BoatWright Assign

BOATWRIGHT

Coming off of the Hasnas piece: we mentioned how fiduciary duty to stockholders (the consent bond) is truly a duty, but that it has possible competitors – other duties that demand recognition.

Boatwright’s topic is the search for the ground of justification for prioritizing the fiduciary duties to the stockholders above these other possible duties.

To let the cat out of the bag: according to Boatwright, we won’t find such ground!

THESIS: There is nothing special about shareholders that privileges the fiduciary duties to them over the fiduciary duties to others.

· It’s important to get the dialectic framed right: Boatwright wants to argue against the position that fiduciary duty extends to shareholders only (that if there are extra responsibilities to other stakeholders, these responsibilities are not grounded on a fiduciary relationship, but some kind of benevolence)

· So Boatwright will explore and attempt to debunk a number of ways one might argue that duties to shareholders posses a unique moral status.

Shareholders as Owners

This position argues that it is the fact that the shareholders are owners of the company that entitles them to this special status.

· In the past, financers made businesses possible with the investing of their personal assets

· Boatwright argues that things are different now:

· Distinction between ownership of personal assets and ownership of a corporation

· Shareholders are not given the right to use corporate assets as if they were personal assets

· In other words, there is no longer control

· Because of this (and as evidence that this is true!), there are (legal) shareholder rights to try to protect shareholder interests (presumably to encourage investment!)

· Right to elect a Board of Directors

· Right to dividends from company profits

· These rights (of ownership if we want to use that word) do not logically entail that managers need to act only in the interests of the shareholders

· Tim says: to say there is a logical gap here is a very weak claim. We could say there is a logical gap between having a right to life and it being wrong for me to kill you, but that doesn’t blunt the force of having a right to life as counting as a pretty strong reason to think it would be wrong to kill you. That said, we can still ask for this link the way Boatwright does. In this case we DO want to know what it is about ownership that provides ground for fiduciary duty. I say this only to qualify the possible rhetorical force of “logical gap”…

· If they don’t automatically entail such a duty, what does?

· Possible answer: The Equity Argument

· That we need to protect the risks of investors? (notice that this is a consequentialist consideration – risk of harm)

· Shareholders do not have contracts to protect their investments

· The investments of shareholders are not associated with particular assets

· No way of withdrawing what they’ve put in (ex: I could donate a table to the chess club and then possibly take it back)

· Boatwright’s Reply

· This doesn’t give grounds for the conclusion that the manager’s fiduciary duties are to the shareholders ALONE

· 1) Perhaps the existing shareholder rights do enough to give this space of protection for shareholder investments

· 2) There is another mechanism that greatly compensates for investor risk: the stock market

· “Indeed, managers and employees of firms generally have far more at stake in the success of a corporation than do the shareholders”

· 3) Shareholders only are owners of stock, NOT owners of the company.

· The argument here is that the space of those shareholder rights mentioned above exhaust the claims of ownership and thus fit closer to seeing shareholders as owners of stock rather than owners of the company.

Contracts

(Like Hasnas argued) this position holds that it is on the basis of a special contract between the shareholders and the manager/CEO that there is special fiduciary duty to shareholders.

· This is different from the Equity argument since it trades on the deontic duties of promise making/keeping.

· First problem: no contract

· It certainly isn’t an explicit contract

· Implicit? Nope (at least not by the nominal legal standards)

· Shareholders frequently buy from previous shareholders, not the company

· Even when they buy the original stock, Boatwright claims that the attitude from shareholders to a company they buy stock in is like a risk (no promises).

· No interaction between managers and shareholders

· Second problem: social contract

· Without a legal contract, we could still argue that the moral dimensions here operate as if there were a contract (JUST like the quasi-contracts of the Social Contract proposal from Hasnas)

· But Boatwright thinks this will be hard to use to justify the special status of shareholders for the same reasons that came up for a real contract

· No opportunities for negotiation. “Shareholders are offered stock on a take-it-or-leave-it basis”

· Little interaction between shareholders and managers. That shareholders are beneficiaries of a manager’s existing fiduciary responsibilities isn’t to say that they are necessarily owed such duties (much less exclusively). In other words, it isn’t TO them that these existing duties are in place.

