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

private benefit of control γ), while stakeholders enjoy the private benefits generated by the
firm’s activity. In section 3, we will assume that at an initial date t = 0 the incumbent
CEO can make a personal investment to credibly commit herself to a “stakeholder-friendly”
behavior, so as to establish a privileged relationship with powerful stakeholder activists.

Figure 1: The timeline

23

Controlling manager Pay-offs accrue.
learns payoffs and picks
project with prob.   θi ,

complies with regulation
with prob.    xr ; with

prob. 1 - θi implements
the status quo.

2.1 The benchmark: no managerial entrenchment

In this section we analyze the impact of the quality of corporate governance rules favoring
managerial turnover (π) and the extent of formal stakeholder protection (x_r) on shareholder
value, stakeholder welfare and the incumbent’s rents, when incumbent CEOs cannot entrench
themselves at t = 0.

In this benchmark case, at t = 2, whenever free from the regulatory interference, any
manager chooses the project which maximizes equity value. As the incumbent manager is
not more lenient to favor stakeholders than a raider is, ceteris paribus, stakeholders benefit
when the more efficient manager takes over:

θ_R [x_rB + (1 - x_r)λB] > θ_I [x_rB + (1 - x_r)λB] .

Hence, they optimally decide not to support the incumbent CEO at t = 1. Given this,

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