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

Assume that π and x_r lie below the xb_r (π) locus. Then the incumbent CEO commits to
a protection of stakeholders’ interests which goes beyond that to which the firm by itself is
committed.¹⁵ If the gains from this implicit alliance are evenly split between the CEO and
stakeholders, then the level of pro-stakeholder concessions x* equals the Nash bargaining
solution:

a∆θB (λ +(1 — λ)x_r ) + πaαR(Γ — ∆θ(p + τ — (1 — λ)x_r τ ))
θI (1 — x_r )(1 — λ)(αB +(1 — π(1 — α))ταR)

Straightforward calculations show that (∂x*∕∂π) > 0, (∂x*∕∂x_r) > 0 and (∂x*∕∂λ) > 0.
Intuitively, a tougher replacement threat (e.g., an independent board or a ban on anti-
takeover defenses) makes the incumbent manager more willing to relinquish concessions to
stakeholders in order to preserve control. The incumbent manager is also forced to larger
concessions when a larger degree of stakeholder protection improves stakeholders’ welfare
under the alternative manager.

4 Who benefits from good corporate governance and
explicit stakeholder protection

We now build on the previous section to analyze the impact of corporate governance reg-
ulation enhancing managerial turnover (π), and of explicit stakeholder protection (x_r), on
shareholder value, stakeholder welfare and CEOs’ rents. We argue that stakeholders and
shareholders may to some extent have congruent preferences over both issues.

4.1 Shareholder value, managerial replacement threats, and stake-
holder protection

In our model, small shareholders completely delegate control to managers, and an active
market for corporate control ensures that inefficient managers are replaced. If stakeholder
activism can impair the functioning of this market, incumbent CEOs have an incentive to
“bribe” stakeholders by committing to less efficient project choices. This potential alliance
changes dramatically shareholders’ preferences over corporate governance regulation and
legal stakeholder protection, as the following proposition shows.

¹⁵ Corporate officers engaged to a socially responsible behavior insist on this voluntary compliance to an
“over-protection” of stakeholders’ interests. In a recent McKinsey report on environmental strategy, Dave
Buzzelli, vice-president of the Environment, Health and Safety department of Dow Chemical Co., claims that
“[Dow Chemical’s] responses [to environmental concerns] go beyond compliance with current mandates and
address global environmental issues on a proactive, voluntary basis.” (“What is Environmental Strategy?”,
The McKinsey Quarterly, 1993, 4: 53-68)

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