The Ethical Responsibility of Business Managers of Fiduciary Honesty with Stockholders - Term Paper Example

The Ethical Responsibility of Business Managers of Fiduciary Honesty with Stockholders Every organization normally has a leader or manager who is charged with the responsibility of overseeing and directing the operations of the organization. An organization may have one or more managers depending on its size and the complexities involved in the management of the business. Business managers (directors and officers) are usually deemed to be fiduciaries of the corporation because their relationship and responsibilities within the corporation as well as its shareholders and stakeholders are one of trust and confidence. As fiduciaries, directors and management officers owe ethical and legal duties to the corporation and the stakeholders as a whole. These fiduciary duties responsibilities include the duty of care and the duty of loyalty. The fiduciary principle and the duties of business managers The fiduciary standards of good faith and honest dealing apply to business as well as to personal relationships. These obligations are reflected in the concepts applied by the courts such as, Loyalty, due care, good faith, and fairness. Corporate governance in this case is the application of the duties associated with these concepts to the management of corporations. Considering the case of any fiduciary duty, the obligation of a corporate director or officer (business managers) to the corporation and its stakeholders is greater than a mere obligation to perform one’s contracts and to avoid injuring others. It involves affirmative duties of good faith, loyalty, disclosure as well as care. The duty of good faith in this case requires honesty of intention in dealing with others and avoidance of conduct that is unconscionable or seeks to take undue advantage of the actor’s superior knowledge of relevant circumstances to the detriment of another. In connection with business managers responsibility of fiduciary, good faith takes into account the fiduciary’s intentions as well as the degree of his attention (McCloskey 120). The duty of care Managers must exercise due care in performing their duties. Generally, managers are required to act in good faith, to exercise the care that an ordinarily prudent person would exercise in similar circumstances, and to do what they believe is in the best interests of the corporation. Managers whose failure to exercise due care results in harm to the corporation or its shareholders and stakeholders can be held liable for negligence. Managers in the business organization are responsible for performing duties for responsible decisions and supervision. They are expected to be informed on corporate matters and to conduct a reasonable investigation of the situation before coming up a decision. Managers can not decide on the moment of the spur without conducting adequate research and investigation on the problem as proposed by Wight, Morton, Calkins, Finch, Hausman, and Mark (151). Directors in this case are also expected to exercise a reasonable amount of supervision when they delegate work to corporate officers and employees. However, business managers (directors and officers) are also expected to exercise due care and to use their best judgment in guiding corporate management, but they are not insurers of business success. Under the business judgment rule, a corporate director or officer will not be liable to the corporation or to its stakeholders for honest mistakes of judgment and bad business decisions. Courts in this case give a paramount defense to the decisions of corporate directors and officers, and consider the reasonableness of a decision at the time it was made, without the benefit of hindsight. Thus, corporate decision makers are not subjected to second-guessing by shareholders and stakeholders or others in the corporation (Crowther and Rayman-Bacchus 48). Duty of care on the other hand relies on the value of prudence that has deep roots in the moral law. The duty of care can be perceived as a corollary of the duty of loyalty because loyalty demands that the fiduciary bring disinterested focus to his responsibilities and exercise prudence in carrying out his trust. ‘Corporate director or officer has a duty to the corporation to perform the director’s or officer’s functions in good faith, in a manner that he or she reasonably believes to be in the best interests of the corporation, and with the care that an ordinarily prudent person would reasonably be expected to exercise in a like position under similar circumstances’ Johnston (37). The duty of loyalty Loyalty in this context can be expressed as faithfulness to one’s obligation and duties. In the corporate context, the duty of loyalty requires directors and officers to subordinate their personal interests to the welfare of the corporation. For instance, directors may not use corporate funds or confidential corporate information for personal advantage. Similarly, they must refrain from putting their personal interests above those of corporation. The duty of loyalty also requires officers and directors to fully disclose to the board of directors any potential conflict of interest that might arise in any corporate transaction as proposed by Miller, Cross, and Jentz (278). The duty of loyalty is simply a restaurant of basic moral principle that a person who undertakes to act for another must refrain from placing his own interest a head of the other interest. In the corporate context, it requires that, managers devote an individual and unselfish loyalty to the corporation. The loyalty rule that was generally applied to the corporate fiduciaries by the American courts during the 19th century followed the strict doctrine of trust law that any transaction between a trustee and the trust is automatically voidable at the behest of a beneficiary. In this context, the principle of fiduciary remains applicable because the action taken by the managers must be taken into good faith and confirm to the fiduciary standards of loyalty, candor, and due care (Aras and Crowther 108). However, fiduciaries and agents have by virtue of their relationship with their clients, an ethical responsibility to look out for the best interest of their client. Technically, a fiduciary is any individual, a company, or association holding assets in trust for a beneficiary. The fiduciary is charged with the responsibility of investing the money wisely for the beneficiary’s benefit as suggested by Bowie (219). The responsibility to look out for the client’s interests comes because the agent or fiduciary has taken it upon herself to play a certain role in the financial services industry. Hence, responsibility arises because one has made a commitment as argent, a broker, an accountant, a banker or a planner. Cooper (19) has argued that, stakeholders should have rights to determine how their property is used, as should an owner of any asset under private property rights. Within the legal system in the UK, and the US, the managers of a business have a fiduciary duty to the owners of that business. This duty to stakeholders is more general and proactive than the regulatory or contractual responsibilities to other groups. Aras and Crowther (218) has argued that stakeholders should have rights to determine how their property be used, as should an owner of any asset under private property rights. In most fiduciary relationships, the fiduciary is given control over some aspect of the life or property of another commonly known as the beneficiary with the expectation that the fiduciary will exercise that control for the benefit of the beneficiary. The salient elements of fiduciary relationship are considered being the actual placing of trust and confidence in fact by one party in another and a great disparity of position and influence amongst varied parties in the business organization. The fiduciary relationship thus gives rise to an ethical obligation of loyalty on the part of the fiduciary. This aspect of the moral law is regularly enforced by courts of equity (Glaser, Glaser and Hamel 96). Works Cited Aras, Güler & David Crowther. A Handbook of Corporate Governance and Social Responsibility. England: Gower Publishing, Ltd. 2010. Print Aras, Güler & David Crowther. The durable corporation: strategies for sustainable development. Gower Publishing, Ltd. 2009. Print. Bowie, Norman E. The Blackwell Guide to Business Ethics. Oxford: Wiley-Blackwell. 2002. Print Cooper, Stuart. Corporate Social Performance: A Stakeholder Approach. England: Ashgate Publishing, Ltd. 2004. Print Crowther, David & Lez Rayman-Bacchus. Perspectives on Corporate Social Responsibility. Burlington, USA: Ashgate Publishing, Ltd. 2004. Print. Glaser, John W., Jack Glaser, & Ronald, Hamel, P. Three Realms of Managed Care: Societal, Institutional, and Individual. Kansas City: Rowman & Littlefield. 1997. Print Johnson, Joseph, F. Natural Law and the Fiduciary Duties of Business Managers. Journal of Markets & Morality. 8 (1), 27–51. Spring, 2005. McCloskey, Deirdre N. The Bourgeois Virtues: Ethics for an Age of Commerce. London, UK: University of Chicago Press, 2006. Print. Miller, Roger LeRoy, Frank, Cross, B. & Gaylord, Jentz A. Essentials of the Legal Environment. New York: Cengage Learning. 2010. Print Wight, John S. , Morton, Martin Calkins, Sally Finch, Daniel Hausman, M., & Mark Schug, C. Teaching the Ethical Foundations of Economics. New York: National Council on Economic Educ., 2007. Print Read More