WEBVTT 00:00:00.000 --> 00:00:03.580 Okay, let's unpack this. We are diving deep today 00:00:03.580 --> 00:00:06.780 into a concept that's, well, it's one of the 00:00:06.780 --> 00:00:09.419 most foundational ideas in all of finance and 00:00:09.419 --> 00:00:13.300 law, the fiduciary. It's a word that sounds very 00:00:13.300 --> 00:00:16.440 formal, very legalistic. It does. And our mission 00:00:16.440 --> 00:00:19.079 today is really to get past that dictionary definition. 00:00:19.300 --> 00:00:22.820 We want to understand the real weight of this 00:00:22.820 --> 00:00:24.859 role. The responsibility that comes with it. 00:00:24.960 --> 00:00:28.160 Exactly. We need to grasp... What this special 00:00:28.160 --> 00:00:30.559 kind of trust actually means, why the law demands 00:00:30.559 --> 00:00:33.259 what it calls the highest standard of care and 00:00:33.259 --> 00:00:36.159 where the lines are drawn, especially when there's 00:00:36.159 --> 00:00:38.159 money involved. Which is almost always the case. 00:00:38.200 --> 00:00:41.700 And these lines get tested by those inevitable 00:00:41.700 --> 00:00:43.960 conflicts of interest. It really is a critical 00:00:43.960 --> 00:00:46.840 subject because even though fiduciary. Sounds 00:00:46.840 --> 00:00:49.439 abstract. You find this relationship governing 00:00:49.439 --> 00:00:51.979 huge parts of daily life. No, absolutely. Whether 00:00:51.979 --> 00:00:54.219 you're dealing with a lawyer or a financial advisor 00:00:54.219 --> 00:00:56.560 who's managing your retirement fund. Right. Or, 00:00:56.659 --> 00:00:59.179 you know, on a much bigger scale, a corporate 00:00:59.179 --> 00:01:01.679 director making these billion dollar decisions 00:01:01.679 --> 00:01:04.359 for a company, even a trustee for a small family 00:01:04.359 --> 00:01:07.120 estate. You're dealing with a fiduciary. And 00:01:07.120 --> 00:01:08.959 I think that distinction you just hinted at is 00:01:08.959 --> 00:01:12.859 so important. The one between, say, normal human 00:01:12.859 --> 00:01:16.439 trust and this hard legal version of trust. It's 00:01:16.439 --> 00:01:18.200 a world of difference. The sources are very clear. 00:01:18.379 --> 00:01:21.879 A fiduciary relationship is a formal, legal or 00:01:21.879 --> 00:01:24.180 ethical relationship of trust. And it's defined 00:01:24.180 --> 00:01:26.900 by one person, the principal, being in a position 00:01:26.900 --> 00:01:30.000 of, well. Vulnerability. Yeah. Vulnerability 00:01:30.000 --> 00:01:32.340 is the absolute key. It's the fulcrum on which 00:01:32.340 --> 00:01:35.319 the entire concept balances. The principle is 00:01:35.319 --> 00:01:37.760 vesting confidence, reliance and trust in the 00:01:37.760 --> 00:01:40.719 fiduciary seeking their help or advice. So they're 00:01:40.719 --> 00:01:42.939 basically handing over control of their assets 00:01:42.939 --> 00:01:44.900 or their money. They are. And that's why these 00:01:44.900 --> 00:01:47.549 duties exist in the first place. Courts of equity 00:01:47.549 --> 00:01:50.129 created them for a very specific reason. Yeah. 00:01:50.209 --> 00:01:52.150 To make sure that the people managing other people's 00:01:52.150 --> 00:01:54.450 money act only in the beneficiaries' interests. 00:01:54.870 --> 00:01:56.989 So it's a legal doctrine specifically designed 00:01:56.989 --> 00:02:01.290 to fight back against basic human greed and self 00:02:01.290 --> 00:02:03.890 -interest. It is. It's a check on power. And 00:02:03.890 --> 00:02:06.090 that connects directly to where this idea came 00:02:06.090 --> 00:02:08.090 from historically. You mean the fact that it 00:02:08.090 --> 00:02:10.770 wasn't born in common law, which is all about 00:02:10.770 --> 00:02:13.530 statutes and contracts. This came from the courts 00:02:13.530 --> 00:02:16.650 of equity. Exactly. The old court of chancery 00:02:16.650 --> 00:02:19.330 in England, which was focused on fairness, on 00:02:19.330 --> 00:02:22.770 conscience. Equity is what steps in when the 00:02:22.770 --> 00:02:25.449 strict letter of the law might lead to an unfair 00:02:25.449 --> 00:02:27.830 result. So because it's dealing with conscience, 00:02:28.069 --> 00:02:31.169 the standard has to be incredibly high. Extremely 00:02:31.169 --> 00:02:33.150 high. Our sources call it the highest standard 00:02:33.150 --> 00:02:36.710 of care in all of equity or law. The fiduciary 00:02:36.710 --> 00:02:39.550 has to be, and this is the term they use, extremely 00:02:39.550 --> 00:02:42.889 loyal. And there's that wonderful old legal phrase 00:02:42.889 --> 00:02:45.289 that just paints such a clear picture. Oh, it's 00:02:45.289 --> 00:02:47.469 one of the best. That they must conduct themselves 00:02:47.469 --> 00:02:50.409 at a level higher than that, trodden by the crowd. 00:02:50.509 --> 00:02:52.889 It's so good. It's basically saying you have 00:02:52.889 --> 00:02:55.430 to be better than everyone else. Yeah. It sets 00:02:55.430 --> 00:02:58.830 the bar at total selflessness. It does. So if 00:02:58.830 --> 00:03:01.830 that's the basic expectation, this extreme undivided 00:03:01.830 --> 00:03:04.650 loyalty. How does the law start to break that 00:03:04.650 --> 00:03:06.610 down? What are the specific ways that loyalty 00:03:06.610 --> 00:03:08.610 can actually be breached? That's where we get 00:03:08.610 --> 00:03:11.689 into part one. We have to look at the concrete 00:03:11.689 --> 00:03:15.550 elements of that undivided loyalty and the law. 00:03:16.139 --> 00:03:18.620 being very practical, focuses on preventing the 00:03:18.620 --> 00:03:20.919 situations that make betrayal possible in the 00:03:20.919 --> 00:03:23.580 first place. Right. So this overriding duty of 00:03:23.580 --> 00:03:26.740 undivided loyalty means avoiding three core types 00:03:26.740 --> 00:03:29.740 of conflicts. These are the traditional lines 00:03:29.740 --> 00:03:32.340 in the sand that equity has drawn over centuries. 00:03:32.740 --> 00:03:35.219 Three specific conflicts. So the law has become 00:03:35.219 --> 00:03:37.860 very good at spotting the pressure points where 00:03:37.860 --> 00:03:41.400 a fiduciary might go wrong. Very good. The first 00:03:41.400 --> 00:03:44.180 one is the most obvious, the easiest one to grasp. 00:03:44.379 --> 00:03:46.939 It's the conflict of duty and interest. The classic 00:03:46.939 --> 00:03:50.460 dilemma. It's the core prohibition. A fiduciary's 00:03:50.460 --> 00:03:53.060 personal interests cannot, under any circumstances, 00:03:53.340 --> 00:03:55.819 clash with their duty to the principal. They 00:03:55.819 --> 00:03:57.659 simply cannot be in a position where they might 00:03:57.659 --> 00:03:59.680 game personally at the expense of the person 00:03:59.680 --> 00:04:01.120 they're supposed to be protecting. Let's really 00:04:01.120 --> 00:04:02.879 drill down on that because it can be subtle. 00:04:03.000 --> 00:04:05.580 Say I'm an investment manager for you. I'm choosing 00:04:05.580 --> 00:04:07.300 between two mutual funds for your portfolio, 00:04:07.439 --> 00:04:09.479 and they're both pretty good. But one of them 00:04:09.479 --> 00:04:11.939 pays my firm a huge kickback, and the other one 00:04:11.939 --> 00:04:14.900 pays nothing. A classic conflict. Okay, that's 00:04:14.900 --> 00:04:17.819 a clear breach. But what if the fund that pays 00:04:17.819 --> 00:04:20.170 the kickback is actually... You know, slightly 00:04:20.170 --> 00:04:22.589 better. What if it has a slightly better return 00:04:22.589 --> 00:04:25.629 history? Am I still in breach? Yes, absolutely. 