Comparing Trusts and Corporations

A. Joseph Warburton (Assistant Professor of Law, Syracuse University College of Law) recently published his article entitled Trusts Versus Corporations: An Empirical Analysis of Competing Organizational Forms, 36 J. Corp. L. 183 (2010). An excerpt from the introduction is below:

We have witnessed the worst capital markets meltdown since the Great Depression. One cause of the financial crisis was a cavalier attitude toward risk and responsibility that led to firm managers making major mistakes in judgments and, in some cases, to outright expropriation of investors. The ensuing economic turmoil has led to a popular recommendation: expose firm insiders to greater fiduciary liability for their decisions.

This Article explores the ramifications of altering fiduciary standards by studying how two different business organizations, trusts and corporations, regulate their insiders. Trust law imposes stricter fiduciary obligations on insiders than corporate law does. Might insiders be less likely to misbehave in a trust as opposed to a corporation? Does the difference in organizational form influence management’s performance or risk tolerance? By leaving less flexibility for management, strict fiduciary responsibilities can limit opportunistic behavior. But that strictness can also constrain business decision making. In other words, trusts and corporations strike different tradeoffs between agency conflict and flexibility in decision making. This Article quantifies the effects on managerial behavior and firm performance of the different standards of conduct required by these two organizational forms.