Politicians as fiduciaries

Political donations have become a hot topic for discussion in Australia, just as they have been in the United States as a result of high-profile lobbyist Jack Abramoff recently pleading guilty to offences of corrupting public officials.

In Australia, Geelong millionaire Frank Costa came under fire earlier this year for undisclosed donations made to individuals running for councillor positions in the 2004 Geelong Council election. Further, there have been reports that the Federal Government is planning to relax the laws on disclosure of political donations, so that only donations to political parties exceeding $10,000 (up from $1,500) would need to be disclosed.

The way that political donation laws in Australia typically work is that donations do not need to be disclosed at the time of receipt, meaning that voters do not normally know who has contributed to the campaigns of a politician at the time of voting. This system has raised a significant degree of hostility towards political donations, mainly due to the fact that donations are not disclosed until well after election time, meaning individuals lack full information about candidates when voting.

I believe this could be resolved by adopting a different approach to regulating political donations, and politicians more generally.

The problems raised by political donations could be overcome by the law characterising the relationship between politicians and the public as being what is called a “fiduciary” relationship. The law relating to fiduciary relationships has emerged over hundreds of years, and is far from being set in stone. According to the courts, one person is a “fiduciary” in terms of their relationship with another person if that person assumes a position where they must perform some function for the other person’s benefit, and the other person is vulnerable or dependent upon the fiduciary performing as such.

The purpose of the law on fiduciary relationships is to ensure that those individuals (“fiduciaries”) who are deemed to be under a duty to act in the interests of others (“beneficiaries”) maintain high standards of honesty and propriety.

The law deems there to be a fiduciary relationship between solicitors and clients, employees and employers, directors and companies, and wards and guardians (among others). It has not been established in Australian law that a politician is in a fiduciary relationship with the voting public, or more specifically their electorate, but why not?

The relationship meets all the characteristics of a fiduciary relationship- namely politicians are voted in to act in the interests of the electorate of individuals who voted for them, and the voting public depend on these elected individuals to do exactly that, and are particularly vulnerable if they don’t keep their word.

Accordingly, rather than wasting time and energy with flawed donation laws, a test case should be run as to whether there is a fiduciary relationship between a politician and individuals in their electorate. I think the answer would come out in the affirmative.

There are important implications of a fiduciary relationship being established. Most significantly, fiduciaries have a duty to act with loyalty towards their beneficiaries. In other words, they must work to serve the interests of their beneficiaries, here the electorate, rather than serve their own interests. In practice, what this means is that fiduciaries must avoid conflicts of interest - be they actual conflicts that exist here and now, or potential conflicts of interest, which might come out of the woodwork in the future.

This does not rule out fiduciaries being paid for their work - the cases say reasonable remuneration is allowed, otherwise how could city lawyers pay for their shiny cufflinks? But this may rule out political donations, particularly when it seems the politician is likely to make decisions that will directly benefit the donor.

Under fiduciary law, if a conflict of interest does arise, the only way that the fiduciary can avoid breaching their duty to act with loyalty is through “informed consent” - that is, they must disclose up front the conflict to their beneficiaries and get approval from them before proceeding. Thus, in the case of political donations, if there is even a hint of possible conflict, which would likely apply to all donations, then the politician should disclose the donation to the voting public before the election. This would apply regardless of whether the donation is made to the politician personally, or to the political party under which the individual is running.

Dusting off ancient case law appears to be the best solution to this vexed issue threatening public confidence in the political process.