A Simple Model of Corporate Fiduciary Duties: With an Application to Corporate Compliance

William C. Bunting

doi:10.1515/rle-2021-0013

Article

A Simple Model of Corporate Fiduciary Duties: With an Application to Corporate Compliance

William C. Bunting

Published/Copyright: November 11, 2021

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From the journal Review of Law & Economics Volume 17 Issue 3

Abstract

This article models the duty of care as a response to moral hazard where the principal seeks to induce effort that is costly to the agent and unobservable by the principal. The duty of loyalty, by contrast, is modeled as a response to adverse selection where the principal seeks truthful disclosure of private information held by the agent. This model of corporate loyalty differs importantly with standard adverse selection models, however, in that the principal cannot use available contracting variables as a screening mechanism to ensure honest disclosure and must rely upon the use of an external third-party audit technology, such as the court system. This article extends the model to the issue of corporate compliance and argues that the optimal judicial approach would define the duty to monitor as a subset of due care – and not loyalty – but hold that the usual legal protections provided for due care violations no longer apply.

Keywords: corporate governance; fiduciary duties; corporate compliance; asymmetric information

Classification Codes: D82; G34; K22; O16

Corresponding author: William C. Bunting, Assistant Professor, Department of Business Law, Fox School of Business and Management, Temple University, 1801 Liacouras Walk, Philadelphia, PA 19122, USA, E-mail: william.bunting@temple.edu

Research funding: This research did not receive any specific grant from funding agencies in the public, commercial, or not-for-profit sectors.
Conflict of interest statement: The authors declare no conflicts of interest regarding this article.
Author contribution: The author has accepted responsibility for the entire content of this submitted manuscript and approved submission.

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Article note

This paper has benefited from the author’s interactions with… All errors should be attributed to the author alone.

Received: 2021-03-08

Revised: 2021-08-14

Accepted: 2021-10-05

Published Online: 2021-11-11

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Articles in the same Issue

https://doi.org/10.1515/rle-2021-0013

Keywords for this article

corporate governance; fiduciary duties; corporate compliance; asymmetric information