A stakeholder approach 1984 which is regarded as a seminal work of stakeholder theory. Yes, sometimes the interests are in conflict, but over time they must be shaped in the same direction. I say asserted contender because stakeholder theory is incomplete as a specification for the. This paper draws attention to the stakeholder theory of management.
Stakeholder theory gives a suitable lens to considering a more intricate point of view of the value for stakeholders, and in addition, the criteria to measure it. Enlightened stakeholder theory specifies longterm value maximization or value seeking as the firms objective and therefore solves the problems that arise from the multiple objectives that accompany traditional stakeholder theory. The main contender to value maximization is stakeholder theory, which argues that managers should attempt to balance the interests of all corporate stakeholders, including not only financial. And as long as their score is defined properly, and for lower levels in the. This paper examines the role of the corporate objective function in corporate productivity and efficiency, social welfare, and the accountability of. Aug 17, 2020 the main contender to value maximization as the corporate objective is stakeholder theory, which argues that managers should make decisions so as to take account of the interests of all stakeholders in a firm, including not only financial claimants, but also employees, customers, communities, and governmental officials. Enlightened value maximization utilizes much of the structure of stakeholder theory but accepts maximization of the longrun value of the. An alternative enlightened shareholder theory will be proposed, inspired by jensens. This belief helped shape his shareholder theory of capitalism. Stakeholder theorists argue that the firm cannot create value if it ignores the interests. Value maximisation, stakeholder theory, and the corporate.
Jensen m c 2001 value maximization stakeholder theory and the. Value maximization and stakeholder theory hbs working. Jul 24, 2000 contending with that value maximization approach is stakeholder theory which says that managers should make decisions so as to take into account all of the interests of all stakeholders in a firm. Enlightened value maximization utilizes much of the structure of stakeholder theory but accepts maximization of the longrun value of the firm as the criterion for making the requisite tradeoffs among its. The stakeholder theory in the modern global business environment. The common good, stakeholder theory and the theory of. Agency theory and ownership structure estimating the effect of ownership structure on firm performance. Jan 25, 2019 shareholder theory is the view that the only duty of a corporation is to maximize the profits accruing to its shareholders. The main framework for stakeholder theory has normally. The stakeholder perspective is an alternative way of understanding how companies and people create value and trade with each other. Stakeholder theory and value creation iese business. Nov 16, 2011 numerous views of stakeholder theory are presented in the literature though a key distinction can be drawn between the tenets of stakeholder theory and the conventional inputoutput model of the firm which see firms as converting investor, supplier, and employee inputs into customer outputs donaldson and preston, 1995. Stakeholder theory, argues that managers should make decisions so as to take account of the interests of all stakeholders in a firm including not only financial claimants, but also employees, customers, communities, governmental officials, and under some interpretations the environment.
Maximizing the companys value maximizes the shareholders wealth. The primary purpose of this paper is to bring stakeholder theory into the mainstream of thought in strategic management. The result is a view of stakeholder theory that is an ethical theory, a theory of the firm, and a theory of management. Jonfs school of btcriness administration, university of uashington abstract taking agency theory. The starting point for the analysis is the agency theory by jensen and meckling 1976, which predicts that higher levels of managerial ownership structure.
Pdf value maximization, stakeholder theory, and the. Among these, stakeholder theory or stakeholder thinking has emerged as a new narrative to understand and remedy three interconnected business problemsthe problem of understanding how value is. This is the traditional view of the purpose of a corporation, since many people buy shares in a company strictly in order to earn the maximum possible return on their funds. Corporations have responsibilities to their customers, employees, and communities that should be given at least equal priority. Sometimes the aims of the business and rational selfinterest will clash with ethics, and when they do, those aims and interests must give way economist 2005. Corporate financial performance and corporate social.
