Introduction
With a critique of high executive compensations, specifically evident in the time of recessions. It can be understood that part of these compensations are payments for the challenges and the opportunities such positions present. Operating with information, which is worth of millions of dollars, it is assumed that a high compensation packages justifies the risk of working with such information, as well as preventing the possibilities of misuse. Nevertheless, in the light of many published scandals in the mass media, it can be seen that, even high compensations and premiums is not a universal panacea for corporate misconduct by directors and executive officers. In that regard, this paper provides a case study of a corporate misconduct, based on the scandal involving Mitchel S. Guttenberg, the former executive director at UBS, a financial services firm.
Fiduciary Duties
It can be stated that the fiduciary duties of directors are the most demanding, where these duties are not specified to a single aspect of the position, but rather “an all encompassing duty” (“Directors’ Statutory and Fiduciary Duties”). In that regard, it can be added to the main condition of preferring company’s interests over his/her own interest, that the fiduciary duties implies not placing oneself in a condition, where own interests will be preferred, or conflicted with the interests of the company. Simply explained, the duty implies that the fiduciary is not entitled to make a profit out of his position, where under the common law he/she “has to act bona fide in the interests of the company and not for any collateral purpose” (“Directors’ Statutory and Fiduciary Duties”).
Such position of avoiding placing oneself in situations of conflicting interests is driven by the fact that directors have the necessary power to do so. In that regard, such power can be expressed through the common characteristics of the situations in which the fiduciary duties are imposed, and through which it can be seen their applicability to directors’ positions. These characteristics are: the scope of the fiduciary to exercise power, the ability to exercise such power to affect “beneficiary’s legal or practical interests”, and the vulnerability of the beneficiary to the fiduciary holding such power (Carroll, Horswill and Ross).
UBS Scandal
The scandal revolved around the allegations of the prosecutions that Mitchel Guttenberg gained more than $1 million by selling confidential stock research. Although 12 others were arrested, the executive position of Guttenberg was assumingly the main factor in charging him with masterminding such trading scheme (“UBS: Notes on a Wall Street Scandal”).
It can be seen that the breach of duty occurred on several levels included in the fiduciary duty of his position. On the one hand, Guttenberg preferred his own interest over the interests of the company, where the main activity of the UBS company includes offering “a range of tailored advice and investment services” to clients (“UBS: Notes on a Wall Street Scandal”). The interests of the company can be seen through the reservation of confidential information, as well as its usage to the benefit of the company. Accordingly, the reputation of the company, which was entrusted to Guttenberg, can be seen as one of its main interests. In that regard, the fact of revealing the upcoming ratings is an illegal act in itself that put the company at risk. If considering that the act was legal, even at such case Guttenberg breached the fiduciary duty, as according to the corporate opportunity doctrine, the duty prohibits taking corporate opportunities that rightly belong to the company, and using them to his/her benefit, taking in consideration that the company’s resources were used. The consequences of that breach can be seen through the process of trial that affected the company, and if assuming that scale of the scandal will take similar to that of the Wall Street firms in 2003, with a settlement of $1.4 billion, the company will suffer direct financial losses as well (“UBS: Notes on a Wall Street Scandal”).
Recommendations
The main criticism that was directed toward UBS was related to their strategy in selecting the employees for such sensitive positions, and in that regard, the first recommendation can be seen through improving the selection process and selection criteria. Additionally, giving consideration to human nature, the company should be prevent the accumulation of power in single figures, and which might be used to the company’s disadvantage. In that regard, in the example of the case, entrusting such sensitive position to a single person made it easier to breach.
Additionally, enforcing the consequences of fiduciary duties’ breach as a criminal act might be seen as a reasonable practice, where the common consequences include merely paying the profits the director made from the breach. Finally, it should be stated that a system of security in the company, where the directors and the executives will be susceptible to control and regulation, will ensure that the beneficiaries in the company will not suffer from the directors’ misconduct.
Conclusion
It can be seen from the example of the UBS Company the way the fiduciary duties were breached. The paper overviewed the fiduciary duties of directors, as well as the common characteristics of the situations in which these duties are imposed. Accordingly, the recommendations in this paper included strengthening the selection of employees’ process, specifically for executive positions, preventing the occurrence of high-risk situations, and enforcing regulations and control in the company.
Works Cited
Carroll, Michael P., Jeffrey D. Horswill, and Jonathan B. Ross. “Fiduciary Duties of Directors and Officers Relating to Corporate Opportunities”. 2008. Davis Legal Advisors. Web.
“Directors’ Statutory and Fiduciary Duties”. 2002. Accountlaw-tax.com. Tan Leng Cheo & Partners. Web.
“UBS: Notes on a Wall Street Scandal.” Business Week (2007). Web.