00:04:25.910 --> 00:04:27.509 And this is what's so important to understand. 00:04:28.110 --> 00:04:31.269 The breach exists whether or not you, the client, 00:04:31.410 --> 00:04:34.149 actually suffered a financial loss. Really? Yes. 00:04:34.329 --> 00:04:36.129 Equity isn't just concerned with the outcome. 00:04:36.250 --> 00:04:38.389 It's concerned with the potential for your judgment 00:04:38.389 --> 00:04:41.089 to be swayed. Your personal interest in that 00:04:41.089 --> 00:04:44.089 kickback compromises your duty to give impartial 00:04:44.089 --> 00:04:47.579 advice. That's enough. So the remedy isn't just 00:04:47.579 --> 00:04:50.800 about paying me back if I lost money. No. The 00:04:50.800 --> 00:04:53.180 primary remedy is about stripping you of the 00:04:53.180 --> 00:04:55.579 profit you made from being in that conflicted 00:04:55.579 --> 00:04:58.180 position. It's about removing the incentive to 00:04:58.180 --> 00:05:00.360 ever let that happen again. That is incredibly 00:05:00.360 --> 00:05:02.899 rigorous. Okay, what's the second type of conflict? 00:05:03.139 --> 00:05:05.240 The second is the conflict of duties. So this 00:05:05.240 --> 00:05:06.819 is when you have duties to two different people. 00:05:07.060 --> 00:05:09.920 Exactly. It happens when a fiduciary owes a duty 00:05:09.920 --> 00:05:12.139 to two different principles, and the interests 00:05:12.139 --> 00:05:15.129 of those principles are at odds. It's the classic 00:05:15.129 --> 00:05:18.009 problem of trying to serve two masters. Like 00:05:18.009 --> 00:05:20.149 a law firm trying to represent both sides in 00:05:20.149 --> 00:05:23.870 a divorce. Or a bank trying to advise two rival 00:05:23.870 --> 00:05:26.129 companies in a hostile takeover bid. That's the 00:05:26.129 --> 00:05:28.910 perfect example. You just can't give your best, 00:05:29.029 --> 00:05:32.189 unbiased advice to both parties. You're forced 00:05:32.189 --> 00:05:33.870 to balance opposing interests, and that's just 00:05:33.870 --> 00:05:36.670 unacceptable under this high standard. If you 00:05:36.670 --> 00:05:39.389 prioritize principle A, you are, by definition, 00:05:39.750 --> 00:05:42.370 breaching your duty of loyalty to principle B. 00:05:42.569 --> 00:05:45.120 Okay, and the third one. The no profit rule. 00:05:45.680 --> 00:05:47.980 This one sounds like the most extreme. It is 00:05:47.980 --> 00:05:51.339 unbelievably strict. This rule says you cannot 00:05:51.339 --> 00:05:53.519 profit from your position as a fiduciary without 00:05:53.519 --> 00:05:55.759 the principal's prior fully informed consent. 00:05:56.079 --> 00:05:58.959 It's not just about, say, stealing from the account. 00:05:59.240 --> 00:06:01.199 Not at all. And this is the part that makes it 00:06:01.199 --> 00:06:04.279 so powerful. It includes any benefit or profit 00:06:04.279 --> 00:06:06.459 that came about simply because of the opportunity 00:06:06.459 --> 00:06:09.199 your role gave you, even if it seems unrelated. 00:06:09.560 --> 00:06:11.639 So even if the principal couldn't have taken 00:06:11.639 --> 00:06:14.040 that opportunity for themselves. Or even if they 00:06:14.040 --> 00:06:17.240 didn't lose a single penny. Even then. The fiduciary 00:06:17.240 --> 00:06:19.860 cannot take that profit. It's about preventing 00:06:19.860 --> 00:06:22.680 any benefit from flowing to the fiduciary that 00:06:22.680 --> 00:06:25.779 arises from that position of trust. It preserves 00:06:25.779 --> 00:06:28.220 the sanctity of the relationship itself. It's 00:06:28.220 --> 00:06:29.740 what they call a prophylactic measure, right? 00:06:29.839 --> 00:06:32.139 Yeah. It's designed to prevent the problem before 00:06:32.139 --> 00:06:34.379 it can even start. Exactly. But this is where 00:06:34.379 --> 00:06:37.639 we start to see some really fascinating differences 00:06:37.639 --> 00:06:40.480 depending on where you are in the world. It gets 00:06:40.480 --> 00:06:42.519 into this distinction between what lawyers call 00:06:42.519 --> 00:06:45.740 prescriptive and prescriptive duties. Okay, let's 00:06:45.740 --> 00:06:47.579 break. that down. What's the difference? Prescriptive 00:06:47.579 --> 00:06:50.480 duties are negative. They tell you what you cannot 00:06:50.480 --> 00:06:53.220 do. You cannot have a conflict. You cannot profit 00:06:53.220 --> 00:06:55.839 without consent. In a lot of places like Australia, 00:06:56.060 --> 00:06:58.600 the duties are generally limited to just that. 00:06:58.779 --> 00:07:01.839 So the courts there are essentially saying we 00:07:01.839 --> 00:07:04.519 will stop you from doing wrong, but we're not 00:07:04.519 --> 00:07:06.800 going to tell you what you must do. That's a 00:07:06.800 --> 00:07:09.079 good way to put it. They are often reluctant 00:07:09.079 --> 00:07:11.899 to impose positive obligations because they don't 00:07:11.899 --> 00:07:13.759 want to interfere too much with what was agreed 00:07:13.759 --> 00:07:17.129 in a contract. But other jurisdictions, and you 00:07:17.129 --> 00:07:19.689 mentioned Canada, take a much broader view. They 00:07:19.689 --> 00:07:22.350 have prescriptive duties. They do. Canada is 00:07:22.350 --> 00:07:24.589 really notable for this. They recognize both 00:07:24.589 --> 00:07:27.089 the negative prescriptive duties and positive 00:07:27.089 --> 00:07:29.569 prescriptive duties. The prescriptive means the 00:07:29.569 --> 00:07:32.149 law tells you what you must do. Right. It requires 00:07:32.149 --> 00:07:34.829 you to take positive actions for your principle. 00:07:35.230 --> 00:07:38.129 So, for instance, you might have a duty to actively 00:07:38.129 --> 00:07:40.509 monitor the market for better investment opportunities 00:07:40.509 --> 00:07:44.009 or a duty to disclose information that might 00:07:44.009 --> 00:07:46.629 actually hurt your own position but would benefit 00:07:46.629 --> 00:07:49.410 your client. Wow, that's a huge philosophical 00:07:49.410 --> 00:07:51.509 difference. So if you're a financial advisor 00:07:51.509 --> 00:07:55.290 in, say, Sydney, your main job is to avoid self 00:07:55.290 --> 00:07:57.899 -dealing. But if you're in Toronto... You might 00:07:57.899 --> 00:07:59.939 have a legally required duty to tell your client 00:07:59.939 --> 00:08:02.279 that a cheaper product just hit the market, even 00:08:02.279 --> 00:08:04.199 if it means you lose your commission. That's 00:08:04.199 --> 00:08:06.639 the practical implication. It speaks to how far 00:08:06.639 --> 00:08:08.560 the courts of equity are willing to step into 00:08:08.560 --> 00:08:11.240 that commercial relationship to protect the vulnerable 00:08:11.240 --> 00:08:14.819 party. This flexibility, the fact that the definition 00:08:14.819 --> 00:08:18.319 can change based on the situation and the jurisdiction, 00:08:18.579 --> 00:08:22.139 it reminds me of that. fantastic metaphor used 00:08:22.139 --> 00:08:24.279 by the Law