http://www.ecgi.org/members_directory/member.php?member_id=621
Geneviève Helleringer
ESSEC Business School ( email )
3 Avenue Bernard Hirsch
CS 50105 CERGY
University of Oxford - Institute of European and Comparative Law ( email )
St Cross Building
St Cross Road
Oxford, OX1 3UL
United Kingdom
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