Institutional Investing When Shareholders Are Not Supreme

Publication Title

Harvard Business Law Review

Document Type


Publication Date

Spring 2015


Institutional investors, with trillions in assets under management, hold increasingly important stakes in public companies and fund individual retirement for many Americans, making institutional investors’ behaviors and preferences paramount determinants of capital allocations and the economy. In this paper, we examine high fiduciary duty institutions' (HFDIs') response to decreased profit maximization pressure as measured by the effect of constituency statutes on HFDI investment. We ask this question, in part, to anticipate HFDIs’ response to alternative purpose firms, like benefit corporations. Only with access to institutional investors’ capital can alternative purpose firms gain economic significance to rival the purely for-profit corporation.

In our empirical study, we ask whether decreased profit maximization pressure, as evidenced by expanded director discretion to pursue nonshareholder interests, affected HFDIs’ decision to invest (or remain invested) in firms incorporated in constituency statute states (constituency firms) because of a conflict, or perceived conflict, of fiduciary duties owed to beneficiaries and shareholders. HFDIs, as agency investors for their shareholders and beneficiaries, are subject to strict fiduciary duties, which among other things explicitly disallow, everything else equal, sacrificing monetary returns for other goals. We focus on HFDIs for our statistical analysis under the theory that any impact of fiduciary duties on investment behavior would be strongest among those subject to the strictest duties. In other words, if we were to see an effect at all between expanded duties and investment behavior, it would be most easily observable in HDFI.

Constituency statutes expand directors’ ability to consider non-profit maximizing goals similar to, although smaller than, the expansion of director prerogatives under alternative purpose firm legislation. Moreover, constituency statutes are particularly well-suited to an empirical study because 1) institutional holdings of public firms are public and easily observable unlike investment levels in alternative purpose firms, which are all private; 2) the sample is large, as it comprises all public firms in all states; and 3) the timespan over which states passed constituency statutes, three decades, makes it unlikely that any effect observed would be confounded empirically by some other concurrent event. Before testing changes in HFDI investment, we review 30 years of court decisions to verify that constituency statutes, once enacted, were enforced by courts and therefore changed directors’ duties in practice.

Our findings answer questions raised in early constituency statute scholarship regarding the scope and impact of constituency statutes. Our findings also connect constituency statutes to the current academic debate on alternative purpose firms by identifying potential litigants and theories of recovery under the new statutes. Finally, as to our empirical inquiry, we observe that HDFIs did not meaningfully change investment behavior in response to constituency statutes’ expansion of director duties. Extrapolating our empirical observation to the current question of alternative purpose firms, we do not foresee expanded director duties under these new hybrid entities to, by itself, be a barrier to HFDI investment.

Recommended Citation

Christopher Geczy, Jessica S. Jeffers, David K. Musto, & Anne M. Tucker, Institutional Investing When Shareholders Are Not Supreme, 5 Harv. Bus. L. Rev. 73 (2015).





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