Commission in England and Wales. The 00:08:24.279 --> 00:08:26.920 legal polyphila. It's perfect. It really is. 00:08:27.060 --> 00:08:29.620 Explain what they meant. They said that fiduciary 00:08:29.620 --> 00:08:32.519 duties can't be understood on their own. Instead, 00:08:32.679 --> 00:08:34.759 they're like legal polyphila, that stuff you 00:08:34.759 --> 00:08:37.179 use to patch holes in a wall. They mold themselves 00:08:37.179 --> 00:08:40.379 flexibly around other legal structures like contract 00:08:40.379 --> 00:08:43.659 law or tort law, and they fill in the gaps. So 00:08:43.659 --> 00:08:46.179 when standard contract law isn't enough to fix 00:08:46.179 --> 00:08:48.980 a deep breach of trust, equity steps in with 00:08:48.980 --> 00:08:52.159 this higher conscience -based standard to patch 00:08:52.159 --> 00:08:54.559 the hole. And that's exactly why courts all over 00:08:54.559 --> 00:08:57.080 the world refuse to create a rigid checklist 00:08:57.080 --> 00:08:59.639 definition of what a fiduciary is. If they did, 00:08:59.879 --> 00:09:02.019 someone would invent a new financial product 00:09:02.019 --> 00:09:04.500 tomorrow to get around it. So they develop it 00:09:04.500 --> 00:09:06.779 case by case. Always case by case. They're always 00:09:06.779 --> 00:09:08.919 asking the same fundamental questions. Was there 00:09:08.919 --> 00:09:11.919 trust? Was there vulnerability? And did the person 00:09:11.919 --> 00:09:14.480 with the power benefit unfairly? So the label 00:09:14.480 --> 00:09:17.159 fiduciary isn't the end of the analysis. It's 00:09:17.159 --> 00:09:19.220 really just the starting gun for a much deeper 00:09:19.220 --> 00:09:21.960 inquiry. Which brings us directly to that famous 00:09:21.960 --> 00:09:24.100 quote from the U .S. Supreme Court, the one that 00:09:24.100 --> 00:09:27.179 really frames this whole area of law. The Frankfurter 00:09:27.179 --> 00:09:29.980 test from SEC v. Chenry Corporation. It's the 00:09:29.980 --> 00:09:32.639 perfect analytical tool. Justice Frankfurter 00:09:32.639 --> 00:09:35.500 said, and I'm paraphrasing slightly, to say that 00:09:35.500 --> 00:09:37.840 a man is a fiduciary only begins the analysis. 00:09:38.519 --> 00:09:41.179 It gives direction to further inquiry. It's not 00:09:41.179 --> 00:09:43.019 the answer. It's the beginning of the question. 00:09:43.200 --> 00:09:45.679 Precisely. And it directs the court to ask four 00:09:45.679 --> 00:09:48.960 very specific, very concrete questions. First, 00:09:49.200 --> 00:09:51.820 to whom is the duty owed? Okay. Second, what 00:09:51.820 --> 00:09:55.259 obligations does that person owe? Third, in what 00:09:55.259 --> 00:09:57.039 way have they failed to meet those obligations? 00:09:57.059 --> 00:09:59.340 And finally, what are the consequences of that 00:09:59.340 --> 00:10:02.120 failure? That really frames the entire discussion 00:10:02.120 --> 00:10:05.340 perfectly. It moves us from this abstract idea 00:10:05.340 --> 00:10:08.559 of trust right into the nitty gritty of corporate 00:10:08.559 --> 00:10:11.100 and personal responsibility. Here's where it 00:10:11.100 --> 00:10:13.240 gets really interesting, because as soon as you 00:10:13.240 --> 00:10:15.639 step into a position of corporate power, like 00:10:15.639 --> 00:10:18.139 being a director, you are immediately wearing 00:10:18.139 --> 00:10:21.139 that very strict fiduciary hat. And the stakes 00:10:21.139 --> 00:10:24.679 become enormous. The rules become much more concrete 00:10:24.679 --> 00:10:27.720 and the financial consequences are massive. And 00:10:27.720 --> 00:10:29.299 if we want to understand corporate fiduciary 00:10:29.299 --> 00:10:32.809 duties, especially in a global context. We really 00:10:32.809 --> 00:10:34.809 have to start with Delaware, don't we? You have 00:10:34.809 --> 00:10:38.750 to. Delaware is, by a huge margin, the most influential 00:10:38.750 --> 00:10:41.250 corporate jurisdiction in the U .S. Something 00:10:41.250 --> 00:10:44.789 like 64 % of the Fortune 500 companies are incorporated 00:10:44.789 --> 00:10:48.370 there. So what the Delaware courts say effectively 00:10:48.370 --> 00:10:51.070 sets the standard for big business around the 00:10:51.070 --> 00:10:53.759 world. So what does the Delaware Chancery Court, 00:10:53.840 --> 00:10:56.460 which is famous for this, demand from a company's 00:10:56.460 --> 00:10:58.960 officers, directors, and controlling shareholders? 00:10:59.419 --> 00:11:02.500 They owe three primary fiduciary duties, though, 00:11:02.600 --> 00:11:04.679 as we'll see, the third one is increasingly being 00:11:04.679 --> 00:11:06.820 seen as just a part of the second. Okay, let's 00:11:06.820 --> 00:11:09.779 start with the first one, the cornerstone, the 00:11:09.779 --> 00:11:12.600 duty of care. The duty of care is all about process. 00:11:12.659 --> 00:11:15.600 It requires directors and officers to act on 00:11:15.600 --> 00:11:17.600 an informed basis. So they have to do their homework. 00:11:18.039 --> 00:11:19.899 They have to do their homework. They have to 00:11:19.899 --> 00:11:22.740 give due consideration to all the material information 00:11:22.740 --> 00:11:25.100 available to them. And they have to reasonably 00:11:25.100 --> 00:11:27.539 inform themselves of the alternatives before 00:11:27.539 --> 00:11:31.080 they make a big decision. They can rely on experts, 00:11:31.299 --> 00:11:34.480 lawyers, accountants, but they have to do it 00:11:34.480 --> 00:11:36.480 with a critical eye. So they can't just rubber 00:11:36.480 --> 00:11:38.990 stamp a report from a consultant. No, they can't 00:11:38.990 --> 00:11:42.509 be willfully blind. If a board approves a massive 00:11:42.509 --> 00:11:44.509 merger after a five -minute meeting where they 00:11:44.509 --> 00:11:47.009 just glance at a two -page summary, they've almost 00:11:47.009 --> 00:11:49.929 certainly violated their duty of care. But if 00:11:49.929 --> 00:11:52.690 they do follow that diligent process, they get 00:11:52.690 --> 00:11:54.769 a lot of protection, right? The business judgment 00:11:54.769 --> 00:11:57.190 rule. A huge amount of protection. The business 00:11:57.190 --> 00:11:59.350 judgment rule is really the bedrock of American 00:11:59.350 --> 00:12:02.820 corporate law. What does it actually do? It creates 00:12:02.820 --> 00:12:05.059 a legal presumption that the directors acted 00:12:05.059 --> 00:12:07.720 properly, that they were informed, that they 00:12:07.720 --> 00:12:10.000 acted in good faith and that they honestly believed 00:12:10.000 --> 00:12:12.080 their decision was in the company's best interest. 00:12:12.259 --> 00:12:14.620 So it protects them from being sued just because 00:12:14.620 --> 00:12:17.399 a business decision turned out badly. Exactly. 00:12:17.480 --> 00:12:19.799 It's designed to shield directors from liability 00:12:19.799 --> 00:12:23.000 for honest mistakes. It encourages them to take 00:12:23.000 --> 00:12:25.620 calculated risks, which is essential for a dynamic 00:12:25.620 --> 00:12:28.299 economy, without them having to fear personal 00:12:28.299 --> 00:12:31.200 financial ruin if a risky bet doesn't pay off. 00:12:31.379 --> 00:12:34.580 OK, that leads to the second and arguably the 00:12:34.580 --> 00:12:38.129 most important duty, the duty of loyalty. This 00:12:38.129 --> 00:12:40.090 is where self -interest really has to be eliminated. 