Fiduciary duty vs. morality…vs. legality by mattsteinglass
August 5, 2008, 12:16 pm
Filed under: Economics

A commenter in a Dan Drezner thread writes, a propos of fair trade and moral investment:

The fund managers of other people’s money have very specific fiduciary responsibilities under the law: Investing for someone’s version of what is ‘moral’ or ‘immoral’ would be a clear violation of their fiduciary responsibilities, subjecting them to legal liability from disgruntled investors (those prosperous professors in the TIAA).

Similar opinions have been circulating on the Creative Capitalism blog. John Quiggin argues here that the idea that managers’ fiduciary responsibility to shareholders trumps all their other obligations is nonsense, since managers do all kinds of things that fail to maximize share prices, whether in their own interests or in the interests of their companies, and are not held legally liable.

I’m interested in something that hasn’t been mentioned yet so far as I know: fiduciary responsibility vs.  legality. I’m fairly sure no one would argue that managers have a fiduciary responsibility to their shareholders to break the law, if they can get away with it, in order to maximize profits or share prices. But in many third world countries, which are the subject of concern for people like the misguided anti-globalization professor in Drezner’s post, companies are constantly in violation of the law, not out of willful malice, but simply because third world legal systems are generally incoherent, self-contradictory, poorly enforced, and routinely violated or ignored by their own governments. In fact, third world governments often create deliberate legal contradictions or impassable obstacles to business, to enable officials to extract bribes in exchange for declining to enforce the law.

As a result, much international business in the third world unavoidably involves a certain amount of illegal activity, ranging from technical violations (exchanging currency through traders who don’t possess the proper license, as virtually every foreign bank in Vietnam did up until 2 years ago) to serious bribery and corruption (widespread in the energy, construction and transportation industries). This sort of illegal activity cannot be eliminated. Corporate codes of conduct can try to minimize it, but it cannot be eliminated when local governments prefer that private enterprises operate in a legal grey zone which allows government to shut them down at will.

This problem of pervasive illegality renders the question of moral business practices much more complicated. In an effective legal system, one can argue that it is not up to businesses to behave altruistically; it is government’s responsibility to set the moral rules of the game, and businesses’ responsibility to pursue profit. But in a chaotic, deceptive and fictitious legal system, this argument does not work very well. Vietnam has fairly good laws on the minimum wage, worker safety, sickness and maternity leave, and collective bargaining rights. But these laws are selectively enforced, and many unscrupulous businesses bribe their way out of them. Businesses that choose to observe the laws (Nike, Timberland, etc.) operate at a disadvantage. Are they violating their fiduciary obligations to shareholders? Conversely, Vietnamese workers can strike for higher wages, but technically they can only do so via a decision of the (sole, Communist Party-affiliated) national Labor Union, which never actually launches strikes because its interests lie with government and thus with foreign manufacturers. So virtually all strikes in Vietnam are “illegal” wildcat strikes, which the Labor Union and local Ministry of Labor officials then step in to mediate. Some major foreign businesses, particularly Japanese manufacturers, have begun complaining lately about these “illegal” strikes and asking the government to intercede to stop them. Is this fair, given the fundamentally unfree and mendacious legal structure on which labor relations in Vietnam are predicated? Do these companies have a fiduciary duty to their shareholders to take advantage of the letter of the law, even where the law is clearly unfree and unfair, seldom enforced, and generally written to be ignored?

It would seem to me that advocates of global capitalism and free trade would not argue that companies have a duty to exploit the weaknesses of third world governance in order to maximize their own profits and share prices. I think they would argue that companies should contribute to strengthening third world governance by insisting on clearer, more transparent, and better enforced rules. This may mean creating their own codes of conduct and bringing in private inspectors to monitor compliance, and pressuring competitors to match their standards. But it is pollyanna-ish to believe that such behavior will always coincide with a company’s immediate self-interest or with the interests of its shareholders.


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