Value Maximization, Stakeholder

Theory and Corporate Objective

Function
Value Maximization
o Having too many objectives would make it difficult for the manager
to make a reasoned decision. This will handicap the firm in its
competition for survival.
o Social welfare is maximized when ALL firms in an economy attempt
to maximize their own total firm value
o When a firm produces an output that is valued by its
customers at more than the value of the inputs it consumes,
social value is created.
o Firm value is long-term market value of this expected stream
of benefits.
o Maximizing the total value of the firm is the objective function that
guides managers in making the optimal tradeoff between different
constituencies It tells the firm to spend an additional dollar of
resources to satisfy the desires of each constituency as long as that
constituency values the result at more than a dollar.
o Link between value maxidemization and social welfare:
o Based on the premise that suppliers will not sell things for
less than it values them, and may value outputs for more
than the price they pay to the firm Therefore when a
company acquires an additional unit of any input to produce
an additional unit of any output, it increases social welfare by
at least the amount of its profit (Difference between value of
output and cost of inputs required in producing it)
o Sends a signal to the management.

Stakeholder Theory
o Firms has to pay attention to all their constituencies.
o However, the stakeholder theory does not tell the decision-makers
how to choose among multiple constituencies.
o Implications:
o No criteria for performance Managers cannot be evaluated
in any principled way. Stakeholder theory allows managers to
pursue their own interests at the expense of the firms
financial claimants and society.
o Increases agency costs.
o Stakeholder theory has its roots in deep emotional commitments to
the family or tribe.
Enlightened Value Maximization
o Have to give employees a vision or strategy to work towards, so as
to maximize value.
o Cannot just tell them to maximize value on its own.
o Limit of the value maximization theory is that it does not tell us how
to create a grand vision.
o Basic principle of enlightened value maximization is that you cannot
maximize the long-term market value of an organization if you
ignore or mistreat any important constituency.

Engligtened Stakeholder Theory

o Similar to the regular stakeholder theory, except that the objective
function of the firm is to maximize total long-term firm market value

Balanced Scorecare Framework

o Suffers from the same problem as the stakeholder theory While
there are approximately two dozen measures, it does not tell us how
to assess corporate performance.
o For example, it does not explain how to balance the scores obtained
on the different scales.