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



social/environmental objectives.7

Managerial talent

The payoffs attached to new projects are unknown unless further investigation is carried
out by the firm’s CEO. A manager i learns the new projects’ payoffs with probability θ
i , in
which case she selects one. With probability (1
- θi), the manager does not learn anything;
hence, she optimally decides to run the status quo project. We define θ
i to be the managerial
talent for innovation. The incumbent CEO has talent θ
I . A better alternative manager, with
talent θ
R > θI is known to exist. However, she still has to be identified in the managerial
labor market.

CEO replacement attempts

We assume that with probability π (0, 1) the board of directors or a coalition of
shareholders identifies the alternative manager (or else, the latter realizes that it can improve
the firm’s value and launches a hostile takeover on the firm). π thus represents the extent
of effective competition in the managerial labor market, both at the firm level and at the
economy-wide level. π is likely to be high when corporate law and the firm’s charter promote
independent boards and proxy fights, and when anti-takeover defenses are not allowed.

Stakeholder activism

When a replacement attempt occurs, stakeholder representatives such as social and en-
vironmental activists or local communities may side with the incumbent CEO to make sure
that she is not replaced. Activists dispose of powerful tools in this respect: they may start a
media campaign and even threaten a boycott in case the replacement occurs; alternatively,
by exerting pressure on political leaders to back their cause, they can create an adverse polit-
ical climate to the proxy fight or the takeover (Hellwig, 2000).
8 If undertaken, a stakeholder
campaign succeeds with probability a in deterring CEO replacement, where a
(0, 1), and
fails with probability (1
- a). 9 We assume that a stakeholder campaign is costless; the cost
of campaigning could be taken into account in the model without changing its qualitative
results.

7This modeling choice follows Aghion and Tirole (1997)’s lines in capturing the idea that parties in a
relationship may have a partial congruence of interests over the course of action to be taken.

8 Hellwig (2000) argues that organized stakeholders like unions and local communities often act as “white
squires” to block hostile takeovers. In recent years, intense media campaigns against corporate takeovers
have been led by social and environmental activists. See for instance DeAngelo and DeAngelo (1998) for a
report on the environmentalist campaign against the 1986 hostile takeover of Maxxam over Pacific Lumber
Company.

9 For the sake of simplicity, we assume that stakeholders do not choose the intensity of the campaigning
activity, but only whether to campaign or not, hence a is an exogenous parameter.



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