Constituency Statutes Research Articles

The spillover effect of constituency statutes along supply chains: Evidence from supplier commitment

This study examines the spillover effect of constituency statutes along the supply chain. We posit that the enactment of constituency statutes in customer firms’ incorporation states, by removing legal obstacles for customer firms to cater to non-shareholders’ interests, builds suppliers’ trust and cooperation. Consistent with the notion that constituency statutes entice greater trust from suppliers, we find that suppliers make more relationship-specific investments in the supply chain after the enactment of constituency statutes in customers’ states, indicating a greater commitment to the customer. We also show an improvement in customers’ corporate social responsibility performance in the post-constituency-statute period, thus substantiating the claim that the constituency statutes increase customers’ stakeholder orientation. Cross-sectionally, we find the positive effect of constituency statutes on supplier relationship-specific investments is attenuated if the customer and supplier have more repeated interactions in the past, whereas the effect is more pronounced if suppliers produce durable goods. Overall, we provide novel evidence on the spillover of constituency statutes along the supply chain.

Can Firms’ ESG initiatives deter hostile Takeovers?

In this study, we examine the role of acquiree firms’ environmental, social, and governance (ESG) performance in affecting hostile takeover threats from acquiring firms. Our results show that firms facing hostile takeover threats increase investment in ESG initiatives. The positive association between hostile takeover threats and firms’ ESG investments is stronger for firms domiciled in states with expanded constituency statutes and for firms with fewer antitakeover provisions. Quasi-natural experiments based on the adoption of poison pill statutes further show that firms domiciled in states with such laws tend to exhibit lower levels of ESG investment after (vs. before) the passage of the statutes. In addition, we find that the probability of receiving hostile bids in a given year is lower for firms that increased their ESG investment in previous years, especially firms with a strong threat of ex-ante hostile takeover. Taken together, our findings suggest that firms use ESG investments as an important antitakeover device and that the threat of corporate hostile takeover has unintended effects on firms’ ESG investment and ethical business practices.

Mitigating risk-shifting in corporate pension plans: Evidence from stakeholder constituency statutes

We use staggered enactments of state stakeholder constituency laws as a natural experiment to examine the effect of such laws on corporate pension risk shifting. Our analysis encompasses three components of pension risk shifting: funding risk, investment risk, and benefit risk. We observe a reduction in all three elements of pension risk shifting following the enactment of stakeholder orientation laws that promote greater consideration of stakeholder interests. We also find that the post-enactment reduction in pension risk-shifting is greater for firms with fewer investment opportunities. Overall, our results provide insight into how stakeholder constituency can mitigate an important form of risk-shifting.

Managerial flexibility, capacity investment, and inventory levels

We study the effect of managerial time horizon on two key operations decisions: inventory levels and capacity investment. For identification, we exploit a quasi‐natural experiment provided by the staggered adoption of constituency statutes, which alleviate managerial short‐termism by providing legal protection to executives adopting a long‐term approach in their corporate decisions. Using a staggered difference‐in‐differences design, we find that, after the reforms, firms incorporated in constituency states (treated firms) increased inventory and capacity investment by 5.2% and 15.4%, respectively, relative to firms not incorporated in constituency states (control firms). We also find that these increases are gradual and persist over time, suggesting that they are structural in nature. We further show that the effect of constituency statutes on inventory levels and capacity investment are stronger for firms with ex ante higher level of managerial short‐termism, such as firms with low institutional ownership. Performance also increases relatively more for affected firms with higher ex ante managerial short‐termism. Our results pass a battery of robustness and validity tests. Interestingly, while constituency statutes are intended to protect executives from short‐term oriented shareholder sanctions, our findings suggest that these statutes ultimately benefited not only executives, but also potentially the long‐term interest of shareholders. Even in the absence of regulation, executives facing short‐term pressure could intensify communication efforts with shareholders on how specific operational decisions and investments would be beneficial to the company. Notably, executives could use various media channels to help shape retail investors’ attitude toward operational investments that may create future value.