00:12:40.330 --> 00:12:43.169 It is. The duty of loyalty demands that directors 00:12:43.169 --> 00:12:45.429 and officers put the interests of the company 00:12:45.429 --> 00:12:47.970 and its shareholders above any personal interests. 00:12:48.330 --> 00:12:50.769 This is the rule that prohibits self -dealing, 00:12:50.850 --> 00:12:52.789 taking corporate opportunities for themselves, 00:12:53.009 --> 00:12:55.269 or using inside information for personal gain. 00:12:55.450 --> 00:12:57.649 Can you give us a more complex example, something 00:12:57.649 --> 00:13:00.100 beyond just... you know, stealing from the company. 00:13:00.179 --> 00:13:02.179 Sure. Imagine a director on the board of a big 00:13:02.179 --> 00:13:04.779 company. That director is also a major shareholder 00:13:04.779 --> 00:13:07.740 in a smaller supplier company. The director votes 00:13:07.740 --> 00:13:10.460 to reward a massive no bid contract to their 00:13:10.460 --> 00:13:12.440 own smaller company, even though other suppliers 00:13:12.440 --> 00:13:14.779 might have offered better prices. Now, the director 00:13:14.779 --> 00:13:17.500 might argue, well, my company's quality is superior, 00:13:17.659 --> 00:13:22.299 but the conflict of loyalty is undeniable. Because 00:13:22.299 --> 00:13:24.620 they approved an action that gave them a direct 00:13:24.620 --> 00:13:27.320 personal benefit. A personal benefit that didn't 00:13:27.320 --> 00:13:29.500 primarily benefit the corporation they serve. 00:13:29.879 --> 00:13:32.059 The corporation's interest in getting the best 00:13:32.059 --> 00:13:34.899 possible deal has to come first, period. And 00:13:34.899 --> 00:13:37.080 then there's the third duty, the duty of good 00:13:37.080 --> 00:13:39.419 faith, which has been a bit controversial. It 00:13:39.419 --> 00:13:42.379 has. The duty of good faith essentially requires 00:13:42.379 --> 00:13:45.620 directors to exercise the care and prudence that 00:13:45.620 --> 00:13:48.820 a reasonably prudent person would. A failure 00:13:48.820 --> 00:13:50.980 of good faith happens when they take actions 00:13:50.980 --> 00:13:53.620 for an improper purpose, like, say, trying to 00:13:53.620 --> 00:13:55.740 block a takeover just to save their own jobs, 00:13:55.820 --> 00:13:58.860 or when their actions lead to grossly inequitable 00:13:58.860 --> 00:14:01.620 results. But you mentioned that courts are now 00:14:01.620 --> 00:14:03.039 looking at this a bit differently. That's the 00:14:03.039 --> 00:14:05.779 modern trend, yes. Delaware courts are increasingly 00:14:05.779 --> 00:14:08.220 folding the duty of good faith into the duty 00:14:08.220 --> 00:14:11.500 of loyalty. Why is that? The logic is that if 00:14:11.500 --> 00:14:14.259 a director acts in bad faith, If they consciously 00:14:14.259 --> 00:14:16.580 disregard their duties or act for an improper 00:14:16.580 --> 00:14:19.899 purpose, that is fundamentally an act of disloyalty 00:14:19.899 --> 00:14:22.600 to the corporation itself. It simplifies the 00:14:22.600 --> 00:14:25.500 analysis and focuses it squarely on the key question. 00:14:25.860 --> 00:14:28.480 Did the director put the company first or themselves? 00:14:28.919 --> 00:14:31.840 Now, let's contrast this with Canada. The sources 00:14:31.840 --> 00:14:34.019 point to a really different philosophical framework 00:14:34.019 --> 00:14:37.559 there, this tripartite duty. It's a very different 00:14:37.559 --> 00:14:40.779 approach. Canadian corporate law has a more expansive 00:14:40.779 --> 00:14:44.450 three -part fiduciary duty. It starts with the 00:14:44.450 --> 00:14:47.429 same duty to the corporation, but then it specifically 00:14:47.429 --> 00:14:50.250 adds a duty to protect shareholders from harm 00:14:50.250 --> 00:14:53.409 and a procedural duty of fair treatment for the 00:14:53.409 --> 00:14:55.429 interests of relevant stakeholders. Stakeholders. 00:14:55.490 --> 00:14:57.750 So that's not just shareholders. That means employees, 00:14:58.049 --> 00:15:00.830 communities, the environment. Exactly. It's a 00:15:00.830 --> 00:15:03.649 much broader, more modern view than the traditional 00:15:03.649 --> 00:15:06.210 Delaware model, which has historically focused 00:15:06.210 --> 00:15:08.669 almost exclusively on maximizing shareholder 00:15:08.669 --> 00:15:11.110 value. So Canadian law essentially frames the 00:15:11.110 --> 00:15:14.429 director's duty as... in the best interests of 00:15:14.429 --> 00:15:16.750 the corporation, viewed as a good corporate citizen. 00:15:16.970 --> 00:15:19.350 That's the phrase, and it's a powerful one. It 00:15:19.350 --> 00:15:21.710 mandates a responsibility that goes beyond just 00:15:21.710 --> 00:15:24.470 the quarterly earnings report. It requires directors 00:15:24.470 --> 00:15:26.230 to think about the long -term sustainability 00:15:26.230 --> 00:15:29.149 and the societal impact of their company's actions. 00:15:29.490 --> 00:15:32.409 That is a significant difference. Okay, so we've 00:15:32.409 --> 00:15:34.269 covered the corporate world, but this concept 00:15:34.269 --> 00:15:35.870 is everywhere. Let's just run through some of 00:15:35.870 --> 00:15:38.600 the other relationships where the law... automatically 00:15:38.600 --> 00:15:40.940 imposes this high standard. The list is long 00:15:40.940 --> 00:15:43.279 and it's really instructive. The original one, 00:15:43.360 --> 00:15:45.559 of course, is the trustee beneficiary relationship. 00:15:45.840 --> 00:15:47.639 That's the classic model. Right. And then you 00:15:47.639 --> 00:15:49.899 have all the professional services, lawyer client, 00:15:50.159 --> 00:15:53.200 agent principal, executors of estates, administrators 00:15:53.200 --> 00:15:56.299 of wills. And in the financial sector, it's not 00:15:56.299 --> 00:15:59.080 just personal advisors. It extends to anyone 00:15:59.080 --> 00:16:02.169 managing. Big pools of money. Yes, absolutely. 00:16:02.590 --> 00:16:05.049 Retirement plan administrators, the people who 00:16:05.049 --> 00:16:08.850 manage 401k plans, they owe a strict fiduciary 00:16:08.850 --> 00:16:11.490 duty to all the workers and retirees in that 00:16:11.490 --> 00:16:14.309 plan. These are people responsible for billions 00:16:14.309 --> 00:16:16.690 of dollars. So the duty of care and the duty 00:16:16.690 --> 00:16:19.350 of loyalty are critically important there. Critically. 00:16:19.450 --> 00:16:22.230 And the concept even extends into public law, 00:16:22.429 --> 00:16:25.549 which is fascinating. It acts as a check on government 00:16:25.549 --> 00:16:28.409 power. The sources mention the relationship between 00:16:28.409 --> 00:16:30.759 governments and indigenous peoples. Right, citing 00:16:30.759 --> 00:16:32.980 cases like Seminole Nation v. United States. 