Stakeholder Activism, Managerial Entrenchment, and the Congruence of Interests between Shareholders and Stakeholders

Stakeholder Activism, Managerial Entrenchment, and
the Congruence of Interests between Shareholders and

Stakeholders. *

Giovanni Cespa ⅛nd Giacinta Cestone ^

July 21, 2002

Abstract

We argue that when stakeholder protection is left to the voluntary initiative of
managers, concessions to social activists and pressure groups can turn into a self-
entrenchment strategy for incumbent CEOs. Stakeholders other than shareholders thus
benefit from corporate governance rules putting managers under a tough replacement
threat. We show that a minimal amount of formal stakeholder protection, or the
introduction of explicit covenants protecting stakeholder rights in the firm charter, may
deprive CEOs of the alliance with powerful social activists, thus increasing managerial
turnover and shareholder value. These results rationalize a recent trend whereby well-
known social activists like Friends of the Earth and active shareholders like CalPERS
are showing a growing support for each other’s agendas.

Keywords: Corporate Governance, Managerial Entrenchment, Social Activists,
Small Shareholders, Stakeholder Society

*We thank Ramon Caminal, Marco Pagano, Urs Peyer, Jean Tirole and Xavier Vives for helpful discus-
sions, and Doug Cogan of the Investor Responsibility Research Center (IRRC) for providing information on
social shareholder resolutions. The paper also benefited from seminar audience at IAE, Universitat Pompeu
Fabra, INSEAD, and the 2002 ESSFM in Gerzensee. Giacinta Cestone acknowledges financial support from
the TMR Network on “The Industrial Organization of Banking and Financial Markets in Europe,” and the
University of Salerno. Authors’ addresses: Giovanni Cespa, Departament d’Economia i Empresa, Universitat
Pompeu Fabra, Ramon Trias Fargas 25-27, 08005 Barcelona, Spain. E-mail: [email protected]
- Giacinta Cestone, Institut d’Analisi Economica (CSIC), Campus UAB, 08193 Bellaterra Barcelona, Spain.
E-mail: [email protected]

t Universitat Pompeu Fabra

* Institut d’Analisi Economica (CSIC) and CEPR

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