TOUIRA Sara 3756 Finance 2

Value Maximization, Stakeholder Theory and the

Corporate Objective Function

Stakeholder Theory according to Freeman is when Managers should make

decisions to take account of the interests of all the stakeholders in the firm .
And when Jensen's took on Stakeholder Theory, he found out that it is
Incomplete. In fact, there is no corporate purpose neither an objective
function. He also found out that stakeholders are important, but each group
has different wants, the theory doesn't tell the firm how to address the
tradeoffs between conflicting demands. The theory also politicizes the
corporation and leaves the managers empowered, serving their private
interest instead of serving the commun interests.
Next, Jensens talking about Value Maximization, and that the Managers
should make all decisions so as to increase the total long-run market value of
the firm. But should the firms really maximize Value ? in Order to answer this
question, Jensen found out two issues issue :
#1) Should the firm have a single valued objective (or scorecard)?
#2) Should that objective be value maximization or something else?
First issue : Single Valued Objective
Cannot maximize more than one factor at a time since they are
tradeoffs. For ex. profit and market share.
Many objectives leads to no objective because the manager will have
no way to make a rational decision, due to confusion and lack of
purpose.
Second Issue : Total firm value maximization makes society better
off
What is better ?
Need to distinguish between better vs. worse
The meaning of better needs to be defined to make a foundation which
allows for managers to make purposeful decisions.
better = value seeking

In this sheet, Jensen also talks about value maximisation. According to him
definition of better is "social welfare is maximized when all firms in an
economy maximize total firm value". In this part, he also examines the
ultimate question what firm behavior will result in the least social waste?
Jensen found out a way out of the conflict between value maximisation and
stakeholder theory. It lies on the melting together in what he called :
Enlightened value maximisation :
SCORECARD : tells a firm how to measure success (create value), but
the way company performs functions are part of the competitive and
organizational strategy.
Provides a structure to employees/managers
TOUIRA Sara 3756 Finance 2

To maximize long-run market value, the firm needs good relationships

Enlightened stakeholder Theory :
Manage all stakeholder relationships + objective of the firm is to
maximize long term market value.
Long term stock value is important for long term firm value
(shareholders don't rank above other groups, but stock value is
important factor to max market value.)

Further, Jensen talked about the balanced scorecard. He treats the following
points :
Jensen believes Kaplan and Norton's balanced scorecard is flawed
(method used by stakeholder management that Jensen also objects to)
Trying to maximize more than one factor without knowing the tradeoffs
--> no purposeful decisions can be made.
More similar to a dashboard because it doesn't tell you if you're winning
or losing.
Tells managers interesting things about the firm and how to create
value, but it should not be used to measure performance.

In conclusion, Jensen's focus is on longer term business objectives. That

means that If you focus on just one theory it will harm the company's long
term performance.
The two theories alone are incomplete so mold together the Stakeholder
Theory and Value Maximization and take ideas from each.