· Ex: prohibition on insider trading is something that protects shareholder interests, but it may not be on the grounds that a (even quasi-contract) promise TO shareholders has been broken. Instead Boatwright posits that this is owed to the investing public in general (not the specific shareholders of the company)

· Another concern: if we take the social contract route, then it will be likely that the position of exclusive duty to shareholders will not win out. Most social contract theories (like Rawls) see such a quasi-contract as holding between all members of society.

Agency

Part of the compelling nature of the stockholder theory (which prioritizes the fiduciary responsibility to stockholders) requires us to see the manager as agents of the stockholders, and Boatwright wants to challenge the legitimacy of this aspect as well.

Being an “agent” is like being a “surrogate”. (example from biomed ethics)

· Friedman holds pretty clearly that the managers are agents of the shareholders. Boatwright thinks that pretty clearly they are not.

· Boatright’s argument

· Legally, managers are agents of the company, not of the shareholders specifically.

· To become an agent (according to the 2nd Restatement of Agency which comes from the American Law Institute) a few conditions must be met:

· 1) consent to the relation (on both sides)

· As has already been argued, there is no real opportunity for the manager to express consent to such a relation

· 2) power for the putative agent to act on the other’s behalf

· Managers are not given the power to redefine the legal relations of the company with a 3rd party (ex: merging, changing bylaws) – these require shareholder approval

· If they were to be agents Boatwright thinks they ought to have some of these powers

· 3) the element of control

· Shareholders have no right to intervene on the way the company runs. Here managers are given independent authority and this is actually protected by law.

· Tim says: what do we think of this argument? Hasnas complained of arguments for moral claims that cite law as their justification. Why might he be upset about that?

· Managers have existing fiduciary responsibilities (legally) that are not covered by the notion that they are agents of shareholders.

· Like the prohibition on insider trading

· Boatwright doesn’t argue as much for this claim.

· Worries? Do legal responsibilities count?

· Think again back to the framing from Hasnas: there the real issue was whether there is a duty to non-shareholders (social responsibility). How is Boatwright doing compared to this burden?

Public Policy

Boatwright argues that it is obvious that managers have fiduciary duties inasmuch as they are holding control of the company “in trust” in some way (and note that Boatwright concedes that social responsibility is not a fiduciary duty). But at this point he concludes it is implausible that these fiduciary duties can all be exhausted by the fiduciary duty managers have to shareholders. So what else could ground these duties?

A: now we’re back to the argument that in assuming a fiduciary duty for managers, we maximize public welfare (the consequentialist defense of the Stockholder Theory from Hasnas)

Notice the dialectic here: the fight over the original thesis is pretty much over at this point. The rest here on public policy doesn’t give any other reasons why there is nothing special about stockholders (other than that the presence of an alternative makes it easier to justify giving up a theory – that’s something but not a lot).

Main ideas in this section:

· We begin from the assumption that we can’t ground fiduciary duty in the consent between manager and shareholders (on the grounds of the separation of ownership and control as already talked about)

· One way to take it from here is to think that with the shareholder fiduciary duty dethroned, there is room to open up fiduciary duty to all stakeholders

· But another way is to retain the semblance of the fiduciary duty to shareholders without the previous justification

· Instead the justification is now on the grounds of avoiding giving the managers absolute power of management (and the risk of abuse). This is a justification stemming from public interest

· I like this quote as a summary: “the present state of corporate governance is not ideal but it is a workable arrangement”

· This position is largely supported by contemporary law

· EITHER WAY, Boatwright argues, issues of putative fiduciary responsibility are all grounded on public interest and there is no special status here for fiduciary duty to shareholders – it’s a level playing field with public interest as the measuring stick.

· “except for the useful role they play in corporate governance, there is nothing special about shareholders”