Stakeholder orientation and product market performance: Evidence from a natural experiment

AbstractWe examine the causal effect of stakeholder orientation on firms' product market performance. Using the staggered enactment of constituency statutes across different states as an exogenous shock that increases the extent of the stakeholder orientation, difference‐in‐difference estimations suggest that on average firms incorporated in states that adopted constituency statutes increase sales growth by 1.7% relative to firms incorporated in states that did not adopt such statutes. The effect is stronger if a firm has higher labor intensity and if a firm operates in a durable goods industry. In addition, we find that stakeholder orientation improves the quality of innovation.

How does dividend payout affect corporate social responsibility? A channel analysis

We find that dividend paying firms demonstrate superior corporate social responsibility (CSR) performance in the subsequent year than non-paying firms. This effect can be explained by stakeholder relationship management through CSR, as dividend payout reflects the inherent conflict between shareholders and stakeholders. Specifically, for dividend payers, we find an increase in CSR performance after states adopt constituency statutes which encourage board’s attention on stakeholders, supporting a causal inference of the stakeholder relationship management’s effect on CSR. The increase in dividend payers’ CSR around the constituency statute adoption is more pronounced when management is friendlier to CSR, which lends further support for the stakeholder relationship management channel. We find no support for the short-termism view of dividends or the notion that CSR is solely an outcome of agency problems within firms. In conclusion, our findings suggest that dividend payout serves as a mechanism for balancing shareholder and stakeholder interests, leading to improved CSR performance among dividend-paying firms.

Staggered adoption of stakeholder constituency statutes and corporate cash holdings in the U.S.

Staggered adoption of stakeholder constituency statutes and corporate cash holdings in the U.S.

Stakeholder orientation and trade credit: Evidence from a natural experiment

Using the enactment of constituency statutes, which encourage corporate directors and officers to consider stakeholders’ interests when making business decisions, as a quasi-natural experiment, we examine the impact of stakeholder orientation on corporate trade credit. We employ a difference-in-differences research design and find that an increase in stakeholder orientation following the introduction of constituency statutes leads to a higher level of trade credit usage. The findings remain robust across a series of sensitivity tests. We also find that the treatment effect is more pronounced for firms with greater conflicts of interest between shareholders and stakeholders, firms with higher level of information asymmetry and lower trustiness, firms are more financially constrained and have greater liquidity needs, and firms with more market power. Overall, our findings support the view that stakeholder orientation can have a causal effect on trade credit.

Stakeholder Orientation and Bank Payout Policy: Evidence from US Constituency Statutes

AbstractWe investigate the impact of stakeholder orientation on bank payout policy. As a quasi‐experimental setting, we exploit the staggered enactment of constituency statutes across US states, which broaden the scope of managerial duties to an extended group of stakeholders. The results of a difference‐in‐differences analysis suggest that bank holding companies (BHCs) incorporated in states enacting constituency statutes experience significant declines in total payouts, which is driven by a decline in share repurchases. This observed decline in share repurchases is stronger for banks with sizeable implicit claims, lower transparency and substantial agency conflicts. These findings remain intact following a myriad of robustness checks and alternative estimation techniques.

Not all technologies are created equal for stakeholders: Constituency statutes, firm stakeholder orientation and investments in technology generality

Previous research has analyzed the effect of stakeholder orientation on the amount of technological investment firms make but has ignored its effect on the characteristics of that investment. To address this gap, we explored the impact of stakeholder orientation on the degree of generality of a firm's technological investment. More general technologies (i.e., technologies easily deployable in a wider range of industries) are more likely to promote major changes in the firm's scope. However, these changes undermine the value of stakeholders’ past relationship-specific investments, which are tailored to a certain firm scope. Therefore, more stakeholder-oriented firms will invest in less general technological assets to reduce stakeholder concerns and opposition. This negative effect will be stronger in more uncertain industries, where stakeholders are more concerned that firms might use technology generality to change their scope following the realization of previously unforeseen contingencies. However, it will be weaker in more competitive industries, where stakeholders tend to make less relationship-specific investments and are less concerned with changes in firm scope triggered by an increase in technology generality. We test our hypotheses by exploiting the enactment of constituency statutes in 34 U.S. states during the period 1976–2000 as a plausibly exogenous variation in firms’ stakeholder orientation.

