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Value Maximization And Stakeholder Theory: Compatible Or Not?

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  • James S. Wallace

Abstract

Complicating the current corporate governance controversy is a major disagreement about the fundamental purpose of the corporation. There are two main views on what should constitute the principal goal of the firm. Most economists tend to endorse value maximization—that is, maximization of the value of the firm's debt plus equity—or a version of value maximization known as “value‐based management” (VBM) that aims to maximize shareholder value. The main challenger is “stakeholder theory,” which argues that the corporation exists to benefit not just investors but all its major constituencies—employees, customers, suppliers, the local community, and the federal government, as well as shareholders. Thus, whereas the success of a corporation under VBM could be assessed simply by its long‐run return to shareholders, under stakeholder theory a company's success would be judged by taking account of its contributions to all its stakeholders. Using statistical analysis of various measures of corporate success in satisfying non‐investor stakeholders, the author investigates whether a broader focus on multiple stakeholders is necessarily inconsistent with the pursuit of long‐term shareholder value. His main findings in fact suggest just the opposite—namely, that long‐term value creation appears to be a necessary condition for maintaining corporate investment in stakeholder relationships. More specifically, the author's study shows that companies with higher levels of value creation tend to have stronger reputations for treating stakeholders well while companies that create little value end up shortchanging not just their shareholders but all their constituencies. For profitable companies that have previously failed to devote the optimal level of resources to their non‐investor stakeholders, the message of this article is that investing in stakeholders can add value—and, in fact, it pays for companies to spend an additional dollar on stakeholder relationships as long as the present value of the expected (long‐run) return is at least a dollar.

Suggested Citation

  • James S. Wallace, 2003. "Value Maximization And Stakeholder Theory: Compatible Or Not?," Journal of Applied Corporate Finance, Morgan Stanley, vol. 15(3), pages 120-127, March.
  • Handle: RePEc:bla:jacrfn:v:15:y:2003:i:3:p:120-127
    DOI: 10.1111/j.1745-6622.2003.tb00466.x
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    Cited by:

    1. Dima Jamali, 2008. "A Stakeholder Approach to Corporate Social Responsibility: A Fresh Perspective into Theory and Practice," Journal of Business Ethics, Springer, vol. 82(1), pages 213-231, September.
    2. Volkov, Dmitry L. & Berezinets, Irina V., 2007. "Accounting-based valuations and market prices of equity: Case of Russian market," Working Papers 790, Graduate School of Management, St. Petersburg State University.
    3. Ruichen Ma, 2023. "The sustainable development trend in environmental, social, and governance issues and stakeholder engagement: Evidence from mergers and acquisitions in China," Corporate Social Responsibility and Environmental Management, John Wiley & Sons, vol. 30(6), pages 3159-3173, November.
    4. Carola Hillenbrand & Kevin Guy Money & Chris Brooks & Nicole Tovstiga, 2019. "Corporate Tax: What Do Stakeholders Expect?," Journal of Business Ethics, Springer, vol. 158(2), pages 403-426, August.
    5. Riyad Neman Darwazeh & Mohammad Dabaghia, 2018. "Privatization Effect on Shareholder Value in the Jordanian State Owned Enterprises," International Journal of Economics and Financial Issues, Econjournals, vol. 8(2), pages 70-78.
    6. Barbara Sveva Magnanelli & Elisa Raoli & Agnese Sacchi, 2016. "Key Factors for Success of Social Enterprises in Italy: Analysis of Financial and Operating Performance," Review of Economics & Finance, Better Advances Press, Canada, vol. 6, pages 43-60, February.

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