An "other constituency statute" permit, but do not require, boards of directors to consider non-shareholder interests (such as the interests of employees, the environment, et cetera) when making decisions. California and Delaware are among a handful of states that have not enacted an other constituency statute. Their decision to eschew such legislation appears to have been a wise one, at least according to one recently released study.
In The Cost (and Unbenefit) of Conscious Capitalism, the authors examined a sample of U.S. publicly traded firms spanning nearly three decades. Their conclusions are not good news for advocates of other constituency statutes and stakeholder capitalism:
- "[T]he 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.
The paper by Jitendra Aswani, Alona Bilokha, Mingying Cheng and Benjamin Cole is available here.