May 11, 2009
Limits on the "Faithful" Fiduciary
Posted by Ronald Colombo

Following up on Gordon's very interesting post, what are (or, what should be) the limits of the "faithful" fiduciary?  More specifically (and I feel as though I ought to know this), to what extent does a fiduciary have a "conscientious objection" defense were he or she to breach the shareholder wealth maximization norm on account of deeply held personal beliefs? 

I have seen an analogous question raised with regard to judges: what must a judge do when confronted with an unjust law, in light of his / her oath of office?  The answer that appears most correct to me is that, assuming the confrontation is intractable, the judge must resign.

But something tells me that since the boardroom is a context different from that of the courtroom, a different solution might be more appropriate under corporate law.

Imagine a director faced to vote upon an opportunity to further the corporation's interests (and shareholder wealth), yet recoils from doing so because the opportunity violates his moral principles.  What are his or her options?  What should corporate law say about this?

And is the test entirely subjective, or should it involve an objective component?  Compare, if you will, the following two hypothetical corporate opportunities:  one that the vast majority of people would consider acceptable (imagine, for example, the sale of earrings), but that the individual director finds objectionable because of his/her particular religious beliefs (imagine, for example, a rather robust view of the biblical command against the bodily mutilation); versus one that the vast majority of people (including the director) would consider unacceptable (imagine: the creation and sale of computer-generation child pornography - assuming, for the sake of the hypo, that this would be both legal and profitable for the corporation in its jurisdictions of operation). 

In short, even if some "conscientious objection" defense for directors were to be recognized (under a theory of good faith) should need there be a limit or a reasonableness standard applied to the director's level of scrupulosity / moral sensitivities? 

I don't presume to know the answers to these questions - I'm simply thinking out loud, and raising the question for the group's consideration.  If forced, my initial reaction is that the director should be absolved of liability if he or she acts in subjective good faith due to the dictates of his or her particular conscience, and if the reasons of his/her actions are honestly and appropriately disclosed.  The remedy here would be at election time - or via the sale of stock on the part of investors who disapprove.  But, as I mentioned in my last post, granting directors this amount of discretion raises some very serious concerns regarding shareholder protection - the very concerns around which so much of corporate law has evolved.


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