Professor Tamar Frankel’s excellent book, Fiduciary Law, is a thorough and comprehensive look at the fiduciary-law forest. My contribution to the Symposium on The Role of Fiduciary Law and Trust in the Twenty-First Century is one leaf on one branch of one tree in the forest that Professor Frankel so expertly navigates. In this Essay, I explore the fiduciary relationship between corporate directors and officers and the shareholders they serve. I examine how the breach of fiduciary duties owed to shareholders has the power to dramatically impact non-shareholder groups.
Professor Frankel accurately observes that “[f]iduciary duties are anchored in the interests of the parties to the relationship rather than the public’s interests.” But her statement ignores the expansive reach and impact of fiduciary law in general and fiduciary duty breach in particular. Corporate fiduciaries’ inattentiveness to the fiduciary obligations they owe shareholders can significantly impact non-shareholder constituencies. The breach of fiduciary duties owed to shareholders deleteriously impacts the public interest in some instances. Local and global communities can be affected by corporate fiduciaries’ breach of the obligations they owe shareholders. In this Essay, I explore the significance of this observation in the context of subprime mortgage lending and the securitization of subprime mortgages that major financial institutions undertook in the years leading up to the 2008 financial crisis.
This Essay makes no contribution to the discussion about mortgage brokers and lenders and whether they owe fiduciary duties to consumers. The focus of this Essay is on the fiduciary duties that financial institution directors and managers owed their shareholders in the process of securitizing subprime mortgages. The participation of financial institution managers in the predatory subprime lending debacle that contributed to the 2008 economic downturn harmed shareholders and consumers along with local and global communities. The harm to consumers and communities has proven to be deeper and more enduring than the harm to shareholders, but the most salient aspect of my thesis is the fact that corporate fiduciary duty breaches have a pervasive impact beyond the shareholders to whom fiduciaries owe duties. The factual context explored in this Essay – financial institutions’ involvement in the securitization of subprime loans – vividly illustrates the expansive impact of fiduciary duty breach beyond corporate shareholders.