While my writing on comparative corporate governance has focused principally on the core issues of power and purpose – that is, the division of governance authority between boards and shareholders, and the aims toward which board decision-making ought to be oriented – this work brought another striking divergence to my attention. While in the US we refer to “fiduciary duties” (plural) to describe directors’ duties of loyalty and care, other common-law jurisdictions generally conceptualize only the duty of loyalty as “fiduciary” in nature. That a well-functioning corporate legal system needn’t describe the duty of care as a fiduciary duty led me to ask, in a recent essay, whether there might be some practical utility in drawing such a clear distinction between loyalty and care concepts – and what costs might attend not doing so.
The rationale for applying the “fiduciary” label solely to the duty of loyalty is two-fold. First, the duty of loyalty is unique to fiduciary status, whereas the duty of care isn’t. Second, breaches of these respective duties involve differing consequences that ought to be distinguished analytically. Millett L.J. summarized this position – in a manner consistent with approaches taken in Australia and Canada as well – in the UK Court of Appeal’s 1996 decision in Bristol and West Building Society v. Mothew, [1998] Ch. 1 (Eng.):
The expression “fiduciary duty” is properly confined to those duties which are peculiar to fiduciaries and the breach of which attracts legal consequences differing from those consequent upon the breach of other duties. Unless the expression is so limited it is lacking in practical utility. . . .
It is . . . inappropriate to apply the expression to the obligation of a trustee or other fiduciary to use proper skill and care in the discharge of his duties.
The issue of which duties ought to be described as “fiduciary” in nature has received some attention over recent years among US legal academics, and articulate advocates have urged narrower and broader frameworks, respectively. Compare, for example, the approaches of William Gregory (endorsing the Mothew approach and arguing that equating duties of loyalty and care amounts to “bad law and worse semantics”) and Julian Velasco (arguing that there are five fiduciary duties – care, loyalty, objectivity, good faith, and rationality – corresponding with distinct standards of review). In my essay I approach the issue somewhat obliquely, crediting the Mothew framework as a rational and comprehensible alternative and then asking what costs might have attended the differing US framework. I conclude that describing both loyalty and care as fiduciary in nature has led judges – notably in Delaware – to conflate distinct analytical approaches to evaluation of board conduct, with consequences for the development of US corporate law that are not entirely positive.
The duty of loyalty has historically been enforced more aggressively, an approach aiming principally to reduce conflicts of interest that scrupulous directors could realistically detect ahead of time, and thus avoid – associating a correlative moral stigma with breach. The duty of care, on the other hand, generally has gone unenforced in order to promote entrepreneurial risk-taking – reflecting an assumption that even scrupulous directors could not manage their own liability exposure so straightforwardly, and accordingly diminishing the moral stigma associated with breach. (I say that it has “generally” gone unenforced because this has not historically been the case in banking, where skepticism regarding the social benefits of risk-taking resulted in more robust enforcement of the duty of care – a dynamic that I explore here.) As I describe in some depth, however, Delaware’s tendency to conflate the two duties as reflections of a singular fiduciary concept embodied by the business judgment rule (BJR) has tended to blur this core distinction – rendering Delaware’s analytical framework for the evaluation of board conduct considerably less coherent.
The confusion latent in Aronson, 473 A.2d 805 (Del. 1984) – which described the BJR as a presumption of both informed and disinterested director decision-making (in contrast with an earlier formulation suggesting that only disloyalty could give rise to monetary liability) – fully manifested itself in the Cede litigation, 634 A.2d 345 (Del. 1993), where the Delaware Supreme Court depicted the BJR as the primary embodiment of the demands of “fiduciary” status, accordingly describing the duties of loyalty and care alike as mere elements of, and means of overcoming, the BJR. In turn the court reached the remarkable conclusion that a care breach – with no showing of resulting injury – rebuts the BJR and “requires the directors to prove that the transaction was entirely fair,” the standard typically applied in the loyalty context, rendering rescissory damages available. As Steve Bainbridge has observed, rescissory damages in a duty of care case could “have the effect of ordering the defendant directors to return a benefit that they never received,” and “threaten to be so astronomical as to substantially chill the decisionmaking process.”
It is critical to recognize that each step in the development of this muddled analytical framework rests upon the conflation of loyalty and care as twin reflections of a singular fiduciary concept (via the BJR). In this light, I believe that corporate law would have benefited from a clearer conceptual distinction between loyalty and care duties, fostering a clearer analytical distinction between the desirable enforcement regimes in these differing contexts.
So, do I favor pursuing such clarity through a formal re-styling of the duty of care in non-fiduciary terms? No. While I might have favored such an approach if we were writing on a clean slate, we’re most assuredly not writing on a clean slate – and I think it quite reasonable to fear that abruptly re-styling care as non-fiduciary might be misinterpreted as some sort of demotion, potentially undercutting whatever degree of compliance might arise from motivations other than fear of damages. A better approach, in my view, would be a statutory damages rule permitting imposition of monetary damages for loyalty breaches, but not for care breaches (along the lines that I initially proposed here). Such an approach would permit the duty of care to retain whatever fiduciary oomph it currently possesses in the marketplace, while foreclosing the sort of analytical confusion described above and simplifying Delaware’s complex and convoluted framework for evaluating disinterested board conduct.