Shifting Contours of Directors’ Fiduciary Duties and Norms in Comparative Corporate Governance

Modern corporate governance is highly fragmented. It has been described as “a braided framework” that encompasses an array of techniques to control the improper exercise of discretion and conflicts of interest by directors and officers. These regulatory techniques include not only legal rules, such as traditional fiduciary duties, but also non-binding norms found in corporate codes, which have proliferated around the world in recent times.

My recent paper in the University of California Irvine (UCI) Journal of International, Transnational and Comparative Law, examines these two accountability techniques from a comparative law perspective.

First, the paper explores fiduciary duties through the lens of La Porta et al’s influential law matters hypothesis. This hypothesis, which was promulgated two decades ago, claimed that the structure of capital markets around the world is directly linked to a country’s corporate governance regime and that jurisdictions with a high level of minority shareholder protection would develop deep dispersed share ownership structures. The hypothesis claimed that common law jurisdictions provided stronger minority shareholder protection than civil law jurisdictions, and that this factor explained dispersed capital market structure of, for example, the United Kingdom and the United States. One aspect of common law that the law matters study viewed as particularly advantageous was the important role played by independent judges, who relied on legal reasoning to decide cases. Judicial decision-making of this kind is a central feature of the development of the law of fiduciary duties in common law jurisdictions.

It is often assumed, on the basis of the law matters hypothesis, that there is a unified common law approach to fiduciary duties. My paper argues that, although there are broad similarities in the scope and operation of fiduciary duties in common law jurisdictions, such as the United States, United Kingdom and Australia, at a more granular level, there are important differences, which can affect the accountability of directors and officers. The paper explores some of these differences, which include significant variations with regard to:- legal history; the classification of fiduciary duties; legal sources (and whether the duties are equitable or statutory in nature); waiver for breach of duty; the scope of legal safe harbours (such as business judgment rules and exculpation clauses); and, finally, public versus private enforcement.

Secondly, my paper considers the recent phenomenon of corporate codes. It focuses on the implications for corporate accountability of two different kinds of code – corporate governance codes and shareholder stewardship codes.

These codes, although generally non-binding, can create powerful norms concerning the role of directors and officers and expectations regarding their use of power. Indeed, these norms may be more important than formal legal rules in promoting corporate accountability. Norms can interact in complex ways with fiduciary duty law to drive greater convergence or divergence across jurisdictions. Furthermore, the lines between formal legal rules and norms can sometimes be hard to define, and there can be movement in either direction between so-called “hard law,” comprising enforceable legal rules, and “soft law,” encompassing norms.

Corporate codes have proliferated in both common law and civil law jurisdictions in recent decades. As my paper shows, however, such codes are by no means homogeneous and are issued by different bodies with different purposes and goals. The provisions of these codes sometimes complement and bolster key directors’ duties. For example, corporate governance codes typically stress the need for independent directors as a means of providing procedural protection against managerial conflicts of interest. However, in other instances, codes may create tension with established principles of fiduciary law. Nowhere is this more apparent than in the current tension between shareholder versus stakeholder rights and interests. Whereas traditional fiduciary duties in common law jurisdictions tend to focus on shareholder interests, there is an increasing emphasis in corporate governance codes (and some, but by no means all, shareholder stewardship codes) on the interests of stakeholders and society as a whole.