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An Economic Analysis of Corporate Directors' Fiduciary Duties

63 Pages Posted: 27 Jan 2001  

María Gutiérrez Urtiaga

Universidad Carlos III de Madrid-Departamento de Economía de la Empresa; European Corporate Governance Institute (ECGI)

Multiple version iconThere are 2 versions of this paper

Date Written: October 2000

Abstract

This paper studies how the legal liability rules for directors can be optimally designed to provide them with the incentives to fulfill their fiduciary duties and to maximize ex-ante firm value. I present a principal-agent model where the shareholders can obtain a verifiable but costly and imperfect signal on the director's fulfillment of his fiduciary duties by taking legal action against him. This allows the firm to make the director's remuneration contingent not only on performance but also upon the court's decision.The paper shows that, when damages awards are high, the widespread use of liability insurance and limited liability provisions that is observed in the US is optimal because it allows shareholders to credible commit to an optimal suing strategy. The results on the use of liability insurance are maintained when the parties can settle out of court.

Keywords: corporate governance; fiduciary duties; directors' remuneration; Directors and Officers liability insurance; Limited Liability Provisions

JEL Classification: G34, K22, K41

Suggested Citation

Gutiérrez Urtiaga, María, An Economic Analysis of Corporate Directors' Fiduciary Duties (October 2000). EFA 2001 Barcelona Meetings; CEMFI Working Paper No. 0014. Available at SSRN: https://ssrn.com/abstract=257594 or http://dx.doi.org/10.2139/ssrn.257594

María Gutiérrez Urtiaga (Contact Author)

Universidad Carlos III de Madrid-Departamento de Economía de la Empresa ( email )

Calle Madrid 126
Getafe, 28903
Spain
+34-91 624 58 40 (Phone)
+34-91 624 96 07 (Fax)

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

HOME PAGE: http://www.ecgi.org

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