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

Lemma 3 For any π ∈ (0, 1), there exist Γ_o(π), Γ₁ (π) such that for Γ_o(π) < Γ < Γ₁ (π),
xb_r (π) ∈ (0, 1) is the threshold level of stakeholder protection above which the incumbent
CEO’s entrenchment strategy becomes unprofitable. The threshold xbr is increasing in π and
Γ, and decreasing in ∆θ.

Proof. See the appendix. ■

Figure 2 depicts the function xb_r (π) in the space (π, x_r). Above the xb_r (π) locus, the incum-
bent CEO never invests in stakeholder relationships. This is either because poor corporate
governance rules (low π) makes it easy for the CEO to preserve her job, or because explicit
stakeholder protection (x_r high) makes stakeholders value less managerial concessions. In-
deed, when faced with a potential alliance with the incumbent management, stakeholders
trade off the benefit of managerial concessions against the cost of a less innovative manage-
ment: if they expect to receive a good treatment independently of who runs the firm, they
do not want to “strike” an implicit alliance with the incumbent CEO.

Figure 2: The function xbr .

Remark 1 The fact that the locus xb_r (π) is increasing in π suggests that when stakeholder
activism is very effective, corporate governance reforms aimed at enhancing managerial
turnover should be accompanied by an increase in explicit stakeholder protection. If not,
they may simply spur more managerial concessions and stakeholder activism.

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