Managers, Workers, and Corporate Control

Abstract

If management has high private benefits and a small equity stake, managers and workers are natural allies against takeover threats. Two forces are at play. First, managers can transform employees into a "shark repellent" through long-term labor contracts and thereby reduce the firm's attractiveness to raiders. Second, employees can act as "white squires" for the incumbent managers. To protect their high wages, they resist hostile takeovers by refusing to sell their shares to the raider or by lobbying against the takeover. The model predicts that wages are inversely correlated with the managerial equity stake, and decline after takeovers.LABOR ECONOMISTS VIEW INDUSTRIAL RELATIONS as being shaped by the conf lict between workers and management. Financial economists view corporate governance as the outcome of the diverging interests of shareholders and management. Actually, these two conf licts are present simultaneously and interact. We show that the conf lict in corporate governance, when particularly acute, can soften the clash in industrial relations. Managers who place a great value on control and own only a small equity stake have an incentive to pay high wages and not to monitor workers too strictly. Noncontrolling shareholders are those who bear most of the costs of such an employment policy.

Customer satisfaction and brand equity

“…Hence, the satisfaction of these customers substantially reinforces the managerial position in the firm. Pagano and Volpin (2005) use a similar argument applied to employees and suggest that firms offer long-term labor contracts to improve employee satisfaction and thereby deter takeover threats. When they experience less pressure from financial markets, managers have fewer incentives to generate SV and more incentives to pursue their own private benefits.…”

Is Corporate Social Responsibility an Agency Problem? Evidence from CEO Turnovers

“…The agency-driven CSR predicts that firms with higher CSR scores are weakly governed and their CEOs are less likely to be removed in light of poor firm financial performance. Consequently, CEO turnover-financial performance relation is negatively associated with CSR because entrenched managers engage in such activities to extract private control benefits and "weak" firm governance reduces their likelihood of dismissal (Pagano and Volpin, 2005;Cestone and Cespa, 2007). Conversely, the shareholder-driven CSR hypothesis predicts that the CEO turnover-financial performance relation increases in firm CSR scores.…”

“…Pagano and Volpin (2005) provide a theoretical model in which top managers and lower level employees collude in order to entrench managers and avoid takeover threats. Specifically, high-level managers buy employee support by increasing employee benefits, which deters potential takeovers thereby lowering the likelihood of managerial turnover.…”

“…An agency perspective implies that owners' inability to remove underperforming managers (poor firm governance) results in managers engaging in CSR activity from which they privately benefit at the expense of shareholders (Tirole, 2001;Pagano and Volpin, 2005;Cespa and Cestone, 2007;Benabou and Tirole, 2010). Consequently, firm CSR ratings are negatively associated with the likelihood that its CEO is dismissed in light of poor financial performance.…”

An analysis of the length of labour and financial contracts: a study for Spain

“…Second, the shortsightnesss of shareholders may induce managers to adopt short-term investment policies. Third, the lack of flexibility of long-term labour contracts acts like a 'poison pill' to deter potential raiders (Pagano and Volpin, 2002). However, these contracts generally involve superior investment levels as well as lower levels of disposable cash flow for managers, which in turn, improve a firm's value (Del Brio et al, 2003).…”