A Statutory Model for Corporate Constituency Concerns
52 Pages Posted: 27 Jun 2011
Date Written: 2000
The modern corporation by its nature creates interdependencies with a variety of groups with whom the corporation has a legitimate concern, such as employees, customers, suppliers, and members of the communities in which the corporation operates. Corporate governance involves a system of contractual and fiduciary duties that influence directors and officers to make decisions consistent with defined obligations. This system requires that directors consider shareholders' interests first and foremost in making corporate decisions because the share-holders are the, "owners," of the corporation. Over the past several decades, a number of states have implemented this policy by enacting constituency statutes. These statutes transform the obligations of corporate directors by expanding the groups to which boards of directors are accountable in decision making, greatly impacting the management decisions of business firms. Both legal and economic changes result from redefining the duties of corporate directors, ultimately transforming American business.
This development has engendered a hot debate about the desirability of such a policy. This article posits that the best solution is to simply offer a choice to corporations, corporate management, shareholders, and stakeholders by enacting an opt-out statute. An opt-out statute would create a default rule that makes consideration of non-shareholder interests mandatory upon incorporation, but allows shareholders to amend the articles to favor themselves if they so choose.
The article gives a description of both the shareholder primacy model and constituency statutes. However, because constituency statutes are relatively new and corporate law has historically been based on the shareholder primacy model, the article focuses primarily on the policies behind and justification for constituency statutes. While we provide a form of model corporate constituency statute, we do not advocate one position over another. Instead, we advocate the idea that corporations should begin as stakeholder-centered, but then have a choice to focus on the shareholder if they decide to do so.
Keywords: corporate constituencies, fiduciary duties, contract model of corporate governance
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