Private Law Theory

ABSTRACT
Although the laws of firms state the same traditional duty of loyalty, they diverge in expressing the duty of care and the concept of good faith. The differences are not subtle shades of refinement, but quantum contrasts of discrete legal states. The law shuffles, reclassifies, and relocates core elements of the duty of care and the concept of good faith uniquely in each form of firm. Why? Despite apparent legal divergence, a single fiduciary rule governs all forms of firms. This Article presents a theory of calibrated fiduciary duties that explains important variations in the formulation of fiduciary duty and standard of conduct. The law cannot state a uniform standard of conduct because forms of firms do not share a single optimal welfare state. To induce their varying optimal ends, the law must uniquely calibrate fiduciary duties. This Article advances two important insights: (1) bilateral relational risk is the idea that owners and managers are exposed to an intrinsic risk arising from their relationship, comprising of the risk of agency cost for owners and the risk of liability for managers; and (2) intermediated risk preference is the idea that the personal risk preferences of owners and managers are intermediated through the firm and the rule of fiduciary duty such that managerial actions, incentivized as such, actuate an intermediated risk preference that achieves an optimal welfare state for each form of firm. Based on this calculus, this Article derives four factors of calibration, each affecting the standard of conduct to achieve unique optimal welfare states for forms of firms. The theory of calibrated fiduciary duties explains why the law precisely varies fiduciary standards in forms of firms and why this variance is right. Lastly, this Article provides an important datum that corroborates the theory of calibrated fiduciary duties. It is an episode from the history of Goldman Sachs, which is its conversion from a private partnership to a public corporation.

Rhee, Robert J, A Theory of Calibrated Fiduciary Duties in Firms (February 20, 2025). Accepted for publication, volume 51, Journal of Corporation Law (forthcoming 2026).