00:16:33.200 --> 00:16:35.960 The idea is that the government acts in a position 00:16:35.960 --> 00:16:38.539 of trust regarding the nation's assets and welfare, 00:16:38.919 --> 00:16:41.960 imposing these fiduciary -like obligations on 00:16:41.960 --> 00:16:44.419 the state itself. It just shows how powerful 00:16:44.419 --> 00:16:47.399 the concept is. But to really see how it's not 00:16:47.399 --> 00:16:49.720 a one -size -fits -all rule, we have to look 00:16:49.720 --> 00:16:52.820 at the boundary cases. The ones where one country 00:16:52.820 --> 00:16:55.440 says, yes, this is a fiduciary relationship, 00:16:55.659 --> 00:16:58.259 and another says, no. And the classic example 00:16:58.259 --> 00:17:00.340 here is the doctor -patient relationship. It's 00:17:00.340 --> 00:17:02.519 the perfect illustration of these different legal 00:17:02.519 --> 00:17:05.740 philosophies. So in Canada. In Canada, the doctor 00:17:05.740 --> 00:17:07.960 -patient relationship is considered fiduciary. 00:17:08.079 --> 00:17:11.119 The physician owes that highest duty of loyalty 00:17:11.119 --> 00:17:13.819 to their patient. But not in Australia. Not in 00:17:13.819 --> 00:17:16.279 Australia. The Australian High Court, in a famous 00:17:16.279 --> 00:17:18.900 case called Breen v. Williams, expressly decided 00:17:18.900 --> 00:17:21.720 it is not a fiduciary relationship. Their argument 00:17:21.720 --> 00:17:24.099 was that the doctor doesn't have that representative 00:17:24.099 --> 00:17:26.880 capacity of a trustee. They're not married. managing 00:17:26.880 --> 00:17:29.180 the patient's financial affairs. So if a doctor 00:17:29.180 --> 00:17:31.660 in Australia breaches a patient's trust, say, 00:17:31.779 --> 00:17:34.980 by misusing confidential information, the patient 00:17:34.980 --> 00:17:37.400 has to sue them for normal negligence or breach 00:17:37.400 --> 00:17:40.019 of contract. Correct. The Australian courts felt 00:17:40.019 --> 00:17:42.019 that those existing remedies were good enough. 00:17:42.559 --> 00:17:44.859 But think about what the Australian patient is 00:17:44.859 --> 00:17:46.980 missing. They're missing that proactive standard. 00:17:47.529 --> 00:17:50.250 In Canada, the patient benefits from the law 00:17:50.250 --> 00:17:53.569 enforcing loyalty and, crucially, the disgorgement 00:17:53.569 --> 00:17:55.589 of any profit the doctor might have made from 00:17:55.589 --> 00:17:57.950 the breach, even if the patient didn't suffer 00:17:57.950 --> 00:18:00.630 a measurable financial loss. Exactly. The Canadian 00:18:00.630 --> 00:18:03.009 approach is about punishing the breach of trust 00:18:03.009 --> 00:18:05.440 itself. The Australian patient would have to 00:18:05.440 --> 00:18:08.039 prove quantifiable damages, which is a much, 00:18:08.079 --> 00:18:10.279 much harder thing to do. Another fascinating 00:18:10.279 --> 00:18:13.039 contrast is the parent -child relationship. Again, 00:18:13.200 --> 00:18:15.819 Australian courts do not presume a fiduciary 00:18:15.819 --> 00:18:17.759 relationship there. But the Canadian Supreme 00:18:17.759 --> 00:18:20.750 Court did. They did. They allowed a child to 00:18:20.750 --> 00:18:23.670 sue her father for breach of his fiduciary duties 00:18:23.670 --> 00:18:26.230 related to an inheritance she was supposed to 00:18:26.230 --> 00:18:29.690 receive. It shows that in Canada, the sheer vulnerability 00:18:29.690 --> 00:18:32.730 of that relationship can be enough for a court 00:18:32.730 --> 00:18:35.730 to impose this highest duty of trust, even within 00:18:35.730 --> 00:18:38.710 a family. That's a profound difference. Okay, 00:18:38.769 --> 00:18:40.730 let's touch on the edge cases in the business 00:18:40.730 --> 00:18:43.670 world that often cause confusion. Joint ventures 00:18:43.670 --> 00:18:46.390 and employment. Right. Most joint ventures are 00:18:46.390 --> 00:18:48.769 just commercial agreements between two sophisticated 00:18:48.769 --> 00:18:51.329 companies. They're operating at what's called 00:18:51.329 --> 00:18:53.829 commercial arm's length. Meaning they're expected 00:18:53.829 --> 00:18:56.170 to look out for their own interests. And so they're 00:18:56.170 --> 00:18:59.009 not presumed to be fiduciary. But a fiduciary 00:18:59.009 --> 00:19:01.769 duty can arise if the venture starts to look 00:19:01.769 --> 00:19:04.369 more like a true partnership where one party 00:19:04.369 --> 00:19:06.710 hands over critical assets or management control 00:19:06.710 --> 00:19:09.210 to the other. Then a court might find that a 00:19:09.210 --> 00:19:11.829 duty of loyalty exists. It all depends on how 00:19:11.829 --> 00:19:13.849 much trust and reliance has been placed on one 00:19:13.849 --> 00:19:19.359 part. Exactly. And what about employment? Generally, 00:19:19.940 --> 00:19:22.960 no. The employment contract is not presumed to 00:19:22.960 --> 00:19:26.180 be fiduciary. An employee owes basic duties of 00:19:26.180 --> 00:19:28.460 loyalty and confidentiality, but they're still 00:19:28.460 --> 00:19:31.059 allowed to have their own self -interest. They 00:19:31.059 --> 00:19:33.339 can negotiate for a raise or plan their next 00:19:33.339 --> 00:19:35.859 career move. But that completely flips for senior 00:19:35.859 --> 00:19:38.720 employees, right? It does. A senior executive. 00:19:39.420 --> 00:19:41.720 someone with high -level decision -making power, 00:19:41.859 --> 00:19:45.400 access to trade secrets, the ability to act on 00:19:45.400 --> 00:19:48.220 behalf of the company. They are much more likely 00:19:48.220 --> 00:19:51.440 to be found to owe fiduciary duties. The famous 00:19:51.440 --> 00:19:54.839 Canadian case Canadian Aeroservice LTD v. O'Malley 00:19:54.839 --> 00:19:57.460 made it clear that senior employees can't just 00:19:57.460 --> 00:19:59.339 seize corporate opportunities for themselves 00:19:59.339 --> 00:20:02.359 even right after they leave the company. So the 00:20:02.359 --> 00:20:04.440 law is there to stop them from using the privileged 00:20:04.440 --> 00:20:06.559 position they were entrusted with to undermine 00:20:06.559 --> 00:20:08.799 the company. Okay, so once you're in that position, 00:20:09.019 --> 00:20:10.920 you're held to this incredibly high standard. 00:20:11.119 --> 00:20:13.079 Which brings us to the practical side of things. 00:20:13.299 --> 00:20:16.000 Part three, what are the actual rigorous rules 00:20:16.000 --> 00:20:18.740 of accountability that a fiduciary has to follow? 00:20:19.099 --> 00:20:21.980 It all comes down to absolute transparency and 00:20:21.980 --> 00:20:25.339 meticulous record keeping. For someone administering 00:20:25.339 --> 00:20:27.799 an estate, for example, there are often formal 00:20:27.799 --> 00:20:30.359 legal requirements. They might have to file a 00:20:30.359 --> 00:20:32.339 fiduciary bond with the court. Which is like 00:20:32.339 --> 00:20:35.000 an insurance policy, right? Exactly. It's a surety 00:20:35.000 --> 00:20:37.279 bond that guarantees they'll perform their duties 00:20:37.279 --> 00:20:40.480 faithfully. If they misappropriate funds, the 00:20:40.480 --> 00:20:43.359 bond provides a way for the beneficiary to recover 00:20:43.359 --> 00:20:45.680 the money. It's a financial safety net. It is. 00:20:45.759 --> 00:20:48.480 And another fundamental requirement is preparing... 