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tances,
legally bind or create liabilities for the principal. Neither directional
arrow holds, in any meaningful way. between stockholder and director. Not only
do individual stockholders lack legal standing to specify details of how a business
should be managed, directors and top managers can neither bind individual
shareholders to contracts with third parties or generate personal liabilities for
them through debt or tort.' On the other hand, directors (and their agents, highlevel
managers) can legally bind the corporate entity as a whole to either
contractuai obiigations or financiai liability.
This distinction is not merely semantic. The duties required of a fiduciary are
not to obey a person, as an agent might, but to make every effort to protect their
property, in this case the funds or other assets the stockholder has exchanged for
corporate shares. As a fiduciary, a corporate director's relationship is not with
the shareholder personally but with her investment.
Not only is this relationship not that of agency, it is also not contractual in
any legally meaningful way. The general fiduciary obligation is one of fulfilling
a normatively defined level of responsibility toward beneficiaries with little connection
to contract law and its underlying presumption of voluntary bargaining
between informed parties (Mitchell, 1992), By contrast, the fiduciary principle
evolved from the far older law of property, which directs trustees to manage
property in the interest of those judged incompetent to do so themselves, historically
because of age, gender, or infirmity (Mennell, 1994; Mitchell, 1992).
Fiduciary duties were imposed on these trustees in order to protect legal owners
who were not in a position to manage their own affairs from the unscrupulous
self-dealing of those administrators the incompetent were forced to rely upon
IRRELEVANCE OF FIDUCIARY DUTIES TO SHAREHOLDERS 277
(Johnston, 1988: Mennell, 1994). This is a set of circumstances that would describe
any outside corporate investor, whose involvement in the business is based
upon the expectation of a financiai return through either dividends or sale of the
security, and who is almost never in a position to oversee that this investment is
neither negligently handled nor exploited for personal gain by the handler.
The beneficiary/fiduciary relationship is considerably more straightforward
than those derived from contracts in which parties negotiate some terms and
explicitly or implicitly adopt others from extant regulations or currently accepted
practices (Mitchell, 1992). The typical penalty for breach of contract involves
monetary damages, making all but the most egregious breaches a business decision
as to whether cost of the penalty (and. possibly, damage to reputation)
exceeds the gain from repudiation. By contrast, the fiduciary duties required of
trustees—honesty, adequate care for tbe entrusted property, providing the owner
with any relevant information, avoiding any unauthorized personal gain even
when such gain does not hurt the beneficiary (Block et al., 1989)—are not typically
subject to negotiation, and a judge would carefully scrutinize the
circumstances of any claim that a beneficiary freed the fiduciary from any of
these duties (Mitchell. 1992).
As a result, contractual duties and fiduciary duties are measured differently.
Contractees are