Stakeholder orientation and cost stickiness: Evidence from a natural experiment

Using the enactment of state-level constituency statutes that allow firms to consider nonshareholding stakeholders’ interests when making business decisions as a quasi-natural experiment, we study how stakeholder orientation affects asymmetric cost behavior. We employ a difference-in-differences research design and find that the enactment of constituency statutes leads to a significant increase in the degree of operating cost stickiness. We further show that this effect is mainly driven by resource adjustment costs.

For whom (and for when) is the firm governed? The effect of changes in corporate fiduciary duties on tax strategies and earnings management

AbstractThe proper object of the fiduciary duties of corporate directors and officers is frequently described as the central question in all corporate law. We use the adoption of constituency statutes, which shift the loci of corporate managers' duties from shareholders to a wide range of stakeholders, as a quasi‐natural experiment to determine the actual impact of fiduciary duties. We find that though the adoption of constituency statutes has no significant effect on measures of earnings management, it has a robust effect on firms' effective tax rate, which increases in a range between 0.570% and 1.903%. These results are robust in terms of various measures of the firm's effective tax rate. We provide explanations for why fiduciary duties apparently do not influence manager behaviours in relation to shareholders but do affect their behaviours in relation to the taxing authority. We argue that a change to fiduciary duties does not appear to alter the motivation of managers to maximize shareholder welfare outcomes, but rather it allows them to eschew short‐term strategies that often impair long‐term outcomes.

Taken for granted? The impact of stakeholder orientation on CSR and CEO's wealth and prominence

In this study, we assess the causal impact of stakeholder orientation on the impact of corporate social responsibility and CEO’s wealth and prominence. To obtain exogenous variation in stakeholder orientation, we exploit the enactment of state-level constituency statutes, which allow corporate executives and directors to consider non-shareholders’ interests when making business decisions. Using a cross-section of Texan firms during 2002-2012, we have found that the enactment of constituency statutes leads to significant increases in the quality of a firm’s corporate social responsibility (CSR); however, the effect of CSR does not necessarily lead to superior firm performance or value. We further argue and provide evidence suggesting that the obligated stakeholder orientation decreases the impact of CSR on the CEO’s compensation but increases the impact of CSR on the CEO’s media exposure. Finally, we posit that the impact of non-shareholder orientation on the CEO’s wealth and prominence is salient in non-consumer-focused industries, since the impact of CSR is depending upon the extent to how stakeholders take the value of it.

For Whom (and For When) is the Firm Governed? The Effect of Changes in Corporate Fiduciary Duties on Tax Strategies and Earnings Management

The proper object of the fiduciary duties of corporate directors and officers is frequently described as the central question in all corporate law. We use the adoption of constituency statutes, which shift the loci of corporate managers’ duties from shareholders to a wide range of stakeholders, as a quasi-natural experiment to determine the actual impact of fiduciary duties. We find that while the adoption of constituency statutes has no significant effect on measures of earnings management, it has a robust effect on firms’ effective tax rate, which increases in a range between 0.570% and 1.903%. These results are robust in terms of various measures of the firm’s effective tax rate. We provide explanations for why fiduciary duties apparently do not influence manager behaviors in relation to shareholders, but do affect their behaviors in relation to the taxing authority. We argue that a change to fiduciary duties doesn’t appear to alter the motivation of managers to maximize shareholder welfare outcomes, but rather it allows them to eschew short-term strategies that often impair long-term outcomes.