00:20:48.490 --> 00:20:51.390 a complete inventory of all the property, usually 00:20:51.390 --> 00:20:54.809 sworn under oath. This document establishes the 00:20:54.809 --> 00:20:57.210 baseline. It's the official record of what the 00:20:57.210 --> 00:20:59.730 fiduciary is responsible for protecting, and 00:20:59.730 --> 00:21:02.009 it's what all their future actions will be measured 00:21:02.009 --> 00:21:04.450 against. To give our listeners a real sense of 00:21:04.450 --> 00:21:06.470 just how demanding this is, we can look at a 00:21:06.470 --> 00:21:08.930 specific example, like the Texas Estates Code. 00:21:09.769 --> 00:21:11.730 It lays out the accounting duties in incredible 00:21:11.730 --> 00:21:14.210 detail. And these requirements show that this 00:21:14.210 --> 00:21:17.049 goes way beyond just normal bookkeeping. The 00:21:17.049 --> 00:21:20.730 goal is total, unambiguous transparency. First, 00:21:20.890 --> 00:21:23.549 there's the duty to timely inform principle. 00:21:23.829 --> 00:21:26.410 It says they have to inform the principle of 00:21:26.410 --> 00:21:28.789 each action they take. Not a summary at the end 00:21:28.789 --> 00:21:31.470 of the year, but each action. Then there's the 00:21:31.470 --> 00:21:33.549 maintenance of records. They have to keep perfect 00:21:33.549 --> 00:21:36.789 records of every single action or decision. And 00:21:36.789 --> 00:21:39.029 the burden of proof is always on the fiduciary 00:21:39.029 --> 00:21:41.829 to show that they acted properly. If their records 00:21:41.829 --> 00:21:44.869 are sloppy, they're in trouble. And most importantly, 00:21:45.089 --> 00:21:48.130 they have to provide a full accounting upon demand. 00:21:48.730 --> 00:21:51.089 And this accounting has to be exhaustive. It 00:21:51.089 --> 00:21:53.809 really does. The code is meticulous. It says 00:21:53.809 --> 00:21:55.910 the accounting has to list receipts of principal 00:21:55.910 --> 00:21:58.710 and income separately. It has to list all the 00:21:58.710 --> 00:22:00.750 property with a full description and its current 00:22:00.750 --> 00:22:03.369 value. It also requires listing all the cash 00:22:03.369 --> 00:22:06.609 balances, where that cash is held, and every 00:22:06.609 --> 00:22:09.230 single known liability. This level of detail 00:22:09.230 --> 00:22:11.509 is designed to prevent any blurring of the lines 00:22:11.509 --> 00:22:13.970 between the fiduciary's own money and the principal's 00:22:13.970 --> 00:22:16.269 money. And then there's the final catch -all 00:22:16.269 --> 00:22:18.420 clause, which really captures this. spirit of 00:22:18.420 --> 00:22:21.200 equity. The legal polyphila in action. Right. 00:22:21.319 --> 00:22:24.539 The accounting must include any other information 00:22:24.539 --> 00:22:28.400 and facts necessary for a full and definite understanding 00:22:28.400 --> 00:22:31.519 of the exact condition of the property. It's 00:22:31.519 --> 00:22:34.460 an open -ended demand for total clarity. It is. 00:22:34.579 --> 00:22:37.279 The law is not satisfied with just ticking boxes. 00:22:37.440 --> 00:22:40.559 It demands that the fiduciary give the vulnerable 00:22:40.559 --> 00:22:43.319 principal everything they need to truly understand 00:22:43.319 --> 00:22:46.000 what's going on with their own assets. Let's 00:22:46.000 --> 00:22:48.079 circle back to the no profit rule and see how 00:22:48.079 --> 00:22:50.319 strictly the courts enforce this in practice. 00:22:50.599 --> 00:22:52.660 This is where we see the concept of the constructive 00:22:52.660 --> 00:22:55.759 trust being used as a really powerful tool. And 00:22:55.759 --> 00:22:58.140 the band example from the sources is a perfect 00:22:58.140 --> 00:23:00.559 way to illustrate it. OK, so we have two band 00:23:00.559 --> 00:23:02.920 members. Let's call them X and Y. They're equal 00:23:02.920 --> 00:23:05.299 partners. which means they owe fiduciary duties 00:23:05.299 --> 00:23:07.680 to each other. Right. They're in a joint venture 00:23:07.680 --> 00:23:09.819 that operates like a partnership. They create 00:23:09.819 --> 00:23:13.539 some demos together. Then member X secretly takes 00:23:13.539 --> 00:23:16.140 those demos, pitches them to a record label as 00:23:16.140 --> 00:23:18.740 his own work, and lands an exclusive contract 00:23:18.740 --> 00:23:22.500 with a $50 ,000 advance. And he keeps it all 00:23:22.500 --> 00:23:25.839 secret from Y. X has clearly breached his fiduciary 00:23:25.839 --> 00:23:28.700 duty. He used a partnership asset, the demos, 00:23:28.920 --> 00:23:31.240 and a partnership opportunity to get a personal 00:23:31.240 --> 00:23:34.019 benefit. He put his own interest ahead of the 00:23:34.019 --> 00:23:36.420 duo's interest. So the court finds a breach. 00:23:37.119 --> 00:23:40.059 What's the remedy? Does the court just punish 00:23:40.059 --> 00:23:42.799 X and take the contract away? No, the remedy 00:23:42.799 --> 00:23:45.759 is much more elegant than that. Equity isn't 00:23:45.759 --> 00:23:48.420 about punishment. The court says that X holds 00:23:48.420 --> 00:23:51.220 both the contract and the $50 ,000 in a constructive 00:23:51.220 --> 00:23:53.839 trust for the benefit of the duo. So X becomes 00:23:53.839 --> 00:23:56.559 a trustee. Exactly. He's not punished. He's made 00:23:56.559 --> 00:23:59.839 a trustee. Since Y was entitled to half the benefit, 00:24:00.099 --> 00:24:03.140 the court ensures that both X and Y get a half 00:24:03.140 --> 00:24:05.400 share of the contract and the money. It just 00:24:05.400 --> 00:24:07.359 restores the situation to what it should have 00:24:07.359 --> 00:24:09.539 been if X had acted loyally in the first place. 00:24:09.759 --> 00:24:12.059 The law isn't trying to treat X like a criminal. 00:24:12.240 --> 00:24:14.279 It's just trying to correct the unjust enrichment 00:24:14.279 --> 00:24:16.640 that came from his breach of trust. Precisely. 00:24:16.640 --> 00:24:18.819 And the same logic applies to how the law now 00:24:18.819 --> 00:24:21.420 treats secret commissions or bribes. Historically, 00:24:21.480 --> 00:24:24.140 if a fiduciary took a bribe, the law just treated 00:24:24.140 --> 00:24:26.400 it as a debt that they owed back to their principal. 00:24:26.799 --> 00:24:28.599 What was the problem with that? The problem was 00:24:28.599 --> 00:24:31.740 bankruptcy. If the fiduciary who took the bribe 00:24:31.740 --> 00:24:34.599 went bankrupt, that bribe money was just another 00:24:34.599 --> 00:24:37.500 asset in their general pool of assets. So the 00:24:37.500 --> 00:24:39.539 victim, the principal, would have to get in line 00:24:39.539 --> 00:24:41.519 with all the other creditors. Right. With the 00:24:41.519 --> 00:24:44.400 banks, the suppliers, everyone. They might only 00:24:44.400 --> 00:24:47.180 get back pennies on the dollar. They would effectively 00:24:47.180 --> 00:24:49.740 lose the money that was stolen from them through 00:24:49.740 --> 00:24:52.720 the breach of trust. So the law changed to protect 00:24:52.720 --> 00:24:55.200 the victim. It did. Now, bribes are classified 00:24:55.200 --> 00:24:57.880 as being held by the fiduciary on a constructive 00:24:57.880 --> 00:25:00.339 trust for the principal from the moment they 00:25:00.339 --> 00:25:02.799 are received. So that money is treated as belonging 00:25:02.799 --> 00:25:05.339 to the principal all along. Which means if the 00:25:05.339 --> 00:25:08.000 fiduciary goes bankrupt, that bribe money is 00:25:08.000 --> 00:25:10.119 kept separate. It doesn't go into the general 00:25:10.119 --> 00:25:13.099 pot for creditors. The principal can recover 00:25:13.099 --> 00:25:15.859 the full amount. It just underscores how seriously 00:25:15.859 --> 00:25:18.500 equity protects the integrity of this relationship. 