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

shareholder value is:

VSH(π, xr) =

= πθR [xr(p+ λτ) + (1 - xr)(p+τ)] R+ (1 - π)θI [xr(p+ λτ) + (1 - xr)(p+τ)] R

= [θI + π(θR - θI)] [p + τ - (1 - λ)τx_r] R,

where expected project returns under the relevant regulatory constraints are multiplied by
the average managerial quality. Stakeholder welfare also depends on project choice and
average managerial quality:

W_ST (π, x_r) = πθ_R [x_r + (1 - x_r)λ] B + (1 - π)θ_I [x_r + (1 - x_r)λ] B        (1)

= [θI + π(θR - θI)] [λ + (1 - λ)x_r] B.

Finally, the incumbent manager’s utility is:

UI(π, xr) = (1 - π) [γ + θI (p + τ - (1 - λ)τxr) αR] + πθR (p + τ - (1 - λ)τxr) αR
= θR (p + τ - (1 - λ)τxr) αR + (1 - π) [γ - ∆θ (p + τ - (1 - λ)τxr) αR] .

An incumbent CEO with a high enough stake might be better off when she is replaced, to
the extent that the additional value of her stake offsets the lost benefits of control. Here,
however, we focus on CEOs whose private benefits of control are sufficiently large relative to
their equity stake that they always want to stay on (i.e., γ > ∆θ (p + τ - (1 - λ)τ) αR). This
implies that low-talented incumbent CEOs are always opposed to good corporate governance.

In table 1 we display the preferences of each type of agent (stakeholders, shareholders,
and the incumbent CEO) with respect to corporate governance rules reducing the security
of managerial jobs and to formal stakeholder protection:

Table 1: Effect of an increase in π and x_r on agents’ utilities

Notice that while shareholders and stakeholders have dissonant preferences over the ex-
tent of stakeholder protection, they both are better off under a tighter corporate governance
regime. Indeed - although their views may differ on which is the best project to adopt - both

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