Fiduciary Duty

The legal and ethical obligation of an agent to act in the best interests of the principal. In corporate finance, the CEO acts as agent for shareholders: “If you are the CEO of a business, you are acting as an agent on behalf of shareholders. Allocating capital into the business on their behalf. You have a fiduciary duty to treat that capital only in ways that are in the best interests of the shareholders.”

The practical implication, per The Secret CFO’s reading of Warren Buffett: “The capital belongs to the shareholders. Your plans must deliver a return that is better than the shareholders could achieve elsewhere. Otherwise, you need to give them their money back.” The default position is to return capital; management must affirmatively justify retention. See Capital Allocation and Free Cash Flow.

• The Meta/metaverse example illustrates the tension: Zuckerberg redirecting capital from proven core businesses (Facebook, Instagram) into unrelated R&D caused investors to crash the stock 24% — not because they disliked the metaverse, but because they felt he was investing their capital in a venture-style bet they hadn’t signed up for.
• Share Buybacks are valuable when the stock price is below intrinsic value, because the remaining shareholders capture more of the future upside at a lower cost.

Where this appears

• Warren Buffett Said That Great… (tweet)