ethics and policy

Assignment readings

Two main questions shape the discussion of fiduciary obligations: What are the circumstances in which fiduciary obligations apply?What does a fiduciary obligation require a person to do? If a person is in a fiduciary relationship with another, he or she must be loyal to the interests of the other person ( the “beneficiary”). The fiduciary’s obligations go beyond being merely fair and honest; rather, s/he is obliged to act to further the beneficiary’s interests. A fiduciary also must avoid engaging in acts that put their own interests in conflict with those of the beneficiary.

It’s important to understand whether, in one’s role in a business or profession, one is held to have a fiduciary duty and, if so, to whom such a duty is owned. It’s interesting to note that being a “fiduciary” may be a matter of status rather than agreement. In other words, one may have fiduciary obligations as a consequence of one’s position in an organization or one’s relationship to another person. Anessential feature for the creation of a fiduciary relationship is discretion. A fiduciary must have discretion in determining how to carry out one’s responsibilities so that s/he has the authority to make decisions that serve the beneficiary. If the relationship as structured by the parties does not confer discretion on the putative “fiduciary” then her/his actions are not subject to the fiduciary constraint of acting solely to further the beneficiary’s interests. A fiduciary duty may go beyond one’s legal (e.g., contractual) obligations.

The case Jordan v. Duff & Phelps, Inc., is an example.Jordan was an employee and shareholder in the defendant company. Illinois, where the case arose, was an employment at will state and Jordan did not have an express employment contract with the company. Jordan therefore was an employee at will. As a condition of employees’ purchasing company shares they agreed that upon the termination of their employment for any reason, the employee shall sell back to the company and the company shall buy the employee’s shares at the book value on the December 31 that “coincides with or immediately precedes, the date of termination.”Jordan’s employment ended because he had decided to move to another city. He was on good terms with his employer and could have remained employed at the company. The company did not disclose to Jordan that a purchase of the company was in the works which would significantly increase the value of Jordan’s shares.

The court noted that Jordan could have timed his departure to take advantage of the increased value of his ownership interest if the information had been disclosed. Characterizing the relationship between the employee-shareholder and the employer-corporation as one that imposes a fiduciary obligation on the corporation to disclose material facts to shareholders when purchasing their shares, the court held that even though Illinois is an employment at will state and there was no employment contract, so Jordan could have been fired at any time (i.e., before the purchase of the company was consummated), the company still had a fiduciary obligation to disclose material facts to an employee/shareholder when purchasing their shares. The court noted that even if such an obligation would not exist in a publicly traded corporation, in a closely held company like Duff & Phelps the company did have such a fiduciary obligation.To summarize, then, even though the company had a legal right to fire Jordan at a time of its choosing even if it meant the employee lost a financial benefit that would be derived from an appreciation in the value of his shares, it had a fiduciary obligation to disclose that information to Jordan so he could make the best decision serving his own interest regarding the timing of his departure.

When a court determines that a particular relationship is fiduciary in nature, the parties’ intention may not control their obligations to each other (as it would in a contractual relationship). In other words, the court may hold that there are obligations inherent in one’s status One feature of the fiduciary relationship that traditionally has distinguished it from a contractual relationship is the remedy available if the obligation is breached. Damages for breach of a contract focus on making the plaintiff whole, i.e., damages are based on an assessment of the loss that the breach caused to the injured party. However, fiduciary obligation goes beyond the fairness and honesty required in contractual relationships and demands that the fiduciary act solely to further the interests of the beneficiary. Historically, the remedy for breach of fiduciary duty has recognized the benefit enjoyed by the fiduciary as a result of the breach, even if the fiduciary’s actions have not injured the beneficiary. The rationale for this is to incentivize fiduciaries to remain true to their duties to the beneficiary.

Another distinction between obligations created by contract and through fiduciary relationship is that contractual obligations do not preclude acting self-interestedly so long as the terms of the contract are complied with. As I’ve noted, a fiduciary may not act in his or her self-interest regarding matters within the scope of the fiduciary relationship even if such actions don’t harm the beneficiary.

A third distinction regards the allocation of the burden of proof. In a breach of contract case, the plaintiff alleging they were harmed has the burden of proving the breach. In an action based on breach of fiduciary duty, the fiduciary has the burden of proving that it dealt candidly and fairly with the beneficiary.

Fourth, whereas in the contract context the parties are assumed to be free, autonomous and equally positioned bargaining agents, in the fiduciary context it is the other party’s vulnerability to the fiduciary’s abuse of power or influence that justifies the imposition of fiduciary obligations and constraints.


I’m going to shift gears here to discuss the “prudential reasoning” mentioned in the Young article (“Fiduciary Duties as a Helpful Gide to Ethical Decision-Making in Business”).There are two meanings (at least) to the question “what should I do?” which is a fundamental concern of ethics. One is the ethical sense of the question which seeks to determine what is “right” or “good” and in line with normative values. The second sense of the question asks about the best way to achieve a desired end. For example, if I need a new car I might ask “should I buy or should I lease?” Or if there are dark clouds above I might ask “should I take an umbrella” if my goal is to stay dry. In this sense, the prudential “should” is about determining the wisest course for achieving a particular end. Prudential reasoning may be completely independent of ideas of “right” and “wrong.”

If you have any questions, don’t hesitate to contact me personally ( or, even better because I’m sure other students would be interested in learning about or engaging in whatever the issue, post your question on the DB in the open topic prompt.

Assignment question:

  • Congress is considering a major piece of legislation about which there are strong feelings both in favor and opposed to the proposed law. A recurring topic of debate in this representative democracy of ours is whether our elected officials have an obligation to vote as the majority of their constituents want them to vote or whether they are elected to vote as their own beliefs and conscience direct. To some extent, we can see the question as whether the relationship between elected representatives and their constituents is in the nature of a fiduciary or a contractual relationship.Do you believe elected representatives should be regarded as fiduciaries of their constituents?
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