For Whom Corporate Leaders Bargain

Southern California Law Review, Volume 94, No. 6, pp. 1467-1560, 2021

99 Pages Posted: 20 Aug 2020 Last revised: 21 Jun 2022

See all articles by Lucian A. Bebchuk

Lucian A. Bebchuk

Harvard Law School; European Corporate Governance Institute (ECGI); National Bureau of Economic Research (NBER)

Kobi Kastiel

Tel Aviv University - Buchmann Faculty of Law; Harvard Law School, Program on Corporate Governance

Roberto Tallarita

Harvard Law School; Harvard University - Harvard Law School

Date Written: August 19, 2020

Abstract

At the center of a fundamental and heated debate about corporate purpose, 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 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.

Stakeholderist arguments regarding the potential stakeholder effects of hostile takeovers contributed to the adoption of constituency statutes by more than thirty U.S. states. These statutes, which remain in place and continue to govern corporate transactions, authorize corporate leaders to give weight to stakeholder interests when considering a sale of their company. We study how corporate leaders in fact used their discretion in transactions governed by such statutes in the past two decades. In particular, using hand-collected data, we provide a detailed analysis of more than one hundred cases governed by such statutes in which corporate leaders negotiated a company sale to a private equity buyer.

We find that corporate leaders have 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 stakeholder 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 cases, and examine whether embracing stakeholderism would not similarly fail to produce such benefits. After examining alternative explanations for our findings, we conclude that the most plausible explanation lies in corporate leaders’ incentives 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 therefore should not be supported as an effective way for protecting stakeholder interests, even by those who deeply care about stakeholders.

Presentation slides for this paper are available on SSRN here .


This paper is part of a larger research project of the Harvard Law School Corporate Governance on stakeholder capitalism and stakeholderism. Other parts of this research project include The Illusory Promise of Stakeholder Governance by Lucian A. Bebchuk and Roberto Tallarita, Will Corporations Deliver Value to All Stakeholders? by by Lucian A. Bebchuk and Roberto Tallarita, Stakeholder Capitalism in the Time of COVID by Lucian A. Bebchuk, Kobi Kastiel, and Roberto Tallarita, The Perils and Questionable Promise of ESG-Based Compensation by Lucian A. Bebchuk and Roberto Tallarita, and Does Enlightened Shareholder Value Add Value? by Lucian A. Bebchuk, Kobi Kastiel, and Roberto Tallarita.

Keywords: corporate purpose, stakeholders, stakeholder-ism, stakeholder governance, stakeholder capitalism, constituency statutes, corporate social responsibility, corporate governance, agency costs, entrenchment, accountability, managerial-ism, private equity, mergers & acquisitions

JEL Classification: D21, G32, G34, G38, K22

Suggested Citation

Bebchuk, Lucian A. and Kastiel, Kobi and Tallarita, Roberto, For Whom Corporate Leaders Bargain (August 19, 2020). Southern California Law Review, Volume 94, No. 6, pp. 1467-1560, 2021, Available at SSRN: https://ssrn.com/abstract=3677155 or http://dx.doi.org/10.2139/ssrn.3677155

Lucian A. Bebchuk (Contact Author)

Harvard Law School ( email )

Cambridge, MA 02138
United States
617-495-3138 (Phone)
617-812-0554 (Fax)

HOME PAGE: http://www.law.harvard.edu/faculty/bebchuk/

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Kobi Kastiel

Tel Aviv University - Buchmann Faculty of Law ( email )

Ramat Aviv
Tel Aviv, 69978
Israel

HOME PAGE: http://https://en-law.tau.ac.il/profile/kastiel

Harvard Law School, Program on Corporate Governance ( email )

1575 Massachusetts
Cambridge, MA 02138
United States

Roberto Tallarita

Harvard Law School ( email )

1563 Massachusetts Avenue
Cambridge, MA 02138
United States

Harvard University - Harvard Law School ( email )

1563 Massachusetts Avenue
Cambridge, MA 02138
United States

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