At the center of a fundamental and heated debate about the purpose that corporations should serve, an increasingly influential “stakeholderism” view advocates giving corporate leaders the discretionary power to serve all stakeholders and not just shareholders. Supporters of stakeholderism argue that its application would address growing concerns about the impact of corporations on society and the environment. By contrast, critics of stakeholderism object that corporate leaders should not be expected to use expanded discretion to benefit stakeholders. In a new study we placed on SSRN, For Whom Corporate Leaders Bargain, we put forward novel empirical evidence that can contribute to resolving this key debate.

Although stakeholderism has enjoyed unprecedented levels of support in recent years, during the era of hostile takeovers many states already adopted “constituency statutes” that embraced an approach similar to that advocated by modern stakeholderists. Proposed as a remedy to eliminate or reduce the adverse effects of acquisitions on employees and other stakeholders, these statutes accorded corporate leaders the power to give weight to the interests of stakeholders when considering a sale of their companies. The current debate should be informed, we argue, by the lessons that can be learned from the results produced by this large-scale experiment in stakeholderism.

We therefore set out to investigate empirically whether constituency statutes actually delivered protections for stakeholders as was hoped for. Although constituency statutes have long been a common topic in corporate law textbooks, as well as the focus of many law review articles, thus far there has been no direct study of the terms of acquisition agreements negotiated in the shadow of such statutes. Using hand-collected data on a large sample of such agreements from the past two decades, we put forward novel empirical evidence on the subject.

We document that corporate leaders selling their companies to private equity buyers obtained substantial benefits for their shareholders as well as for themselves. By contrast, corporate leaders made little use of their power to give weight to the interests of stakeholders. Our review of the contractual terms of these deals finds very little protection provided to stakeholders from the risks posed by private equity control.

We conclude that constituency statutes have failed to deliver their promised benefits. These conclusions have implications not only for the long-standing debate on constituency statutes but also for the general debate on stakeholder capitalism. Our findings cast substantial doubt on the wisdom of relying on the discretion of corporate leaders, as stakeholderism advocates, to address concerns about the adverse effects of corporations on their stakeholders.

Below is a more detailed account of our analysis:

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