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Value Maximisation, StakeholderTheory, and the Corporate Objective Function The Monitor Group and Harvard Business School e-mail: MJensen@hbs.edu AbstractThis paper examines the ro

Value Maximisation, Stakeholder

Theory, and the Corporate Objective Function

   

The Monitor Group and Harvard Business School

e-mail: MJensen@hbs.edu

AbstractThis paper examines the role of the corporate objective function in corporateproductivityand efficiency, social welfare, and the accountabilityof managers anddirectors I argue that since it is logicallyimpossible to maximise in more than onedimension, purposeful behaviour requires a single valued objective function Twohundred years of work in economics and finance implies that in the absence ofexternalities and monopoly(and when all goods are priced), social welfare ismaximised when each firm in an economymaximises its total market value Totalvalue is not just the value of the equitybut also includes the market values of allother financial claims including debt, preferred stock, and warrants

In sharp contrast stakeholder theory, argues that managers should make decisions

so as to take account of the interests of all stakeholders in a firm (including not onlyfinancial claimants, but also employees, customers, communities, governmentalofficials and under some interpretations the environment, terrorists and black-mailers) Because the advocates of stakeholder theoryrefuse to specifyhow to makethe necessarytradeoffs among these competing interests theyleave managers with atheorythat makes it impossible for them to make purposeful decisions With no way

to keep score, stakeholder theorymakes managers unaccountable for their actions

It seems clear that such a theorycan be attractive to the self interest of managersand directors

Creating value takes more than acceptance of value maximisation as theorganisational objective As a statement of corporate purpose or vision, valuemaximisation is not likelyto tap into the energyand enthusiasm of employees andmanagers to create value Seen in this light, change in long-term market value

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becomes the scorecard that managers, directors, and others use to assess success orfailure of the organisation The choice of value maximisation as the corporatescorecard must be complemented bya corporate vision, strategyand tactics thatunite participants in the organisation in its struggle for dominance in its competitivearena.

A firm cannot maximise value if it ignores the interest of its stakeholders I offer aproposal to clarifywhat I believe is the proper relation between value maximisationand stakeholder theory I call it enlightened value maximisation, and it is identical towhat I call enlightened stakeholder theory Enlightened value maximisation utilisesmuch of the structure of stakeholder theorybut accepts maximisation of the longrun value of the firm as the criterion for making the requisite tradeoffs among itsstakeholders Managers, directors, strategists, and management scientists canbenefit from enlightened stakeholder theory Enlightened stakeholder theoryspecifies long-term value maximisation or value seeking as the firm's objectiveand therefore solves the problems that arise from the multiple objectives thataccompanytraditional stakeholder theory

I also discuss the Balanced Scorecard, the managerial equivalent of stakeholdertheory The same conclusions hold Balanced Scorecard theory is flawed because itpresents managers with a scorecard which gives no score Ð that is, no single-valuedmeasure of how theyhave performed Thus managers evaluated with such a system(which can easilyhave two dozen measures and provides no information on thetradeoffs between them) have no wayto make principled or purposeful decisions.The solution is to define a true (single dimensional) score for measuringperformance for the organisation or division (and it must be consistent with theorganisation's strategy) Given this we then encourage managers to use measures ofthe drivers of performance to understand better how to maximise their score And aslong as their score is defined properly, (and for lower levels in the organisation itwill generallynot be value) this will enhance their contribution to the firm.Keywords: value maximisation, stakeholder theory; Balanced Scorecard, multipleobjectives, social welfare, social responsibility, corporate objective function,corporate purpose, tradeoffs, corporate governance, strategy, special interestgroups, social responsibility

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1 Introduction

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2 The logical structure of the problem

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3.2 Multiple objectives is no objective

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6.3 Implications for the power of special interests

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8.2 Enlightened stakeholder theory

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References

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I also discuss the Balanced Scorecard, the managerial equivalent of stakeholdertheory The