1 Introduction
When stakeholder protection is left to the voluntary initiative of managers, informal relations
with stakeholders and social activists can turn into a powerful entrenchment strategy for
incumbent CEOs. This is particularly true in countries and periods where social activism,
political lobbying and media campaigns have the power to promote or disgrace top executives
of large corporations. 1 Inefficient managers have then a special motive for committing
themselves to a socially responsible behavior that gains stakeholders’ support. Explicit
stakeholder protection - whether enforced by the law or by a mutually agreed contract
between a firm’s shareholders and its stakeholders - can break this implicit pact, thus favoring
control contestability and managerial turnover.
We propose a simple model where stakeholders other than shareholders 2 can affect the
likelihood of CEO replacement, and incumbent CEOs can commit themselves (and not their
firm) to a stakeholder-friendly behavior. This subtle self-entrenchment strategy becomes
more appealing to CEOs when corporate law and the firm’s charter promote independent
boards, proxy fights and hostile takeovers. As to stakeholders, when deciding whether to
support the incumbent CEO, they trade off the cost of a less talented manager against
the benefit of managerial concessions. The latter are less valuable if stakeholders expect to
receive a fair treatment independently of who runs the firm. Within this framework, we
show the following four facts. First, when private benefits of control are high and stake-
holder activism is 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 to stakeholders. Second, shareholder
value may often be enhanced by the introduction of stakeholder protection rules that crowd
out managerial concessions and make corporate officers less entrenched. Third, although
stakeholders may support an inefficient CEO committed to a socially responsible behavior
against an alternative manager, stakeholder welfare is always increasing in the degree of
1 It is widely recognized that stakeholders enjoy substantial effective control on firms by the threat of
costly boycotts and media campaigns (see Baron 2001, Feddersen and Gilligan 2000 and John and Klein
2001). In particular, social activists, local communities and unions often act as “white squires” to block
hostile takeovers. The Krupp-Thyssen case reported by Hellwig (2000) provides an example of workers as
successful white squires. The interference of other social activists in takeover contests is documented by
DeAngelo and DeAngelo (1998), who comment on the environmentalist campaign set up against she 1986
hostile takeover of MAXXAM over Pacific Lumber Company.
2 Namely, workers, consumers, local communities and potential pollutees. Although most of the literature
has focussed on the relationship between firms and workers (see Blair, 1995, Blair and Roe, 1999, and
Hansmann, 1996), the debate on the stakeholder society concept has unveiled the importance of other
constituencies as well.