I serve my clients as their fiduciary. Serving in that capacity requires me to identify, manage and mitigate situations where my firm’s business practices may conflict with the best interests of my clients. In situations where sufficient mitigation of conflicts of interest is not possible, then clients must be informed in plain language about the nature of these potential conflicts.
There are many rules regarding the implementation of the fiduciary standard. Some of the rules are easily discerned as common sense, some of the rules are more technical and less obvious. We spend a lot of effort observing and documenting our rules and obligations as fiduciaries.
Legal professionals, trust companies and sometimes public accounting firms also have a fiduciary duty to their clients. Each of these professionals have different rules and standards used to fulfill their duties, and different types of conflicts that need to be managed.
There is, however, another type of fiduciary duty that may not be as high profile as law firms or investment advisory firms. This is the fiduciary duty incumbent upon those serving on corporate Boards of Directors in public companies.
A corporate board member has a very narrow type of fiduciary duty. These individuals are chosen by shareholders specifically to look after the interests of the investors, aka common stockholders, of the corporation. In this duty, corporate boards are not tasked with the day-to-day operations of the corporation, but they do have some very specific responsibilities such as hiring and firing top management, declaring dividends and developing strategic planning of the company. On the ladder of control, the Board of Directors sits at the top rung, which is proper as they represent the actual owners of the business.
In the past few weeks, we have experienced some high-profile situations where the role of the corporate Boards has come into the fore, and in both cases in my opinion a new type of conflict of interest, going beyond the typical financial and ethical obligations of the directors, has been revealed. I’m going to discuss these situations, not from an investment perspective, which means not whether the companies are good investments or not, but rather from an “investor” perspective, meaning what are the rights and obligations of investors in America.
I know a lot of investors in Disney, including myself. I bought Disney stock the day they announced the acquisition of Lucas Film (Star Wars) many years ago. I was excited about Disney’s unique ability to enhance this entertainment franchise going forward, creating great Star Wars experiences for generations to come. My sentiment is not unusual with the Disney investors I know. Whether it’s traditional wholesome stories, Marvel, sports on ESPN or the unique American experience of the Disney theme parks, Disney investors tend to believe in Disney products.
So, let’s just get it out there. What in the heck was Disney management doing when it publicly waded into a controversial political debate over parents’ rights in Florida? Regardless of any individual’s position on the new parents' rights law, Disney creates entertainment experiences for a huge swath of American families. There are going to be divergent opinions among a truly diverse customer base for Disney products, and while I may be able to sympathize with Disney management in trying to balance the opinions of some Disney employees, entering this very public political arena is likely to cost the company dearly.
This is where the Board of Directors comes in. The board exists to represent the stock owners of the corporation, and allowing management to put shareholder value at risk by deliberately and publicly entangling the Disney brand in turmoil, to me represents a new type of fiduciary breach of duty. Ideological conflict of interest.
Twitter’s Board this week also flirted with this new type of conflict, in my opinion. When Elon Musk offered to buy Twitter, the reason he stated for doing so is because he believes in Twitter as a platform and a product. As a former Twitter user, my opinion is the platform has been horrendously mismanaged due in large part to ideological bias of its management, the Board also was apparently impacted by this culture of bias before apparently rediscovering its duty is to create shareholder value and accepting Musk’s offer.
We as small investors do have a role in this process. I personally own about 40 stocks, which means I get a proxy shareholder vote card in the mail or email about every week. These proxy cards are where Directors are selected. I admittedly throw a lot of them away. It's easy to think that as a small investor I have no influence on these huge corporations. But I would never not vote in a political election, even though I am only one vote in that process, and it’s time to start taking the same initiatives on our investments. When we invest in stock, that proxy vote is our right to be heard, and going forward I will consider it my obligation as well. Shareholder accountability starts with the Board of Directors; it's time to start holding them accountable as well, and it begins with those pesky proxy cards.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Stock investing includes risks, including fluctuating prices and loss of principal. Marc Ruiz is a wealth advisor and partner with Oak Partners and registered representative of LPL Financial. Contact Marc at marc.ruiz@oakpartners.com. Securities offered through LPL Financial, member FINRA/SIPC.