The papers conclusion will identify the consequences of the new theoretical framework for the definition of cg. Similarly, a stock broker is an agent who acts on behalf. Request pdf value maximization, stakeholder theory, and the corporate. Mar 14, 2021 stakeholder theory pragmatically describes what successful businesses do and need to do. Jensen 2001 goes on to observe that it may be this very feature of stakeholder theory that makes. Value maximization and the corporate objective function harvard. The answer to the questions of how managers should define better vs. This difference was made clear by sisek 2001 who suggested that it may be better to use the term stakeholder approach rather than stakeholder theory, because stakeholder theory would encompass a set of properly.
Pdf globalization is a blind spot in stakeholder theory and this. Concepts, evidence, and implications thomas donaldson georgetown university lee e. He acknowledges that a firm can only maximize one goal, which is sometimes seen as a criticism of stakeholder theory. After demonstrating that a companys interest is not necessarily synonymous with the interests of its shareholders, a proposition will be made that board members should always highlight social interests. Jensen 2001 clarifies that, for economists, the objective of the firm should be to seek maximization of the longterm market value, resulting from the ability to generate cash over time. Value maximisation means that managers should make all decisions to. Stakeholder theory suggests that by being responsive to the needs of stakeholders. Freeman, harrison and zyglidopoulos discuss the foundation concepts and implementation of stakeholder management as well as the advantages this approach provides to firms and their managers. Enlightened value maximization utilizes much of the structure of stakeholder theory but accepts maximization of the longrun value of the firm as the criterion for making the requisite tradeoffs among its stakeholders, and specifies longterm value maximization or value seeking as the firms objective. Stakeholders, he notes, include not only financial claimants, but also employees, customers, communities, governmental officials, and, under some interpretations, the environment, terrorists, blackmailers, and thieves. Preston university of maryland the stakeholder theory has been advanced and justified in the man agement literature on the basis of its descriptive accuracy, instrumen tal power, and normative validity. Jul 08, 2015 stakeholder theory is widely accepted but elementary aspects remain indeterminate as the term stakeholder is an essentially contested concept miles, j bus ethics 108. Enlightened value maximization is proposed by jensen as a way of bridging stakeholder theory and value maximization approaches to the understanding of corporate purpose in particular for western companies.
Shareholder theory equates to an influential view on the role of business in society which pushes the idea that the only responsibility of managers is to serve in the best possible way the interests of shareholders, using the resources of the corporation to increase the wealth of the latter by seeking profits. Possibly because of some widelyheld misconceptions, stakeholder theory has not yet played a central role in this discussion. It also pushes managers to be clear about how they want to do business, specifically what kinds of relationships they want and need to create with their. The common good, stakeholder theory and the theory of the firm. As argued among others by michael jensen 2001, if the firm is run in. Stakeholder theory specify how to make the necessary tradeoffs among competing interests. Taking agency theory and stakeholder theory as points of departure, the purpose of this article is to propose a paradigm that helps explain the following.
Stakeholder theory begins with the assumption that values are necessarily and explicitly a part of doing business. Managers are compensated for achieving the firms ultimate goal, value maximization. Normative stakeholder theory contains theories of how managers or stakeholders should act and should view the purpose of organization, based on some ethical principle friedman 2006. Stakeholder theory as an ethical approach to effective. Oct 01, 2001 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 only financial claimants, but also employees, customers, communities, governmental officials, and under some interpretations the environment, terrorists, and blackmailers. Considerations of csr and stakeholder satisfaction would be subordinate to swm. The relation between stakeholder management firm value. Enlightened stakeholder theory specifies longterm value maximization or value.
From the classroom and the boardroom, freeman continues to lead his capitalist revolution. An important difference is that property rights theory seeks a set of market frictions to 2 the shareholder vs. Another approach to the stakeholder concept is the so called descriptive stakeholder theory. A balanced scorecard is a strategy performance management tool a semistandard structured report, that can be used by managers to keep track of the execution of activities by the staff within their control and to monitor the consequences arising from these actions the phrase balanced scorecard primarily refers to a performance management report used by a management team, and typically. Towards a stakeholder theory of strategic management. Jensen, 2001 for the economy as a whole is attained. Religious principles and the stakeholder perspective. Freeman 1994 argues that in the stakeholder approach an inappropriate action may be applied wherever the stakeholder thought was not primarily oriented in the direction of the survival of the business. It uses aspects of both approaches to propose a third way that draws on stakeholder theory as a process to achieve a single firm objective. Stakeholder theory a business and management viewin practice, stakeholder theory provides pragmatic and logical ways that ultimately add value to the business. It asks managers to articulate the shared sense of the value they create, and what brings its core stakeholders together.
