The problems in global financial markets are often similar, even though the capital market structure across jurisdictions differs significantly. The beginning of the 21st century was marked by a spate of international corporate scandals, and the 2007-2009 global financial crisis reflected the global interconnectedness of contemporary international capital markets.
These corporate crises prompted major financial market reforms around the world. Discerning the causes of the crises was no easy feat, yet framing of the underlying problems was critical to the regulatory responses. In relation to the global financial crisis, for example, opinion continues to be divided across different jurisdictions as to whether shareholders were part of the problem of, or a potential solution to, excessive corporate risk-taking.
These crises also highlight the issue of accountability for wrongful conduct by company directors and officers. Modern corporate governance is highly fragmented, encompassing an array of techniques to control the improper exercise of discretion and conflicts of interest. It has been described by Professor Ron Gilson as ‘a braided framework’ that encompasses not only autonomous legal rules, but also non-binding norms.
My recent paper, forthcoming in the University of California Irvine (UCI) Journal of International, Transnational and Comparative Law, examines two prominent examples of this braided framework: fiduciary duties, which represent legal rules, and corporate codes of conduct, which generally embody non-binding norms.
The paper considers fiduciary duties through the lens of La Porta et al’s influential ‘law matters’ hypothesis. It argues that, although there are broad similarities in the scope and operation of fiduciary duties in common law jurisdictions, such as the United States, United Kingdom and Australia, at a more granular level, there are also important differences, which can affect the accountability of directors and officers. For example, US and UK corporate law have different organizational starting points (and backlash against those starting points), which has led to different corporate law trajectories, including in the area of directors’ duties. Also, the legal sources of directors’ duties vary across common law jurisdictions. Whereas in Delaware directors’ duties are purely equitable, modern UK and Australian law encompass statutory directors’ duties, which interact differently with general law fiduciary duties.
Another significant difference between common law jurisdictions relates to the scope of the safe harbors providing protection against breach of duty by directors and officers. In the UK and Australia, the protection offered to directors for breach of fiduciary duty, including the duty of care, is far less generous than in the United States, where the business judgment rule and exculpation clauses, such as § 102(b)(7) of the Delaware code, provide powerful insulation from liability.
Enforcement of directors’ duties also differs across these three common law jurisdictions. Unlike Delaware and the United Kingdom, which generally depend on private enforcement of directors’ duties, Australia relies predominantly on a public enforcement regime, under which the corporate regulator, the Australian Securities and Investments Commission (ASIC), is responsible for bringing legal actions for contravention of statutory directors’ duties. It appears that this mode of enforcement has affected directors’ duties themselves, shifting them away from the private to the public realm. This has resulted in directors’ statutory duties in Australia being closely linked with the ‘public interest’. Following the findings of the high profile 2019 Australian Banking Royal Commission, ASIC has indicated that it intends to use its enforcement powers in this area more aggressively in the future.
As the paper notes, the behavior of corporate actors is shaped not only by enforceable laws but also by social norms and governance practices, which may indeed be more important in this respect than formal legal rules. Norms can interact in complex ways with fiduciary duty law to drive greater convergence or divergence across jurisdictions. Furthermore, the lines between formal legal rules and norms can sometimes be hard to define, and there can be movement in either direction between so-called ‘hard law’, comprising enforceable legal rules, and ‘soft law’, encompassing norms.
Codes, such as corporate governance codes and shareholder stewardship codes, have proliferated around the world in recent decades. They have focused greater attention on norms and governance practices, many of which intersect with the dictates of directors’ and officers’ fiduciary duties.
These codes operate in a parallel universe to corporate law. Although generally non-binding, codes can nonetheless create powerful norms affecting the scope of directors’ discretion, the nature of their fiduciary obligations, and enforcement practices. They may interact with fiduciary duties in complex and interesting ways, either complementing, or creating tensions with, those duties.
Yet, such codes are by no means homogeneous and are issued by different bodies with different purposes and goals. The provisions of these codes sometimes complement and bolster key directors’ duties. For example, corporate governance codes typically stress the need for independent directors as a means of providing procedural protection against managerial conflicts of interest. However, in other instances, codes may create tension with established principles of fiduciary law. Nowhere is this more apparent than in the current tension between shareholder versus stakeholder rights and interests. Whereas traditional fiduciary duties in common law jurisdictions tend to focus on shareholder interests, there is an increasing emphasis in corporate governance codes (and some, but by no means all, shareholder stewardship codes) on the interests of stakeholders and society as a whole.
This post first appeared on the Columbia Law School Blue Sky blog here.
Jennifer G. Hill is the Bob Baxt AO Chair in Corporate and Commercial Law at the Faculty of Law, Monash University.