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With lines on fiduciary duty - the duty of loyalty and care towards the employer - blurring in corporate governance, an Indian Institute of Management, Ahmedabad (IIM-A) working paper suggests several measures on enhancing the same.
Titled 'Corporate Governance: Changing Trends in Interpreting Fiduciary Duty', the working paper has been authored by IIM-A faculty Anurag Agarwal. Taking a cue from several past court decisions in India and abroad on corporate governance, the paper suggests that more clarity on exact definition of fiduciary should be brought in, apart from sensitising judicial officers and documenting various scenarios for ensuring better corporate governance.
One of the foremost requirements of corporate governance is transparency in the system, which ensures that individuals making decisions for and on behalf of a company do so in the best interest of the company and clearly avoid conflict of interest. According to the paper, it is the crux of fiduciary duty - the duty of loyalty and care towards the employer - that personal interest is sacrificed as compared to the employer's interest.
"Being on the right side of law is the goal but the line between legal and illegal is often hazy and changeable making it difficult for the practitioner to take any action and also for the judge to decide whether the line was breached or not. The paper deals with certain recent cases decided by higher courts in India and abroad on this issue," it states.
Having taken up cues from past domestic and international court cases such as State Bank of India v. National Housing Bank; Birla v. Lodha; Bihar Public Service Commission v Saiyed Hussain Abbas Rizwi and another; U.S. Supreme Court: The Bullock Case, 2013; and U.K. Supreme Court: Futter and Pitt cases, 2013, the paper has offered several suggestions on strengthening corporate governance with regards to fiduciary duty.
Apart from suggesting a clearly definition of terms fiduciary, fiduciary duty, fiduciary relationship, fiduciary capacity and other related terms as well as sensitisation of judicial officers, the paper also suggests that persons at the higher level in any organisation should be made aware of the gravity of their responsibility and seriousness of their actions to ensure high level of fiduciary duty.
"It can be no one's case that people at that level did not understand as to what was expected from them, and hence they acted in a particular manner, and that's why they need not be held liable. Therefore, to be abundantly cautious, it is desirable that these individuals are told explicitly about the fiduciary duty and what proactive measures are expected from them," it states.
Other suggestions include that of giving a benefit of doubt to a person for making a decision as part of his/her duty of trust.
"At times it becomes a matter of debate as to whether the decision made by an individual was discretionary in nature or arbitrary. Benefit of doubt needs to be given to the person making the decision, but after a reasonable limit that individual has to take responsibility of the decisions made and own up in case any arbitrariness has crept in. It is suggested that the fiduciary should be made aware of the fact that he should avoid situations of at least direct conflict of interest; a conflict between the interests of the principal and his own interest, which necessarily must always be secondary vis-à-vis principal's interest, and to a large extent the indirect conflict of interest in situations, which could be anticipated," the paper suggests. Rewarding individuals in positions of fiduciary has also been deemed important by the paper stating that the reward could be "in the shape of salary, bonus, perquisites, retirement benefits, etc".
"It is also suggested that in case of a dispute regarding fiduciary relationship, specially the interpretation of the term fiduciary, both the parties must try to sit together and reach a settlement. It is not at all desirable to skip this step and jump onto the litigation train. Many a time, it is possible to resolve the matter satisfactorily, maybe not to the fullest satisfaction of both the parties, but as the next best alternative to a high level of satisfaction of both the parties, in a practical manner, taking into account putting in a lot of time, effort and money in litigation, and still living in a state of glorious uncertainty, not to talk of losing out on numerous business opportunities," it further stated.
