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The Relationship Between Value Maximization and Stakeholder Theory

Original post by Eric Novinson of Demand Media

A decision that improves employees' happiness could lead to future profits.

Value maximization and stakeholder theory are two methods of determining the goals of a business. Under strict value maximization, managers only consider whether a decision increases the profits of the business without considering other community members. Under stakeholder theory, managers consider how a decision affects other residents of the community.

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Conflict

Some theorists see value maximization as always conflicting with stakeholder theory. The use of stakeholder theory implies that the business is not choosing the most profitable option. An Organizational Research article states that the business theorists Sundaram and Inkpen define stakeholders as all of the individuals or organizations that the business affects which are not stockholders.

Broad View

Other business theorists, such as R. Edward Freeman, believe that stockholders do not necessarily have different goals than stakeholders. A broad view of stakeholders can include stockholders, as well as local residents, environmental activists and government regulators. Stockholders may also have concerns about the ethical performance of the business, and some investment funds use ethical criteria to decide whether to buy a company's shares.

Different Questions

A manager can treat value maximization and stakeholder theory as two theories that explain how to answer different sets of questions. Value maximization is a useful metric for helping managers determine whether the business is operating efficiently, but it does not offer guidance about how the business can attract customers or keep its current customers. Stakeholder theory can help the business strengthen its brand and improve customer relationships, but it does not show managers whether the business is reaching its income potential.

Enlightened Approach

The business theorist Michael Jensen states that focusing on longer-range business objectives eliminates the conflict between value maximization and stakeholder theory. If a business provides better benefits to its workers, preserves the environment and satisfies other stakeholders, these activities may reduce initial profits while improving the long term competitive position of the business. Enlightened value maximization and enlightened stakeholder theory are terms that describe this approach.

Significance

The main idea behind using both measures is that focusing on either measure alone harms the performance of the organization. If a company only considers value maximization, this encourages the company to pollute rivers, pay low wages and take other actions that damage its future growth. Focus on stakeholder theory alone may convince a manager to make arbitrary, personal decisions such as giving away the company's money to her favorite nonprofits. The company can only maximize both measures in the long run by considering both of them when it makes a decision, according to Jensen.


                   

References

About the Author

Eric Novinson has written articles on Daily Kos, his own blog and various other websites since 2006. He holds a Bachelor of Science in business administration from Humboldt State University.

Photo Credits

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