We argue that when stakeholder protection is left to the voluntary initiative of managers, concessions to social activists and pressure groups can turn into a self-entrenchment strategy for incumbent CEOs. Stakeholders other than shareholders thus benefit from corporate governance rules putting managers under a tough replacement threat. We show that a minimal amount of formal stakeholder protection, or the introduction of explicit covenants protecting stakeholder rights in the firm charter, may deprive CEOs of the alliance with powerful social activists, thus increasing managerial turnover and shareholder value. These results rationalize a recent trend whereby well-known social activists like Friends of the Earth and active shareholders like CalPERS are showing a growing support for each other’s agendas.
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Paper provided by Department of Economics and Business, Universitat Pompeu Fabra in its series Economics Working Papers with number
634.
References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
Marco Pagano & Paolo Volpin, 2001.
"The Political Economy of Finance,"
CSEF Working Papers
76, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
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