Part 2: Fiduciary Duties to Shareholders, Partners, and Members
29 What are the “take home” messages from this Part?
This Part described the duties owed among several of the most important ways to organize a business. To understand the ability of entities to operate in a socially responsible manner, it is important to first understand clearly where these entities do have duties to make profits, who those duties are owed to, and what flexibility there exists in fulfilling those duties.
For example, corporations (specifically, corporate boards) owe fiduciary duties to those who have invested money with them as shareholders. These shareholders have power to bring lawsuits–called derivative suits–on behalf of the corporation if they believe the corporation has been mismanaged. At the same time, corporate boards have flexibility through (a) long-term brand building, (b) the business judgment rule, (c) corporate constituency statutes, (d) legally structuring themselves as benefit corporations, and (e) certifying themselves as B-corps. Similarly, partners in a partnership owe duties but the law may choose to enforce them only in cases of gross negligence or willful unlawful conduct. Thus, for egregious violations of fiduciary duties, the law will often give shareholders / partners / members a recompense, but otherwise the law gives boards / partners / managing members flexibility to accomplish fiduciary goals as they see fit.
In the next Part, we will examine a variety of issues in ethics that exist as businesses operate within that flexibility.
Exercises
- Contrast the protections for corporate action (the business judgment rule, etc), with the flexibility in partnership operation from the rule that partners “might not face liability unless they are grossly negligent, reckless, or knowingly violate the law.” How are the protections for corporate boards similar to those for partners? How are they different?
- Shareholders of corporations have the potential to influence the corporation, but their votes may be limited. Consider an activist investor’s approach to forcing McDonalds to change its ESG practices, here. Analyze the results of this action in terms of this Part.