Stakeholder orientation and the value of cash holdings: Evidence from a natural experiment

We investigate whether and, if so, how stakeholder orientation affects the value of cash holdings by disciplining inefficient management and reducing agency costs. In so doing, we exploit the staggered enactment of constituency statutes across different states as an exogenous shock that increases the degree of stakeholder orientation substantially. Specifically, we gauge the monitoring effect of stakeholders by using the market value of cash framework of Faulkender and Wang (2006). We find that on average the marginal value of cash holdings increases significantly, both statistically and economically, after the passage of constituency statutes. The effect of constituency statutes on the value of cash holdings is stronger for firms with relatively weaker stakeholder power, high agency costs, and high information asymmetry. In subsequent tests, we show that investment efficiency in M&As and capital expenditures has improved significantly after the adoption of constituency statutes suggesting that heightened stakeholder monitoring over investments is a potential channel to enhance the value of cash holdings. Overall, our results suggest that stakeholder orientation increases the value of cash holdings by mitigating agency problems.

Stakeholder Orientation and Operations Outcomes: Evidence from Constituency Statutes

We study the effect of stakeholder orientation on operations decisions. For identification, we exploit a quasi-natural experiment that effectively reduced potential personal costs for executives pursuing stakeholder-oriented decisions, the staggered adoption of constituency statutes. Using a staggered difference-in-difference approach, we find that firms incorporated in constituency states (treated firms) are 15.9 percentage points (pp) more likely to hire a chief operating officer (COO) relative to firms in non-constituency states (control firms) post reform. We also find that treated firms engage more in operational decisions discussions and increase operational investments post reform. Importantly, a structural two-stage least squares approach reveals that these changes in operational decisions, operational investments, and COO hiring contribute to increasing firm value by 17.2%, 12.6%, and 9.3%, respectively. We further find that the chief executive officers of treated firms are less likely to be fired relative to control firms post reform. Altogether, our results suggest that constituency statutes lead to higher firm value by allowing executives to implement stakeholder-oriented operational decisions that were potentially personally too costly for them pre reform. To our best knowledge, our study is the first to identify a clear economic mechanism (i.e., the enlarged decision space for executives following the reform) through which stakeholder orientation, by affecting operations decisions, contributes to firm value. Our work contributes to the sustainable operations literature by identifying the separation between shareholders and managers as a fundamental determinant of responsible operations. Interestingly, while constituency statutes were intended to protect executives adopting stakeholder-oriented policies from shareholders’ sanctions, our findings suggest that these statutes benefited not only executives and non-equity stakeholders, but also shareholders. More broadly, our results indicate that policymakers need to assess the implications of regulatory changes beyond the targeted constituencies. Importantly, shareholders should recognize managerial freedom in operations decisions as an important value driver.

Too Big Not to Change: Realigning National Banks' Priorities with Public Interest

Banks have particular characteristics that set them apart from other business entities, including being more highly leveraged, benefitting from government safety nets, and generating massive negative externalities when they fail. These attributes mean that in addition to shareholder interests, bank directors should be allowed to carefully consider the interests of non-shareholders, such as creditors, taxpayers, and the overall economy, when making decisions. While directors of banks in states that have enacted constituency statutes may be allowed to consider non-shareholder interests, no federal act expressly allows directors of federally chartered banks to consider such interests. Moreover, to date, thirty-seven states have enacted legislation to allow for the formation of public benefit corporations that require directors to consider the interests of non-shareholders. No federal law provides a clear path for federally chartered banks to do this. This article proposes dual federal legislation that would (i) enable directors of all federally chartered banks to expressly consider non-shareholder constituents when making decisions, and (ii) allow for the formation of national benefit banks that would require directors to consider non-shareholder interests in their decision-making.

Aligning National Bank Priorities with the Public Interest: National Benefit Banks and a New Stakeholder Approach

Banks have particular characteristics that set them apart from other business entities, including being more highly leveraged, benefiting from government safety nets, and generating massive negative externalities when they fail. These attributes mean that in addition to shareholder interests, bank directors should be allowed to carefully consider the interests of nonshareholders, such as creditors, taxpayers, and the overall economy, when making decisions. While directors of banks in states that have enacted constituency statutes may be allowed to consider nonshareholder interests, no federal act expressly allows directors of federally chartered banks to consider such interests. Moreover, to date, thirty‐seven states have enacted legislation to allow for the formation of public benefit corporations that require directors to consider the interests of nonshareholders. No federal law provides a clear path for federally chartered banks to do this. This article proposes dual federal legislation that would (1) enable directors of all federally chartered banks to expressly consider nonshareholder constituents when making decisions and (2) allow for the formation of national benefit banks that would require directors to consider nonshareholder interests in their decision‐making.