00:25:19.000 --> 00:25:21.460 That rigorous accountability then brings us to 00:25:21.460 --> 00:25:24.059 the inevitable question. What happens when the 00:25:24.059 --> 00:25:27.319 trust is broken? Let's talk about breaches, how 00:25:27.319 --> 00:25:29.079 fiduciaries might try to get out of trouble, 00:25:29.180 --> 00:25:31.569 and the remedies that are available. One of the 00:25:31.569 --> 00:25:33.609 key concepts here is something called constructive 00:25:33.609 --> 00:25:36.410 fraud. Now, this is different from actual fraud, 00:25:36.650 --> 00:25:39.069 which requires a deliberate intent to deceive. 00:25:39.430 --> 00:25:42.210 So what is constructive fraud? It's defined as 00:25:42.210 --> 00:25:45.670 conduct, which could be an act, an omission or 00:25:45.670 --> 00:25:48.690 a concealment that a court considers fraudulent 00:25:48.690 --> 00:25:51.089 because it gives one party an unfair advantage. 00:25:51.869 --> 00:25:55.109 The law demands a remedy for public policy reasons, 00:25:55.430 --> 00:25:57.609 even if the person wasn't being deliberately 00:25:57.609 --> 00:26:00.569 dishonest. So you don't have to prove evil intent. 00:26:01.019 --> 00:26:03.099 You just have to prove that their actions were 00:26:03.099 --> 00:26:06.019 so contrary to their duty of loyalty that the 00:26:06.019 --> 00:26:08.119 law should treat them as if they were dishonest. 00:26:08.160 --> 00:26:10.700 That's the core of it. The outcome is what matters, 00:26:10.700 --> 00:26:13.140 not the intent. And a classic example of this 00:26:13.140 --> 00:26:16.039 is insider trading. Right. An executive uses 00:26:16.039 --> 00:26:18.119 confidential information they got through their 00:26:18.119 --> 00:26:20.630 role. to make a personal profit. They're using 00:26:20.630 --> 00:26:22.869 a company asset, that information, for private 00:26:22.869 --> 00:26:25.069 gain. That's a breach of the duty of loyalty, 00:26:25.289 --> 00:26:27.809 and it operates as a constructive fraud on the 00:26:27.809 --> 00:26:30.029 other shareholders. Okay, so if the standards 00:26:30.029 --> 00:26:32.549 are this strict, is there any way for a fiduciary 00:26:32.549 --> 00:26:35.450 to proceed in a situation with a potential conflict 00:26:35.450 --> 00:26:39.170 without getting sued? Yes, but the path is very 00:26:39.170 --> 00:26:42.329 narrow. The main way is through informed consent. 00:26:42.609 --> 00:26:44.569 So full disclosure. Full and complete disclosure. 00:26:44.690 --> 00:26:47.509 The fiduciary has to lay out the entire conflict 00:26:47.509 --> 00:26:51.589 or the potential profit in detail and then get 00:26:51.589 --> 00:26:54.410 the principal's fully informed, freely given 00:26:54.410 --> 00:26:57.230 consent to go ahead. And that disclosure has 00:26:57.230 --> 00:27:00.210 to be in plain English, I assume, not buried 00:27:00.210 --> 00:27:02.869 in 100 pages of legalese. It has to be understandable 00:27:02.869 --> 00:27:05.630 to the person you're disclosing to. The Australian 00:27:05.630 --> 00:27:08.049 case, Farrah Constructions, made it clear that 00:27:08.049 --> 00:27:10.529 the level of disclosure depends on the sophistication 00:27:10.529 --> 00:27:12.890 of the principal. What you need to tell a big 00:27:12.890 --> 00:27:15.329 institutional investor is very different from 00:27:15.329 --> 00:27:17.390 what you need to tell an elderly person trusting 00:27:17.390 --> 00:27:19.569 you with their life savings. People also try 00:27:19.569 --> 00:27:22.950 to use exclusion clauses in contracts, right? 00:27:23.069 --> 00:27:24.890 Trying to get out of these duties before they 00:27:24.890 --> 00:27:27.990 even start. They do. And in some very sophisticated 00:27:27.990 --> 00:27:30.750 commercial deals between powerful parties, courts 00:27:30.750 --> 00:27:33.450 have allowed clauses that limit or exclude some 00:27:33.450 --> 00:27:36.670 fiduciary obligations. The assumption is that 00:27:36.670 --> 00:27:38.710 both parties know exactly what they're doing. 00:27:38.869 --> 00:27:41.210 But there's a line you absolutely cannot cross. 00:27:41.490 --> 00:27:44.710 A limit to what you can exclude. There is. This 00:27:44.710 --> 00:27:46.910 was established in the landmark English case 00:27:46.910 --> 00:27:50.190 of Armitage v. Nurse. It's the firewall that 00:27:50.190 --> 00:27:52.430 protects the entire concept. And what is that 00:27:52.430 --> 00:27:55.700 limit? You absolutely cannot under any circumstances 00:27:55.700 --> 00:27:59.400 use an exclusion clause to escape liability for 00:27:59.400 --> 00:28:02.309 your own fraud or dishonesty. You can contract 00:28:02.309 --> 00:28:04.970 out of liability for negligence, maybe even gross 00:28:04.970 --> 00:28:08.230 incompetence, but you cannot contract out of 00:28:08.230 --> 00:28:11.430 the core irreducible duty to act honestly and 00:28:11.430 --> 00:28:13.130 in good faith. So you can't get a license to 00:28:13.130 --> 00:28:15.789 be dishonest. Equity will never allow that. It's 00:28:15.789 --> 00:28:18.349 the non -negotiable core of the entire relationship. 00:28:18.730 --> 00:28:20.630 OK, so a breach has happened. We talked about 00:28:20.630 --> 00:28:22.990 the constructive trust. What if the gain is harder 00:28:22.990 --> 00:28:25.470 to pin down? Then the court can order an account 00:28:25.470 --> 00:28:27.990 of profits. This is used when the breach was 00:28:27.990 --> 00:28:30.269 ongoing, like that senior employee secretly running 00:28:30.269 --> 00:28:33.240 a competing side business for years. The court 00:28:33.240 --> 00:28:35.619 will force the fiduciary to hand over all the 00:28:35.619 --> 00:28:38.180 profit they made from that breach. But the courts 00:28:38.180 --> 00:28:41.299 can be fair about this. If the fiduciary put 00:28:41.299 --> 00:28:44.099 in real work to make that profit, even if it 00:28:44.099 --> 00:28:46.259 was wrongful, they might get something for their 00:28:46.259 --> 00:28:49.619 effort. That's a crucial nuance. The court might 00:28:49.619 --> 00:28:51.559 grant them an allowance for their skill and labor. 00:28:51.799 --> 00:28:54.519 The goal is to strip them of their unjust enrichment, 00:28:54.859 --> 00:28:57.720 not to punish them excessively or ignore the 00:28:57.720 --> 00:29:00.190 genuine work they might have put in. And finally, 00:29:00.230 --> 00:29:02.829 there are just straight up compensatory damages. 00:29:03.130 --> 00:29:05.769 Yes. This is a more modern development. Historically, 00:29:05.829 --> 00:29:08.009 courts of equity couldn't award damages, but 00:29:08.009 --> 00:29:10.829 now they can. So a principal can sue for the 00:29:10.829 --> 00:29:12.990 direct financial loss they suffered because of 00:29:12.990 --> 00:29:15.170 the breach, especially if calculating an account 00:29:15.170 --> 00:29:17.809 of profits is just too complicated. As everything 00:29:17.809 --> 00:29:20.369 in our world gets more complex, this standard 00:29:20.369 --> 00:29:23.430 has to evolve with it. Let's spend some real 00:29:23.430 --> 00:29:26.210 time on how this idea is adapting to the 21st 00:29:26.210 --> 00:29:29.269 century, especially with ESG and pension funds. 