The Texture of Loyalty

This paper examines whether and how reforms in corporate governance structures and practices in the United States may reshape conventional notions of the fiduciary duties owed by independent directors of public companies. The paper identifies two focal points for the evolution of directors' fiduciary duties. First, various reforms in corporate governance assign more specific responsibilities to directors, arguably reorienting directors' loyalty to due discharge of a specified function along with ongoing or residual duties of loyalty owed in more general terms to the corporation and its shareholders. The relationships among these specific duties and more general ones may be complex, as may be the consequences of increased emphasis on work to be done by directors as members of committees in contrast to the board as a whole. Second, reforms in corporate governance imply that a director's duty of loyalty to the corporation and its shareholders requires more than disinterest, narrowly defined. That is, a director's duty is one of fidelity to the interests of the corporation that imposes more than an obligation to refrain from participating in board decisions in which the director has a material financial interest. The paper prefaces discussion of evolution of directors' duties by addressing two more fundamental questions about contemporary corporate governance: what role precisely should be assigned to directors, distinct from a corporation's officers and its other senior executives? And what implications follow for the powers of shareholders? To the extent that directors can reasonably be expected to serve only a relatively formal or vestigial function, an expansion in shareholders' powers may be warranted. Overall, the paper is a study of interrelationships among legal and nonlegal mechanisms that shape expectations for directors' conduct. Although distinct, none operates in a vacuum. Formal structures, definitions, and requirements may shape how directors discharge their responsibilities by focusing directors' attention on their gravity and, by enabling independent directors to function more collegially, facilitating the development of institutions of corporate governance that function independently of senior management. Articulating the content of directors' responsibilities with greater specificity heightens expectations that these responsibilities will be fulfilled. In turn, higher expectations for directors' conduct may serve to legitimate directors' capacity, once elected, to exercise discretion independent of intervention from shareholders.