Professional Responsibility and Fiduciary Duty

Core Idea

• Fiduciary duty: Executives advance shareholders' interests by increasing firm value.
• Executives must also adhere to societal norms and laws.

Defendability

• Actions of the firm must be legally defendable.
• Introduction to the concept of individual rights from political theory.

Individual Rights

• Rights are defined and enforced by the state, not just held by individuals.
• Example: In the U.S., individuals have the right to a public trial by jury.
• Enforcement of rights is a state responsibility and requires resources.
• Rights imply community membership, not individual possession alone.

Relevance to Executives

• Executives must ensure that advancing shareholder interests does not infringe on stakeholders' enforced rights.

Stakeholders Defined

• Stakeholders: Individuals/entities affected by the firm's actions and in material relationships with the firm.
• Examples include:
  • Debt holders
  • Customers
  • Employees
  • Communities
  • Suppliers

Stakeholder Rights

• Rights enforced by U.S. laws and agencies:
  • Debt holders' rights against default: Federal bankruptcy laws
  • Customers' rights to safe products: FDA
  • Employees' rights to fair wages and hours: Federal Labor Standards Act
  • Workers' rights to a safe environment: OSHA
  • Community rights to clean environment: EPA

Global Considerations

• Suppliers often offshore, subject to different jurisdictions and enforceable rights.

Constraints on Executives

• Enforced rights increase costs, affecting short-term and long-term profitability.
• Compliance is mandatory to operate legally.

Executive's Professional Responsibility

• Role involves constrained optimization:
  • Advance shareholder interests
  • Respect enforced stakeholder rights
• Aim for legal defendability while seeking market inefficiencies.