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Fiduciary Duties and the Shareholder-Management Relation: or, What's so Special About Shareholders?

Published online by Cambridge University Press:  23 January 2015


The claim that managers have a fiduciary duty to shareholders to run the corporation in their interests is generally supported by two arguments: that shareholders are owners of a corporation and that they have a contract or agency relation with management. The latter argument is used by Kenneth E. Goodpaster, who rejects a multi-fiduciary, stakeholder approach on the grounds that the shareholder-management relation is “ethically different” because of its fiduciary character. Both of these arguments provide an inadequate basis for the fiduciary duties of officers and directors of corporations. The basis is to be found, rather, in considerations of public policy, a point that was established in the Dodd-Berle exchange of the 1930s. This conclusion also shows the inadequacy of Goodpaster’s solution to the so-called stakeholder paradox, and an alternative solution to the paradox is presented.

Copyright © Society for Business Ethics 1994

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This paper has benefited from helpful comments by Thomas L. Carson, Thomas W. Dunfee, Kenneth E. Goodpaster, William L. Langenfus, and Eric W. Orts.

1 Milton Friedman, Capitalism and Freedom (Chicago: University of Chicago Press, 1962), 133; and “The Social Responsibility of Business Is to Increase Its Profits,” The New York Times Magazine, September 13, 1970, p. 33.

2 E. Merrick Dodd, Jr., “For Whom Are Corporate Managers Trustees?” Harvard Law Review, 45 (1932), 1148.

3 R. Edward Freeman, Strategic Management: A Stakeholder Approach (Boston: Pitman, 1984). See also, R. Edward Freeman and Daniel R. Gilbert, Jr., Corporate Strategy and the Search for Ethics (Englewood Cliffs, NJ: Prentice Hall, 1988), and William M. Evan and R. Edward Freeman, “A Stakeholder Theory of the Modern Corporation: Kantian Capitalism,” in Tom L. Beauchamp and Norman E. Bowie, eds., Ethical Theory and Business, 4th ed. (Englewood Cliffs, NJ: Prentice Hall, 1993), 75–84.

4 Kenneth E. Goodpaster, “Business Ethics and Stakeholder Analysis,” Business Ethics Quarterly, 1 (1991), 69.

5 A. A. Berle, Jr., and Gardiner C. Means, The Modern Corporation and Private Property (New York: Macmillan, 1932), 336.

6 J. A. C. Hetherington, “Fact and Legal Theory: Shareholders, Managers, and Corporate Social Responsibility,” Stanford Law Review, 21 (1969), 256.

7 Oliver E. Williamson, The Economic Institutions of Capitalism (New York: The Free Press, 1985), 304.

8 Williamson, The Economic Institutions of Capitalism, 304–5.

9 Williamson replies that although individual investors can protect themselves by selling stock, shareholders as a class cannot. Williamson, The Economic Institutions of Capitalism, 304.

10 See Bayless Manning, review of The American Stockholder by J. A. Livingston, Yale Law Journal, 67 (1958), 1492.

11 Goodpaster, “Business Ethics and Stakeholder Analysis,” 63.

12 Goodpaster, “Business Ethics and Stakeholder Analysis,” 69–70 (emphasis added).

13 Goodpaster, “Business Ethics and Stakeholder Analysis,” 70.

14 Goodpaster, “Business Ethics and Stakeholder Analysis,” 63. By “strategic stakeholder considerations” Goodpaster means considering the interests of stakeholders as a means to the end of serving the interests of the shareholders. A multi-fiduciary stakeholder approach makes the interests of all stakeholder groups the end of corporate activity.

15 Goodpaster, “Business Ethics and Stakeholder Analysis,” 68.

16 The idea that corporations are a “nexus” of contracting relations among individuals is familiar from the work of agency theorists. See, for example, Michael C. Jensen and William H. Meckling, “Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure,” Journal of Financial Economics, 3 (1976), 310. Agency theory does not suppose that the relations in question are contracts that create obligations, however; it asks us, rather, to think of the relation involving shareholders, along with those of all other constituencies, as though they were a multitude of contracts for explanatory purposes only. On this point, see Robert C. Clark, “Agency Costs versus Fiduciary Duties,” in John W. Pratt and Richard J. Zeckhauser, eds., Principles and Agents: The Structure of Business (Boston: Harvard Business School Press, 1985), 59–62.

17 Larry D. Sonderquist and Robert P. Vecchio, “Reconciling Shareholders’ Rights and Corporate Responsibility: New Guidelines for Management,” Duke Law Journal, 1978, p. 840.

18 See, for example, Paramount Communications, Inc. v. Time, Inc., [1989 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 94, 514 (Del. Ch. July 14, 1989).

19 Carpenter v. Danforth, 52 Barbour 581 (NY 1868).

20 Chenery v. SEC, 128 F.2d 303, 307 (D.C. Cir. 1943). See also SEC v. Chenery Corp., 318 U.S. 80 (1942). For a close study of the Chenery case, see David C. Bayne, “The Fiduciary Duty of Management: The Concept in the Courts,” University of Detroit Law Journal, 35 (1958), 561–94.

21 See especially Evan and Freeman, “A Stakeholder Theory of the Modern Corporation,” 76–77.

22 Goodpaster, “Business Ethics and Stakeholder Analysis,” 69.

23 Berle and Means, The Modern Corporation and Private Property, 355.

24 Berle and Means, The Modern Corporation and Private Property, 355–56.

25 A. A. Berle, Jr., “For Whom Corporate Managers Are Trustees: A Note,” Harvard Law Review, 45 (1932), 1367.

26 Berle, “For Whom Corporate Managers Are Trustees,” 1372.

27 At least 28 states have adopted other constituency statutes. In some states this has been accomplished by legislative enactments; in others, by court decisions interpreting state law. For an overview, see Charles Hansen, “Other Constituency Statutes: A Search for Perspective,” The Business Lawyer, 46 (1991), 1355–75. A penetrating analysis that criticizes Hansen is Eric W. Orts, “Beyond Shareholders: Interpreting Corporate Constituency Statutes,” The George Washington Law Review, 61 (1992), 14–135.

28 Roberta S. Karmel, “The Duty of Directors to Non-Shareholder Constituencies in Control Transactions: A Comparison of U.S. and U.K. Law,” Wake Forest Law Review, 25 (1990), 68.

29 Principles of Corporate Governance and Structure: Restatement and Recommendations (Tentative Draft No. 1, 1982). A second draft, published in April, 1984, reads, “may take into account ethical considerations that are reasonably regarded as appropriate to the responsible conduct of business.” The same wording occurs in the Final Proposed Draft, March 31, 1992. A discussion of the first draft is, M. J. Pritchett III, “Corporate Ethics and Corporate Governance: A Critique of the ALI Statement on Corporate Governance,” California Law Review, 71 (1983), 994–1011.

30 Goodpaster, “Business Ethics and Stakeholder Analysis,” 63.