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

Figure 4: The continuous (dotted) curve represents shareholder value when entrenchment is
(not) to be countered. Shareholders preempt entrenchment: π* = 0.038 and b_r(∏*) = 0.063.

4.2 Stakeholder welfare and managerial job security

Stakeholders’ welfare function changes according to whether xr and π lie below or above
the locus xb_r(π). By lemma 3, whenever x_r ≥ xb_r (π), W_ST coincides with (1); hence, it
is increasing in xr as well as π : stakeholders can only benefit from the replacement of an
inefficient manager. When instead xr < xbr (π), stakeholders’ welfare writes as:

WST (π, xr) =

[θI + π(1 — a)(θR — θI)] [x_r + (1 — x_r)λ] B + (1 — π(1 — a))θI(1 — x_r)(1 — λ)x*(π,x_r)B

which is also increasing in π and xr. Notice that the additional term with respect to (1)
represents the benefit of managerial concessions: stakeholders now have a further motive
for endorsing corporate governance rules that enhance managerial turnover, to the extent
that the incumbent’s concessions are an increasing function of π. Indeed, bad corporate
governance rules allowing anti-takeover defenses and staggered boards make CEOs less eager
to appeal to stakeholders, in that they do not need stakeholders’ support to buttress their
positions. This implies that even those stakeholders who would support incumbent CEOs in
return for concessions prefer the firm’s control to be contestable ex ante:

Corollary 1 Although stakeholder activists may want to side with the incumbent CEO at
t=1, their welfare is always increasing in the quality of corporate governance rules enhancing

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