An Analysis of Pay-Offs of Corporate Managers’ Fiduciary Duties

The fiduciary duties of corporate managers are rights owed with to respect to the company to establish a fair conduct of the agents in the business governance, reducing incentives – via the communication of potential direct or derivative actions – in adopting behaviors that can increase the agency costs and potentially reduce or prevent value creation for the long-term.

In fact, this framework of analysis requires a bottom-up reaction of the shareholders, if an unfair condition it is classified as verified with a reasonable margin. Generally, we can find 3 main Duties :

  • Duty of Loyalty, Directors’ Interests must be aligned and consistent to the Company’s ones.
  • Duty of Care, eventual ex-post failures must be justified by enough ex-ante efforts to understand the situation – having collected of enough information and being able to argument the potential benefits.
  • Duty of Good Faith, no intention to violate Ethics & Legal Standards and Duties.

If an observed event or a scenario generate a presumption of a conduct verifiable only in the case of one or more duty breach – that caused an injury – and the damage involved can be applied as a common variable to establish a class of plaintiffs from the shareholders’ population, a corporate class actions can be established.

Consequently, enlarging the definition of the sphere of which events can generate a class action would determine directly an increase in the complexity of business decisions analysis exante, enriching the perceived risk of each decision, making slower the business normal operations and expansions, since Directors can be exposed more likely to a legal action, from a virtual entity (class of plaintiffs) that has an high contractual and legal power.

Especially in the natural competitive business environment, in which a proactive endogenous decision making can maximize the likelihood of success of a new business step, a high probability of success doesn’t necessarily imply the certainty of the execution, since the basically chaotic non-deterministic principles of the reality of the business’s exogenous unpredictable factors, that shareholders should take in account when they are investing.

The Directors’ ability to explain the rationale of a decision, consistent with the Duties, using enough information to pursue the Company Value creation interest, it is the presumption under favorable business oriented Law Frameworks as the Delaware’s Business Judgment Rule, that charge the plaintiff in starting the Burdens of Production, minimizing the cognitive cost for the Directors, allowing a more dynamic and fluid governance decision making.

Oppositely, the lack of insider information and the opaque external understandability for the Shareholders can establish for the agents a greater number of exploitable shadowed opportunities inconsistent with their duties, difficult to identify for the plaintiffs. In fact, in an uncertainty situation it is possible an increase in the likelihood of failing a potential true legitimate class action since the scenario and the legal factispecies could not be correctly argumented and evaluated in relation to the variables involved – since only the final damage is observable – , especially if the legal environment limits the ability of a class of plaintiffs to initialize a legal action that can bring to a deeper analysis of the scenario.

To optimize the Legal Business Environment, the legislator has to find the Pay-Off between the Incentive for the Principals in Investing in Public and Private Companies and for Agents to expand and develop Business Innovations as a natural procedure into competitive markets in maximizing the Consumers wellness and exploiting competitive opportunities.