Union Directors and Fiduciary Duties under State Corporate Law
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Description
Recent heightened takeover activity has brought into sharp focus, for courts and corporations, the question of what fiduciary obligations are owed by corporate directors. At the same time unions, for a variety of reasons, have become involved with placing representatives on corporate boards. Professor Scott observes that the judicial decisions tend to emphasize the duty of the directors to the shareholders, and that this view poses substantial conflict-of-interest problems for directors who appear to be serving “other” interests, such as those of labor. The very fact of union representation on a board may trigger a special duty of care on the part of the other directors. The author concludes that, on a case-by-case basis, pitfalls can probably be minimized, if not avoided entirely, by precautions such as disclosure and abstention, but she is less certain that legal risks can be completely eliminated without legislative change. . . . Placing a representative of labor on the board of a public corporation is not a new idea, but it nonetheless is an idea that continues to raise difficult legal questions concerning the potential for conflicts of interest. At first glance, the phenomenon may seem to be no more than an appropriate advance in the trend toward increased employee participation in the corporation through the formation of labor-management committees and the creation of employee stock ownership plans. As the legal obligations of corporate directors are spelled out, however, the concept of direct labor representation on the board of a public corporation presents deeper and more troublesome problems, for the shareholder directors as well as the union directors. For the union director, the conflict arises because in pursuing the union's objectives, he is representing a constituency that may be seeking something other than the maximization of the value of the firm's shares. Even where stock is owned by employees, directly or indirectly, the same potential conflict of interest exists. The fact that the employees are also shareholders does not alter the labor director's dilemma, for his behavior will still be measured against the traditional corporate law standard of the welfare of the shareholders as a whole. Recent developments are bringing these issues into sharper focus. First, we now have experience, albeit limited, with union directors in major public corporations. The most celebrated example in this country came about in 1980 with the election of then United Auto Workers President Douglas Fraser to the board of directors of Chrysler Corporation. More recently, several labor representatives were elected to the board of directors of Eastern Air Lines. Second, over the last year or two, influential courts have made major statements on the content of the fiduciary duties of directors under state corporate law. Much of the action in corporate law over the last few years has been the result of increased takeover activity. Takeovers provide dramatic factual settings in which to assess the performance of directors. The prevalence and sophistication of the defensive tactics used by corporations that are targets of takeover attempts have forced courts to face, head on, questions about the scope of fiduciary duties. In the process, the courts have developed new or refined tests for the duty of loyalty, and they have invoked the duty of care to closely scrutinize the actions of corporate management. As a result, even when viewed solely from the perspective of corporate fiduciary analysis, the role of the union director presents a dilemma. Under corporate law, a director owes a duty of loyalty to the corporation, which may make it necessary for him to abstain from certain decisions, to absent himself from certain meetings, or to refrain from receiving certain information in order to avoid tainting a board decision with a disabling conflict of interest. On the other hand, he cannot constantly decline to perform his directorial duties by reason of conflicting interests because he is also under a duty of care which requires him to keep informed, to participate in board deliberations, and to engage in active decision making on behalf of the corporation.
Source Publication
Labor Law and Business Change: Theoretical and Transactional Perspectives
Source Editors/Authors
Samuel Estreicher, Daniel G. Collins
Publication Date
1988
Recommended Citation
Scott, Helen S., "Union Directors and Fiduciary Duties under State Corporate Law" (1988). Faculty Chapters. 1124.
https://gretchen.law.nyu.edu/fac-chapt/1124
