Toward a Horizontal Fiduciary Duty in Corporate Law

53 Pages Posted: 6 Mar 2018 Last revised: 18 Sep 2019

See all articles by Asaf Eckstein

Asaf Eckstein

Hebrew University of Jerusalem - Faculty of Law

Gideon Parchomovsky

University of Pennsylvania Law School

Date Written: May 2019

Abstract

Fiduciary duty is arguably the single most important aspect of our corporate law system. It consists of two distinct sub-duties — a duty of care and a duty of loyalty — and it applies to all directors and corporate officers. Yet, under extant law, the duty only applies vertically, in the relationship between directors and corporate officers and the firm. At present, there exists no horizontal fiduciary duty: directors and corporate officers owe no fiduciary duty to each other. Consequently, if one of them fails her peers, they cannot seek direct legal recourse against her even when they stand to suffer significant reputational and financial losses. This state of affairs is undesirable not only from a fairness perspective, but also from an efficiency standpoint as it raises governance costs for firms and may undermine their ability to attract skillful officers and directors.

In this Essay, we call for the introduction of a horizontal fiduciary duty among directors and corporate officers. The proposed duty would complement, rather than replace, the fiduciary duty that corporate officers owe the corporation and the shareholders. We argue that the institution of a horizontal fiduciary duty would (1) lead to improved decisionmaking and information sharing on boards; (2) enable board members to vindicate themselves in situations in which another board member is the one to breach the fiduciary duty; (3) attract more capable individuals to serve as directors; and (4) improve corporate management and governance.

Keywords: Public corporations, fiduciary duties, directors liability, officers liability, reputation

JEL Classification: G34, K22, K42, M14

Suggested Citation

Eckstein, Asaf and Parchomovsky, Gideon, Toward a Horizontal Fiduciary Duty in Corporate Law (May 2019). Cornell Law Review, Vol. 104, p. 803, 2019, U of Penn, Inst for Law & Econ Research Paper No. 18-10, Available at SSRN: https://ssrn.com/abstract=3134607 or http://dx.doi.org/10.2139/ssrn.3134607

Asaf Eckstein

Hebrew University of Jerusalem - Faculty of Law ( email )

Mount Scopus
Mount Scopus, IL 91905
Israel

Gideon Parchomovsky (Contact Author)

University of Pennsylvania Law School ( email )

3501 Sansom Street
Philadelphia, PA 19104
United States
215-898-1603 (Phone)

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