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. In contrast stakeholder theory jensen 2001 argues that managers should make decisions so as to take account of the interests of all stakeholders in a firm. Jensen 2001 suggests that the freeman definition would make even thieves and terrorists stakeholders. Stakeholder theory, the asserted and currently popular1 main contender competing with value maximization for this objective function, has its roots in sociology, organizational behavior, the politics of special interests, and managerial self interest. Agency theory the law of agency an agent is a person who acts on behalf of another person, the principal, in dealing with other people. More recently, stakeholder theory has been introduced in the finance literature by michael jensen 2001. Legal and ethical constraints can be antecedent conditions. The main contender to value maximization as the corporate objective is stakeholder theory, which argues that managers should make decisions so as to take account of the interests of all stakeholders in a firm, including not only financial claimants, but also employees, customers, communities, and governmental officials. Value maximization, stakeholder theory, and the corporate. Indeed, it is a theory that seeks to explain the functioning of the management process and taking into account the interests of stakeholders. Mercier 2001 argues that the descriptive dimension of stakeholder theory concerns relations between the organization and its environment. A balanced scorecard is a strategy performance management tool a semistandard structured report, that can be used by managers to keep track of the execution of activities by the staff within their control and to monitor the consequences arising from these actions.
Enlightened value maximization utilizes much of the structure of stakeholder. Change in longterm market value becomes the scorecard that managers, directors, and others use to assess success or failure of the organization. However, he suggests that stakeholder theory could be implemented by optimizing more goals. I also discuss the balanced scorecard, the managerial equivalent of stakeholder theory. For example, a selling agent acts on behalf of a principal, a manufacturer of goods, to sell goods on the manufacturers behalf. Stakeholder theory has infiltrated many disciplines in some very useful ways. Value maximization, stakeholder theory, and the corporate objective function.
Sep 03, 2008 an alternative enlightened shareholder theory will be proposed, inspired by jensen s enlightened stakeholder theory 2001. Dec 03, 2020 among these, stakeholder theory or stakeholder thinking has emerged as a new narrative to understand and remedy three interconnected business problemsthe problem of understanding how value is. 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 only financial claimants, but also employees, customers, communities, governmental officials, and under some interpretations the environment, terrorists, and blackmailers. In this regard, jensen 2001 proposes that stakeholder theory can add the. Shareholder theory economist milton friedman, whose work shaped much of 20thcentury corporate america, was a believer in the freemarket system and no government intervention. Stakeholder theory and value creation the key idea about capitalism is that the entrepreneur or manager creates value by capturing the jointness of the interests of the stakeholders. Jan 17, 2021 the main contender to value maximization is stakeholder theory, which argues that managers should attempt to balance the interests of all corporate stakeholders, including not only financial. Theres a mismatch, a disconnect, between the story we tell about business and society and what great businesses do and need to do, freeman says. The relation between stakeholder management firm value, and ceo. Purposeful behavior requires the existence of a single valued objective function.
Common good, company, ethics, goods, management, stakeholders, stakeholder theory, theory of the firm. Our results are consistent with jensen s 2001 enlightened value maximization theory. Pdf value maximization, stakeholder theory, and the corporate. After several reanalyses and redefinitions, the 1st order codes were assem. Jensen m c 2001 value maximization stakeholder theory and. Stakeholders include all harvard business school division of research. We also find an endogenous association between compensation and firm value. Value maximization and stakeholder theory hbs working knowledge. The assertion that organisations should concern themselves with the demands of multiple. Stakeholder theory says that managers should make decisions that take account of the interests of all the stakeholders in a firm. Stakeholder theory taps into this confusion and antagonism towards markets and relaxes. Pdf stakeholder theory and the corporate objective.
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