and legal stakeholder protection (e.g., labor protection, environmental regulation, antitrust
enforcement, etc.). We then predict that besides endorsing a better corporate governance
regime, small shareholders may want to support a minimal level of legal stakeholder protec-
tion to prevent the implicit agreement between inefficient managers and stakeholders. This
is likely to occur when stakeholders’ activism is effective but incumbent managers’ private
benefits of control are not too large (see example 1). In this case, shareholders’ preferences
over regulatory regimes are partially congruent with those of other stakeholders, in that
both endorse corporate governance rules favoring managerial turnover and explicit stake-
holder protection rules.18 We also predict that when instead stakeholder activism is very
effective and incumbent managers’ private benefits of control are very large, an “alliance”
between small shareholders and incumbent managers arises at a political level. Both groups
back corporate governance rules that leave CEOs’ positions unchallenged and poor stake-
holder legal protection, at the expense of stakeholder welfare. Such an alliance between
shareholders and incumbent managers seems to be prevailing in the Italian political scene
at the moment. On the one hand, neither labor nor environmental protection are a prior-
ity of the current legislature, as suggested by proposed reforms of the labor market and by
recent laws on environmental liabilities. 19 On the other hand, the security of managerial
jobs has definitely not been impaired by recently-approved laws reducing charges for creative
accounting practices.
5.2 The optimal design of a corporate charter
Our model can also help understand how stakeholders, shareholders and managers contribute
to write or modify a firm’s charter, whereby the organizational structure, the internal rules,
and the allocation of control rights determine the quality of its corporate governance and
the extent to which the firm commits to internalize stakeholder welfare.
Our results suggest that under some conditions, shareholders may want to pressure for a
formal incorporation of socially responsible aims in the corporate charter, rather than leave a
blank cheque to managers to promote shareholder value maximization or stakeholder protec-
tion at their convenience. This probably explains why some mainstream shareholder activists
and institutional investors, having surrendered to the concept of corporate social responsi-
18 In this respect, it will be interesting to see whether a minimal legal protection of workers, consumers and
potential pollutees will still be enforced in case supporters of good corporate governance prevail in countries
like Germany and France.
19 The former aimed at reducing workers’ guarantees against unjust dismissal, the latter substantially
loosening the regulation on hazardous wastes.
20