Constituency Statues Protect Companies’ Ability to Innovate and Thrive
In this world of incredible pressures to produce short-term profits, business leaders can become understandably skittish about taking a longer view that encourages both innovation and their company’s long-term health. With anxious stockholders demanding one dazzling quarterly report after another, and with the constant threat of hostile takeovers, it’s hard to devote the time and patience required to develop new products and services. To remedy this, 34 states in the U.S. have enacted little-known “constituency statutes.”
A constituency statute is a state law that offers companies that legal right to consider stakeholders other than their stockholders, in particular employees and the community within which a company resides. Aleksandra Kacperczyk of MIT recently released a study that examines whether these laws, which first started appearing in the 1980s, actually work. Spoiler alert: They do.
Kacperczyk used patent records as a concrete way of measuring how constituency statutes protect and encourage innovation, more and more a top priority for business. But there’s a difficult “trade-off that you face between short-term profits and the long-term view, in that innovation takes longer to develop,“ as Kacperczyk puts it.
The report — co-authored with Caroline Flammer, assistant professor at the Ivey Business School, University of Western Ontario — found that in states with constituency statutes, the average patent rate rose by at least 6.4 percent. And, ”There were not only more patents, but they were more original and influential,” says Kacperczyk, with the number of citations — other companies incorporating innovations they contain — increasing by 6.3 percent, according to the study.
Constituency statutes were initially designed to protect local communities from losing their businesses due to hostile takeovers by stockholders impatient for profits. According to Kacperczyk, “Hostile takeovers can be detrimental to workers and communities, so they really needed this. This is precisely when the interests of shareholders are being pitted against the interests of stakeholders. You need the stakeholder supremacy model to protect the interests of stakeholders.” The first state to adopt a constituency statute was Ohio in 1984, while Texas was the most recent to do so.