Hostname: page-component-cd9895bd7-gvvz8 Total loading time: 0 Render date: 2024-12-26T04:20:43.346Z Has data issue: false hasContentIssue false
  • English
  • Français

Value Maximization, Stakeholder Theory, and the Corporate Objective Function*

Published online by Cambridge University Press:  23 January 2015

Michael C. Jensen
Get access Rights & Permissions [Opens in a new window]

Abstract:

In this article, I offer a proposal to clarify what I believe is the proper relation between value maximization and stakeholder theory, which I call enlightened value maximization. Enlightened value maximization utilizes much of the structure of stakeholder theory but accepts maximization of the long-run value of the firm as the criterion for making the requisite tradeoffs among its stakeholders, and specifies long-term value maximization or value seeking as the firm’s objective. This proposal therefore solves the problems that arise from the multiple objectives that accompany traditional stakeholder theory. I also discuss the Balanced Scorecard, which is the managerial equivalent of stakeholder theory, explaining how this theory is flawed because it presents managers with a scorecard that gives no score—that is, no single-valued measure of how they have performed. Thus managers evaluated with such a system (which can easily have two dozen measures and provides no information on the tradeoffs between them) have no way to make principled or purposeful decisions. The solution is to define a true (single dimensional) score for measuring performance for the organization or division (and it must be consistent with the organization’s strategy), and as long as their score is defined properly, (and for lower levels in the organization it will generally not be value) this will enhance their contribution to the firm.

Type
Articles
Information
Business Ethics Quarterly , Volume 12 , Issue 2 , April 2002 , pp. 235 - 256
Copyright
Copyright © Society for Business Ethics 2002

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Arrow, Kenneth J. 1964. “The Role of Securities in the Optimal Allocation of Risk Bearing.” Review of Economic Studies 31(86): 91–96.CrossRefGoogle Scholar
Beer, Michael and Nohria, Nithin, eds. 2000. Breaking the Code of Change. Boston: Harvard Business School Press.Google Scholar
Business Roundtable. 1990. Corporate Governance and American Competitiveness. Washington, D.C.: Business Roundtable, March.Google Scholar
Coase, Ronald H. 1960. “The Problem of Social Cost.” Journal of Law and Economics 3 (October): 1–44.Google Scholar
Cools, Kees and van Praag, Mirjam. 2000. “The Value Relevance of a Single-Valued Corporate Target: An Empirical Analysis.” Available from the Social Science Research Network eLibrary at: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=244788.Google Scholar
Debreu, Gerard. 1959. Theory of Value. New York: John Wiley & Sons.Google Scholar
Donaldson, Thomas and Preston, Lee E. 1995. “The Stakeholder Theory of the Corporation: Concepts, Evidence, and Implications.” Academy of Management Review 20(1): 65–91.CrossRefGoogle Scholar
Freeman, R. Edward. 1984. Strategic Management: A Stakeholder Approach. Pittman Books Limited.Google Scholar
Hanks, James L. 1994. “From the Hustings: The Role of States with Takeover Control Laws.” Mergers & Acquisitions 29(2) September-October.Google Scholar
Hayek, F. A. 1988. The Fatal Conceit. Edited by Bartley, W. W. The Collected Works of F. A. Hayek. Chicago: University of Chicago Press.CrossRefGoogle Scholar
Ittner, Cristopher, Larcker, David F., and Meyer, Marshal W. 1997. “Performance, Compensation, and the Balanced Scorecard.” Unpublished. Wharton School, University of Pennsylvania.Google Scholar
Jensen, Michael C. 2001. “Paying People to Lie: The Truth About the Budgeting Process.” January. Available from the Social Science Research Network at http://papers.ssrn.com/paper=267651. (A shorter version of this article appeared in the Wall Street Journal, Manager’s Journal Column, 1/8/2001 under the title “Why Pay People to Lie?” and an executive summary version appears in the Harvard Business Review, November, 2001 under the title “Corporate Budgeting Is Broken: Let’s Fix It”).Google Scholar
Jensen, Michael C. and Meckling, William H. 1992. “Specific and General Knowledge, and Organization Structure,” in Contract Economics. Werin, Lars and Wijkander, Hans, eds. Oxford: Basil Blackwell, 251–274. Reprinted in Michael Jensen, C., Foundations of Organizational Strategy, Cambridge: Harvard University Press, 1998, and Journal of Applied Corporate Finance, Fall 1995: 4–18.Google Scholar
Jensen, Michael C, Karen, H. Wruck, and Brian, Barry. 1991. “Fighton, Inc. (A) and (B).” Harvard Business School Case #9-391-056, March 20.Google Scholar
Kaplan, Robert S. and Norton, David P. 1996. The Balanced Scorecard. Boston, Mass.: Harvard Business School Press.Google Scholar
Lovins, Amory B., Lovins, L. Hunter, and Hawken, Paul. 1999. “A Road Map for Natural Capitalism.” Harvard Business Review, May-June.Google Scholar
Perrin, Towers. 1996. “Inside ‘the Balanced Scorecard.’” Compuscan Report, January: 1–5.Google Scholar
Principles of Stakeholder Management. 1999. Principles of Stakeholder Management: The Clarkson Principles. The Clarkson Centre for Business Ethics, Joseph L. Rotman School of Management, U. of Toronto, Toronto, Canada.Google Scholar
Rose, David C. 1999. “Teams, Firms, and the Evolution of Profit Seeking Behavior.” Dept. of Economics, University of Missouri-St. Louis, St. Louis, Mo. Unpublished manuscript, available from the Social Science Research Network eLibrary at: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=224438.Google Scholar
Senge, Peter. 2000. “The Puzzles and Paradoxes of How Living Companies Create Wealth: Why Single-Valued Objective Functions Are Not Quite Enough,” in Breaking the Code of Change. Beer, Michael and Nohria, Nithin, eds. Boston, Mass.: Harvard Business School Press.Google Scholar
Sternberg, Elaine. 1994. Just Business: Business Ethics in Action. Boston: Little Brown & Co.Google Scholar
Sternberg, Elaine. 1996. “Stakeholder Theory Exposed.” The Corporate Governance Quarterly 2(1): 4–18.Google Scholar
Sternberg, Elaine. 1999. The Stakeholder Concept: A Mistaken Doctrine. London: Foundation for Business Responsibilities. Issue Paper no. 4, November.Google Scholar
Sternberg, Elaine. 2000. Just Business: Business Ethics in Action. Oxford University Press.Google Scholar
Wruck, Karen H., Michael, C. Jensen, and Brian, Barry. 1991. Fighton, Inc., (A) and (B) Teaching Note. Case #5-491-111. Boston: Harvard Business School.Google Scholar