Lucian Bebchuk is the James Barr Ames Professor of Law, Economics, and Finance and Director of the Program on Corporate Governance at Harvard Law School; Kobi Kastiel is Assistant Professor of Law at Tel Aviv University, and a Research Fellow at the Harvard Law School Program on Corporate Governance; and Roberto Tallarita is Associate Director of the Program on Corporate Governance, and Terence C. Considine Fellow in Law and Economics at Harvard Law School. This post is based on their recent study. Related Program research includes The Illusory Promise of Stakeholder Governance.
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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Comment on the Proposed DOL Rule
More from: Sarah Keohane Williamson, Victoria Tellez, FCLTGlobal
Sarah Keohane Williamson is CEO and Victoria Tellez is a Senior Research Associate at FCLTGlobal. This post is based on their FCLTGlobal comment letter to the U.S Department of Labor. Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance by Lucian A. Bebchuk and Roberto Tallarita (discussed on the Forum here), Reconciling Fiduciary Duty and Social Conscience: The Law and Economics of ESG Investing by a Trustee by Robert H. Sitkoff and Max M. Schanzenbach (discussed on the Forum here), and Companies Should Maximize Shareholder Welfare Not Market Value, by Oliver D. Hart (discussed on the Forum here).
The Department of Labor (“The Department”) is inviting public comments on a proposal to codify a regulatory structure for the Department’s current “Investment duties” regulation at 29 CFR 2550.404a-1. This amendment would assist ERISA fiduciaries in establishing regulatory guidelines for plan fiduciaries in light of recent environmental, social, and governance (ESG) investment trends. The Department of Labor has voiced concerns that these trends may lead plan fiduciaries to “choose investments of action to promote environmental, social, and public policy goals unrelated to the interests of plan participants and beneficiaries in financial benefits from the plan and expose plan participants and beneficiaries to inappropriate investment risks”.
Based on FCLTGlobal’s review of existing academic evidence, our own analysis, and research informed by our multi-year conversations with our Members and other experts, we suggest the Department carefully consider the following:
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