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Value Maximization, Stakeholder Theory, and the Corporate Objective Function


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.

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Kenneth J. Arrow 1964. “The Role of Securities in the Optimal Allocation of Risk Bearing.” Review of Economic Studies 31(86): 9196.

Ronald H. Coase 1960. “The Problem of Social Cost.” Journal of Law and Economics 3 (October): 144.

Thomas Donaldson and Lee E. Preston 1995. “The Stakeholder Theory of the Corporation: Concepts, Evidence, and Implications.” Academy of Management Review 20(1): 6591.

F. A. Hayek 1988. The Fatal Conceit. Edited by W. W. Bartley The Collected Works of F. A. Hayek. Chicago: University of Chicago Press.

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Business Ethics Quarterly
  • ISSN: 1052-150X
  • EISSN: 2153-3326
  • URL: /core/journals/business-ethics-quarterly
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