00:29:29.630 --> 00:29:32.170 The 2008 financial crisis was a huge turning 00:29:32.170 --> 00:29:34.990 point here. After 2008, you see this major trend 00:29:34.990 --> 00:29:37.569 of pension fund trustees starting to reassert 00:29:37.569 --> 00:29:39.750 their fiduciary powers much more aggressively. 00:29:40.009 --> 00:29:42.289 They realized they had been too passive. Way 00:29:42.289 --> 00:29:44.750 too passive. They had been absentee landlords, 00:29:45.069 --> 00:29:47.630 just trusting corporate management. After the 00:29:47.630 --> 00:29:49.890 crisis, they became much more active in corporate 00:29:49.890 --> 00:29:51.950 governance, demanding accountability from the 00:29:51.950 --> 00:29:54.509 companies their funds were invested in. And that 00:29:54.509 --> 00:29:57.210 activism led directly into the huge debate around 00:29:57.210 --> 00:30:00.670 environmental, social and governance or ESG investing. 00:30:00.809 --> 00:30:04.420 For years, the big question was. Does considering 00:30:04.420 --> 00:30:07.079 something like climate risk violate your fiduciary 00:30:07.079 --> 00:30:10.519 duty to just maximize financial returns? That 00:30:10.519 --> 00:30:13.509 debate is for the most part over. And that's 00:30:13.509 --> 00:30:15.569 largely thanks to the work of the fiduciary duty 00:30:15.569 --> 00:30:17.869 in the 21st century program, which was led by 00:30:17.869 --> 00:30:20.109 the U .N. What was their big finding? Their 2015 00:30:20.109 --> 00:30:23.329 report was a landmark. It concluded very clearly 00:30:23.329 --> 00:30:26.089 that failing to consider all long term investment 00:30:26.089 --> 00:30:29.170 value drivers, including ESG issues, is a failure 00:30:29.170 --> 00:30:31.710 of fiduciary duty. Wow. So it completely flipped 00:30:31.710 --> 00:30:33.690 the script. It did. The argument is that these 00:30:33.690 --> 00:30:36.730 factors are not just nice to have ethical concerns. 00:30:36.890 --> 00:30:39.490 They are material financial risks and opportunities. 00:30:39.849 --> 00:30:43.019 So if I'm a pension fund trustee. And I invest 00:30:43.019 --> 00:30:45.420 in a company whose entire business model depends 00:30:45.420 --> 00:30:48.400 on fossil fuels. But I don't bother to analyze 00:30:48.400 --> 00:30:51.500 the risk of future carbon taxes or stranded assets. 00:30:51.819 --> 00:30:53.900 Then you are failing in your duty of care. You 00:30:53.900 --> 00:30:56.480 are not acting on a fully informed basis. Climate 00:30:56.480 --> 00:30:59.319 risk, supply chain labor issues, corporate corruption. 00:30:59.839 --> 00:31:01.880 These are all things that can have a massive 00:31:01.880 --> 00:31:04.660 impact on the long -term value of an asset. Ignoring 00:31:04.660 --> 00:31:06.779 them isn't being a good fiduciary. It's being 00:31:06.779 --> 00:31:09.720 negligent. And this is now driving a real global 00:31:09.720 --> 00:31:13.160 shift in policy. It is. The program is pushing 00:31:13.160 --> 00:31:15.779 for these ideas to be embedded in market regulations 00:31:15.779 --> 00:31:18.819 around the world. In Europe, it's already translated 00:31:18.819 --> 00:31:21.940 into hard law. The debate has moved from if we 00:31:21.940 --> 00:31:24.779 should consider ESG to how we can best measure 00:31:24.779 --> 00:31:26.940 and integrate it. The U .S. is still a bit of 00:31:26.940 --> 00:31:29.000 a battleground on this, isn't it? It is. The 00:31:29.000 --> 00:31:31.180 tension there revolves around the very narrowest 00:31:31.180 --> 00:31:33.799 interpretation of fiduciary duty. The question 00:31:33.799 --> 00:31:35.920 is whether considering anything other than pure 00:31:35.920 --> 00:31:38.500 financial return is a breach. So, for example, 00:31:38.579 --> 00:31:41.160 if a union pension fund decides to invest in 00:31:41.160 --> 00:31:43.980 companies that support union labor, some would 00:31:43.980 --> 00:31:46.599 argue that's a breach of duty if a non -union 00:31:46.599 --> 00:31:48.900 company offered a slightly higher potential return. 00:31:49.420 --> 00:31:51.539 That's the heart of the debate. It's a clash 00:31:51.539 --> 00:31:55.160 between a pure shareholder primacy view versus 00:31:55.160 --> 00:31:57.380 a broader stakeholder view that considers the 00:31:57.380 --> 00:31:59.140 well -being of the beneficiaries themselves. 00:32:00.400 --> 00:32:03.180 While the global trend is clear, the U .S. is 00:32:03.180 --> 00:32:05.299 still grappling with these fundamental questions. 00:32:05.579 --> 00:32:08.339 It really shows how this legal polyphila is constantly 00:32:08.339 --> 00:32:11.460 being stretched and reshaped by modern economic 00:32:11.460 --> 00:32:13.900 and political pressures. That really does bring 00:32:13.900 --> 00:32:16.059 everything full circle. It shows this isn't some 00:32:16.059 --> 00:32:18.680 dusty old legal concept. It's a living principle 00:32:18.680 --> 00:32:20.299 that's right at the heart of today's biggest 00:32:20.299 --> 00:32:23.059 debates. So what does this all mean? It means 00:32:23.059 --> 00:32:25.720 that the fiduciary concept is this incredibly 00:32:25.720 --> 00:32:28.799 powerful, adaptable, high stakes contract of 00:32:28.799 --> 00:32:31.420 undivided loyalty. It cuts across every part 00:32:31.420 --> 00:32:33.980 of our economy from a simple family trust to 00:32:33.980 --> 00:32:36.819 the boardroom of a global corporation. And it's 00:32:36.819 --> 00:32:38.900 constantly evolving to meet modern challenges 00:32:38.900 --> 00:32:41.880 like sustainable investing. But at its core, 00:32:42.039 --> 00:32:45.079 it's always the same. Wherever one person places 00:32:45.079 --> 00:32:46.920 their trust and assets in the hands of another, 00:32:47.200 --> 00:32:50.220 the law demands more than just competence. It 00:32:50.220 --> 00:32:53.039 demands the complete submission of self -interest. 00:32:53.420 --> 00:32:55.519 And if you connect that all the way back to its 00:32:55.519 --> 00:32:58.059 origins in the Court of Chancery, the Court of 00:32:58.059 --> 00:33:00.490 Conscience. And you think about that absolute 00:33:00.490 --> 00:33:02.930 rule that you can never contract out of dishonesty. 00:33:03.230 --> 00:33:05.789 If the standard is set at a level higher than 00:33:05.789 --> 00:33:08.210 that trodden by the crowd, what does that teach 00:33:08.210 --> 00:33:10.490 us about the true definition of trust in any 00:33:10.490 --> 00:33:13.210 part of our lives? Maybe it's that the real test 00:33:13.210 --> 00:33:15.130 of trust isn't just about competence when things 00:33:15.130 --> 00:33:17.549 are going well. It's about the willing, legally 00:33:17.549 --> 00:33:19.769 enforceable surrender of your own self -interest 00:33:19.769 --> 00:33:22.390 when the temptation to profit is at its absolute 00:33:22.390 --> 00:33:24.630 highest. Something to think about the next time 00:33:24.630 --> 00:33:26.529 you hand over control of anything important to 00:33:26.529 --> 00:33:26.950 someone else.