Reconsidering the Evolutionary Erosion Account of Corporate Fiduciary Law

This Article reconsiders the dominant account of corporate law’s duty of loyalty, which asserts that the courts have steadily relaxed standards of fiduciary scrutiny applied to self-dealing by corporate managers across more than a century of history—to the great detriment of the shareholder interest. The account originated in Harold Marsh, Jr.’s foundational article, Are Directors Trustees? Conflicts of Interest and Corporate Morality, published in The Business Lawyer in 1966. Marsh’s showing of historical lassitude has been successfully challenged in a recent book by Professor David Kershaw. This Article takes Professor Kershaw’s critique a step further, asking whether the evolutionary erosion account continues to exert normative power in today’s corporate governance context. The answer is that it does not, a result that obtains even though erosion of the standards that courts apply to management self-dealing has continued unabated ever since Marsh published in 1966, and even though there is no reason to think that management self-dealing benefits the shareholder interest. The result follows from the operation of the corporate governance system, which has assimilated and redeployed the erosion account’s motivating insight that officer and director self-dealing transactions do not make cost-benefit sense from the shareholder point of view. Regulation backs up the norm of aversion. Disclosure rules make self-dealing transparent to shareholders, who have no reason to like self-dealing and who now stand ready and able to register their preferences regarding such matters in corporate boardrooms. At the same time, the requirement of a majority independent board makes self-dealing transactions by board members highly inconvenient, because self-dealing undercuts independence. The practice reflects all of this, as shown by reference to hand-collected datasets of self-dealing transactions at publicly-traded companies and of litigation in respect of self-dealing transactions in the Delaware Chancery Court. The classic self-dealing transaction, although still a focal point of academic discourse on corporate fiduciary law, does not matter all that much in real world companies with dispersed shareholders. It is no longer an unsolved problem stemming from separated ownership and control