managerial turnover.
Corollary 1 adds a further argument to The Economist’s view on the use of anti-takeover
defenses: “...who benefits from such protection against outside bids? Not shareholders, who
lose their chance to vote on a change of management; and not employees or other stake-
holders, whose interests may be better served by a new and more dynamic ownership. The
only beneficiaries from obstacles to a market in corporate control are managers.” (“Takeover
Troubles,” January 31st, 2002). Our result rationalize the recent, surprising interest of social
and environmental activists for the corporate governance agenda. Many activists have in fact
joined forces with small shareholders’ lobbies to campaign against anti-takeover legislation,
CEO-dominated boards and lenient auditors.
4.3 CEOs
Interestingly, inefficient CEOs have the opposite view of corporate governance and stake-
holder protection rules. Indeed, lemma 3 implies the following result:
Corollary 2 The incumbent manager always benefits from a reduction in the intensity of
the replacement threat and from a reduction in explicit stakeholder protection.
That CEOs may be opposed to tough competition in the managerial labor market is
not surprising. Here we would rather stress that CEOs prone to make personal commit-
ments to stakeholder representatives (which is the case whenever xr < xbr (π)) are indeed op-
posed to welcome stakeholder-protection laws, or the introduction of explicit pro-stakeholder
covenants in the firm’s charter. This prediction is in line with casual evidence of managers
who profess concerns for corporate social responsibility, but are then reluctant to endorse
pro-stakeholder regulations and all “attempts to institutionalize considerations of stakeholder
interests in corporate governance” (see Hellwig, 2000). 17
5 Applications and discussion
5.1 The political economy of corporate governance and legal stake-
holder protection
Our results can be applied to a political economy framework where interest groups (share-
holders, incumbent managers and stakeholders) contribute to determine financial regulation
17Shleifer and Vishny (1989) informally argue that entrenchment objectives may explain why managers
try to make the firm’s contracts implicit rather than explicit.
19