For Whom Corporate Leaders Bargain: Presentation Slides

The presentation slides in this document provide an overview of our study, For Whom Corporate Leaders Bargain, which is forthcoming in the Southern California Law Review. At the center of a fundamental and heated debate about corporate purpose, an increasingly influential view (which we refer to as “stakeholderism”) advocates giving corporate leaders increased 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 argue that corporate leaders should not be expected to use expanded discretion to benefit stakeholders. This Article presents novel empirical evidence that can contribute to resolving this key debate. Following a stakeholderist framework, the constituency statutes adopted by more than thirty U.S. states authorize corporate leaders to give weight to stakeholder interests when considering a sale of their company. Using hand-collected data, we study how corporate leaders in fact used their stakeholderist discretion in transactions governed by such statutes in the past two decades. In particular, we provide a detailed analysis of more than 100 transactions governed by such statutes in which corporate leaders negotiated a company sale to a private equity buyer. We find that corporate leaders used their discretion to obtain gains for shareholders, executives, and directors. However, despite the clear risks that private equity acquisitions often posed for stakeholders, corporate leaders generally did not use their discretion to negotiate for any stake-holder protections. Indeed, in the small minority of cases in which some stakeholder protections were formally included, they were generally cosmetic and practically inconsequential. Beyond the implications of our findings for the long-standing debate on constituency statutes, these findings also provide important lessons for the ongoing debate on stakeholderism. At a minimum, stakeholderists should identify the causes for constituency statutes’ failure to deliver stakeholder benefits in the analyzed transactions and examine whether embracing stakeholderism would not similarly fail to produce such bene-fits. After examining alternative explanations for our findings, we conclude that the most plausible explanation lies in corporate leaders’ incen-tives not to protect stakeholders beyond what would serve shareholder value. Our findings thus indicate that stakeholderism cannot be relied on to produce its purported benefits for stakeholders. Stakeholderism there-fore should not be supported as an effective way for protecting stakeholder interests, even by those who deeply care about stakeholders. The document is based on presentations slides we prepared for various presentations of our study, including at Columbia Law School, Harvard Law School, the University of Chicago, and the 2021 Global Corporate Governance Colloquium. Our study For Whom Corporate Leaders Bargain is part of a larger research project of the Harvard Law School Corporate Governance on stakeholder capitalism. Another part of this research project is The Illusory Promise of Stakeholder Governance by Lucian A. Bebchuk and Roberto Tallarita.

The Cost (and Unbenefit) of Conscious Capitalism

This paper examines the costs and benefits of ‘stakeholder governance’ for shareholders and other stakeholders by using the adoption of constituency statutes as a quasi-exogenous shock to corporate governance. Constituency statutes permit board members to consider all stakeholder interests, relaxing fiduciary duty to only shareholders. Using a sample of U.S. publicly traded firms (1981-2010) and employing a difference-in-difference methodology, we find that the discretionary adoption of ‘stakeholder governance’ leads to managerial entrenchment and a reduction in institutional ownership and shareholder wealth with little to no ‘trade-off’ benefits to other stakeholders. As states adopted constituency statutes, signs of managerial entrenchment increased (proxied by significant declines in earnings transparency and jumps in CEO and Director compensation) as did harm to shareholder wealth and to governance through institutional ownership. At the same time, we do not observe potential ‘trade-off’ benefits to the non-shareholder stakeholders these statutes were intended to help; we find that labor, customers, and creditors only marginally benefited (if at all) from the introduction of these statutes. These results are robust to a battery of checks including the biasedness in the staggered DiD estimator.