A few days ago, I directed your attention to a short article by Professor Eric Orts at the CLS Blue Sky Law Blog, in which he criticized the corporate objective provision of the forthcoming Restatement of the Law of Corporate Governance. (Go read Orts' article and come back.) As I noted, the article is thoughtful, as is typical of Professor Orts' work, for which I have considerable respect, but I disagreed with a couple of points (as is often the case because we have rather different normative priors).
I've decided to do an article on the Restatement provision and in working on it today, I realized I had a couple of other thoughts about Professor Orts' article. In a prior post, I addressed his criticism of the framing of the Restatement's approach whether directors may depart from shareholder value maximization norm. In this post, I address his criticism of the Restatement drafters' treatment of so-called constituency statutes.
The Restatement expressly splits out what it calls “stakeholder jurisdictions” from what it calls “common-law jurisdictions.”[1] Since Pennsylvania adopted the first constituency statute in 1983,[2] thirty states have adopted constituency statutes (a.k.a. non-shareholder constituency statutes or stakeholder statutes).[3] Although the details vary somewhat, the statutes generally authorize directors to consider various factors other than shareholder value maximization when making corporate decisions.[4] Massachusetts’ statute is typical:
(a) A director shall discharge his duties as a director, including his duties as a member of a committee: . . . (3) in a manner the director reasonably believes to be in the best interests of the corporation. In determining what the director reasonably believes to be in the best interests of the corporation, a director may consider the interests of the corporation’s employees, suppliers, creditors and customers, the economy of the state, the region and the nation, community and societal considerations, and the long-term and short-term interests of the corporation and its shareholders, including the possibility that these interests may be best served by the continued independence of the corporation.[5]
The Principles’ drafters did not address these statutes, instead relegating them to the comments, where the drafters opined that “it is clear that such statutes can be interpreted so as to be consistent with § 2.01.”[6]
In the Restatement, constituency statutes are promoted to the black letter law. Oddly, however, the black letter text of § 2.01(a)(2) suggests that in states with a constituency statute it is only licit for directors to consider the interests of various constituencies.[7] As even a cursory reading of the Massachusetts statute suggests, however, the name constituency statutes is somewhat of a misnomer. Massachusetts allows directors to consider such factors as the economy of the state or nation and “societal considerations,” for example, neither of which fit within a conventional definition of constituency.[8] Thirteen other states contain similar provisions.[9]
In contrast, § 2.01(a)(1) explicitly contemplates that directors of corporations in common law jurisdictions may go beyond the interests of the corporation’s constituencies to consider environmental and ethical concerns.[10] This difference led Professor Orts to complain that Restatement § 2.01 “misinterprets the legal import of corporate constituency statutes in a manner that unduly narrows the discretion of corporate directors and managers.”[11]
For example, “the environment” and “ethical considerations” are explicitly included as allowable decision-making factors in common-law jurisdictions but omitted in stakeholder jurisdictions (§ 2.01(a)). Surely corporate decisionmakers in stakeholder jurisdictions may also take account of environmental and ethical considerations even if they are not specified as stakeholder interests.[12]
I respectfully disagree with Professor Orts’ reading of the constituency statutes. The factors most commonly authorized for director consideration by the statutes are the long-term interests of the corporation, firm profitability, growth prospects, employees, customers, supplies, creditors, and communities.[13] No state explicitly lists the environment as a factor directors are authorized to continue.[14] Only 10 states authorize directors to consider “any other appropriate factors,”[15] which may implicitly authorize consideration of environmental concerns. In this regard, the Restatement drafters got the law right.
[1] The Restatement drafters not infrequently use “traditional” interchangeably with “common law.” See, e.g., Restatement § 2.01 Reporter’s Note 3 (referring to “courts in traditional jurisdictions”).
[2] D. Gordon Smith, The Shareholder Primacy Norm, 23 J. Corp. L. 277, 289 (1998).
[3] Amanda Wise, Corporate Law and the Business Roundtable: Adding to the Debate on Shareholder Primacy vs. Stakeholder Theory, 49 Cap. U.L. Rev. 499, 516 (2021).
[4] For a detailed breakdown of what factors the individual statutes allow directors to consider, see Stephen M. Bainbridge, Mergers and Acquisitions 449-52 (4th ed. 2021).
[5] Mass. Gen. Laws ch. 156D, § 8.30(a).
[6] Principles § 2.01, Reporter’s Note 8.
[7] Restatement § 2.01(a)(2).
[8] See, e.g., Constituency, Merriam-Webster’s Collegiate Dictionary (11th ed. 2020) (defining constituency, inter alia, as “the people involved in or served by an organization (such as a business or institution)”).
[9] See Stephen M. Bainbridge, Mergers and Acquisitions 449-52 nn. 243-70 (4th ed. 2021) (specifying what factors the various statutes allow directors to consider).
[10] Restatement § 2.01(a)(1)(c)-(d).
[11] Eric W. Orts, The ALI’s Restatement of the Corporate Objective Is Flawed, The CLS Blue Sky Blog (June 6, 2022), https://clsbluesky.law.columbia.edu/2022/06/06/the-alis-restatement-of-the-corporate-objective-is-seriously-flawed.
[12] Id.
[13] See Bainbridge, supra note 9, at 449-52 tbl. 10-1 (listing the factors directors may consider on a state-by-state basis).
[14] See Alexandra Leavy, Necessity Is the Mother of Invention: A Renewed Call to Engage the SEC on Social Disclosure, 2014 Colum. Bus. L. Rev. 463, 494 (2014) (“Many constituency statutes . . . do not allow consideration of environmental concerns.”); Steven J. Haymore, Note, Public(ly Oriented) Companies: B Corporations and the Delaware Stakeholder Provision Dilemma, 64 Vand. L. Rev. 1311, 1341 (2011) (asserting that “current constituency statutes omit any protection for directors who base decisions on consideration for the environment”).; see also Bainbridge, supra note 47, at 449-52 nn. 242-70 (specifying the other factors the statutes permit directors to consider, none of which include the environment).
[15] See Bainbridge, supra note 9, at 449-52 tbl. 1 (specifying whether state statutes permit consideration of “any other appropriate factors”).
