Is There A Case for Fiduciary Duties Towards Employees and Other Stakeholders?

AuthorTn, Krishnan

What Is A Fiduciary Duty?

From eons, individuals have faced the need to entrust others with valuable information, property, or other assets. This may be in a situation where a house owner entrusts his/her property to a tenant for its upkeep with care and diligence. It may also happen in a situation where a patient reveals highly personal and sensitive information to a doctor for seeking effective medical interventions. While these interactions and transactions serve useful purposes, it is seen that individuals on the dominant side of a relationship (the tenant or the doctor in the above examples), will sometime use the entrusted asset or knowledge to advance their own interests at the expense of the dependent party or will be less diligent and dedicated than the trusting party would have wished for. In Anglo-American law such relationships of trust and dependency are termed 'fiduciary'. In general a fiduciary relationship may arise when a party/individual is entrusted with property, information or power to make decisions which involve discretionary judgment for the benefit of someone other than herself/ himself. In an organizational context, owners entrust managers with the power and resources to make important strategic and operational decisions on behalf of the owners. These could include not just decisions pertaining to corporate or business strategy such as which markets to compete in, which business to merge, whom to acquire, how to out beat competition in a chosen product market etc. but also important decisions such as the price of products, whom to recruit, what kind of culture is to be sustained in a firm etc. In the organizational scenario, the Director of a company has a fiduciary duty towards the owners. Under the legal lens, fiduciary responsibilities cover two areas: Duty of care and Duty of loyalty. The duty of care essentially entails that decisions that one makes on behalf of someone entails a process orientation and are prudent and rational while the duty of loyalty requires avoiding conflicts of interest and working in the best interests of the client.

Fiduciary Duties of Managers

Most of the economic literatures on organizations provide a rightful rationale on the need to look at shareholder value maximization and the need to view managers as having fiduciary duties towards the owners. These often pertain to two related factors. First, owners through their monetary investments in a firm, risk not getting good returns or...

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