Monday, March 16, 2009

The Concept of Fiduciary Duty in Business Administration

Business schools have been in existence for more than a century, but they have failed to articulate a meaningful explication of the concept of fiduciary duty as it applies to managers. This omission is striking because the primary duty of management is to serve shareholders. The subject of economics, specifically information economics, has developed an attenuated image of fiduciary duty as alignment of two utility functions--that of manager or agent and that of principal or stockholder. However, the practical ramifications of such alignment are not explicit and remain a sphinx-like riddle.

Do managers owe a duty of disclosure to shareholders, and if so, what competencies are required to exercise such disclosure?

Do managers owe a duty to act in good faith toward shareholders? If so, what is the ethical make up required of managers?

Must managers be capable of explaining bad news in a balanced way? If so, what competencies are required?

Are managers expected to act on behalf of shareholders? If so, to what degree does an understanding of economics, incentives and accounting serve as a pre-requisite to competent managerial action?

How far are boards expected to go in assessing personnel standards and systems?

These questions are not asked in management courses. Nor are they answered. They are not asked in business schools at all, nor are they answered.

It is not surprising that American business has become a spectacle of bad ethics, incompetence, mismanagement and waste. Corporate boards have not been required to develop standards of competence. Little is expected of boards. Managers are compensated on the basis of stock market trends that do not reflect managerial skill.


Pinni said...

...and of course, they usually are not held accountable for such conduct due to the manager-friendly Delaware laws in existence. However, is this not an argument against Federalism? Under the Federalism argument, as I see it, each state acts as a laboratory, testing out various new laws without harming the entire union. With corporate law however, each state lowered the liability they placed on the manager, enticing them to come incorporate in their state. (The benefit to the state is they get the filing fees, etc.) This trend continued until Delaware offered the most manager-friendly laws in existence. Perhaps, the best solution to this problem is to nationalize our corporate law. The federal government would not have an incentive to offer a "get out of jail free card" to all managers as they would not be competing with other States for these taxes. What do you think?

With best regards,
Pinni Bohm

Mitchell Langbert said...

I don't think law is the solution to mismanagement. Better management is. Where is the state that passed a law mandating that the car companies must adopt quality practices better than the Japanese's? Not that I'd want one. I think it's a mistake to rely on law to encourage competitive industry. Industry is uncompetitive because of too much federal protection via the Federal Reserve Bank, friendly regulation and the like. Investors invest in stock of poorly managed firms because interest rates are artificially low because of the Fed. In a market economy, given the garbage that passes as corporate enterprise, interest rates would be 14% and someone could retire on a million dollars, instead of 1%.