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Value Maximisation Stakeholder Theory And The Corporate Objective Function Pdf

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In modern managerial economics business decision making by managers are guided by the objective of maximising value of the firm. Since in a corporate form of business it is the shareholders who are the owners of the firm, value of a firm represents shareholders wealth. Thus modern managerial economics departs from the traditional economic theory in which it is assumed that managers of corporate firms or owner-managers of self-owned business enterprises seek to maximise short-run profits.

Shareholder and stakeholder theory: after the financial crisis

The first objective of this paper is to explain and compare new business models that are currently being successfully applied worldwide. The second objective is to carry out an empirical analysis to observe the perception of experts regarding these models, the differences between them, and their orientation toward the traditional theory of the firm or the stakeholder approach in some of the characteristic elements of the organizational structure of the firm.

In a first step we conduct a literature review that compares the dominant theory of the firm neoclassical model with the stakeholder theory. Secondly, we present six additional business models and compare them with both the neoclassical and stakeholder approaches.

In a second part of the paper we use a fuzzy Delphi methodology in order to collect qualitative information from a group of experts about those six additional business models. The stakeholder approach is a valuable explanatory tool to address how firms can generate a broader positive impact at the social level.

The maximization behavior endorsed by the dominant economic paradigm does not seem particularly oriented towards building a better and sustainable economy in the long-term. In contrast with the traditional theory of the firm, stakeholder theory considers all stakeholders involved in an organization, promotes a decision-making system that considers different interests, and tries to maximize stakeholder value Freeman, In fact, it could be accepted that the stakeholder approach has, to a great extent, displaced the model focused on shareholder value maximization.

As specified in a study of firms taken from the Fortune , only 10 firms were found to champion an emphasis on shareholder value maximization.

Today, it may seem that the trend in favor of stakeholder theory continues. However, this perception could be misleading. In , the Academy of Management organized a symposium on the future of stakeholder theorizing in business, where it was discussed if stakeholder theory had generated a real change in management or had just facilitated the use of new terminology Agle et al.

Currently, the situation has not changed substantially. With the intention of identifying business models that are helpful in implementing a stakeholder orientation, the first objective of this study is to analyze the main differences between the shareholder approach and stakeholder theory, and then explain and compare new business models that are currently being successfully applied worldwide which are close to stakeholder theory.

The second objective is to carry out an empirical analysis to observe the perception of experts regarding those models, the differences between them, and their orientation towards this new narrative. Through this analysis our final aim is to show that, according to a panel of experts, the principles of the new narrative for businesses are compatible with different business models. This could be a relevant contribution to stakeholder theory, and for managers looking for a way to implement the principles of stakeholder theory in their organizations.

After the introduction, we will present a systematic analysis of both the current shareholder approach and stakeholder theory. In both cases we will use a microeconomic perspective, since that is the one that defines the behavioral patterns of firms, individuals, and families.

We will consider the goal of the firm, property rights, contractual ties, value generation, trust, and governance, concluding that the two approaches differ regarding those elements. In section three, we will analyze the six most relevant business models that incorporate an orientation towards stakeholders as part of their own aims, and not only as an instrumental behavior to maximize shareholder value: economy of communion, social economy, solidarity economy, economy for the common good, B-Corps, and blue economy.

In the fourth section, we will observe, through an empirical exploration, whether a group of experts share a consensus on the main characteristics of these new business models or not, and whether this consensus corroborates the analysis made in section 3. Finally, we will present our conclusions, recognize the limitations of this study, and propose future lines of research. Profits would then be a consequence of developing value propositions that are appealing for stakeholders, and not the aprioristic aim of the firm Aguado et al.

As a result, some corporations have started to adopt a triple approach to performance measurement that includes indicators pertaining to three different dimensions: profit, people, and planet Elkington, There seems to be a growing consensus on the need for a transformation of the dominant social and economic model in order to promote higher levels of justice and equality.

However, it is difficult to find coherent proposals to implement this shift. We believe that it is important to modify the basic ideas about the role, the mission, and the objectives of the firm by articulating an alternative theory of the firm. A theory of the firm is understood to develop the conceptual framework that states what a firm is and what role it should have in society and in the economy. This theoretical development serves as a basis for the legal and cultural systems surrounding the firm.

The following table table 1 presents a comparison between the dominant theory of the firm shareholder theory and stakeholder theory. At the same time, we present the theoretical foundation of the new narrative for businesses based on stakeholder theory. The last few decades have witnessed the appearance of business models that differ from the traditional system.

In this section, we will focus on six important alternative models to capitalist businesses: the economy of communion, the social economy, the solidarity economy, the economy for the common good, B-Corps, and the blue economy. We will briefly describe the main characteristics of each model and then analyze to what extent these new models are closer to stakeholder theory.

This movement organized a community of sharing, based on fraternity and unity Lubich, The EC was born when the Focolare Movement tried to fight against the structural inequalities of the economy by creating new businesses or transforming the existing ones. In doing so, the EC generated employment and resources that helped people to get out of poverty under the principle of profit sharing Gold, However, their profits are not delivered to shareholders, but instead allocated to three different objectives: one-third of the profit is invested in the firm in order to maintain or enhance its level of competitiveness; another one-third is used to help people in need, particularly those in the community where the firm is located; and the remaining one-third is devoted to the dissemination of the culture of the economy of communion both locally and globally.

These organizations create wealth and redistribute it. This creates a paradigm shift, considering that usually firms create wealth and the public administration redistributes it. The management of the firm also differs from the classical theory of the firm, in the sense that they try to build long-term and mutually profitable relationships with stakeholders.

There is no consensus when talking about social and solidarity economies and these concepts are often used indifferently. In this paper, we will distinguish between them according to their initial fundamental objectives and property distribution. Organizations working in the social economy have some factors in common. First, people taking part in the firm must have taken the decision freely. The decision-making is democratic, meaning that the property of the organization is in the hands of the employees, and every associated employee has a vote independently of the amount invested.

This ensures that individuals do not accumulate profit. At the same time, this kind of organization promotes solidarity within the group and tries to achieve not only economic sustainability for the future, but also promote social aspects and individual development. In order to achieve economic and social objectives, these organizations offer quality products or services.

Thus, they carry out a business activity, usually with a profit orientation European Network of Social Economy Foundations, These are the main characteristics of the social economy and, basically, cooperatives and mutual companies are the types of corporation that fulfill them.

The organizations inside the solidarity economy are born with the aim of meeting public needs, promoting internal solidarity, as well as solidarity towards the community. These organizations are involved with local development, equal opportunities, social cohesion, the generation of quality employment, the reconciliation of work and family life, and sustainability, carrying out activities related to health, education, culture, the environment, and social housing.

According to its fundamental principles, profits are not allocated based on any proportionality criteria with respect to capital. The owners and employees renounce obtaining market returns or market salaries in order to have more funds in the organization to help people and society to satisfy their needs. In order to make it easier for organizations to know how to make decisions that seek the good of all, Felber proposes a practical development of the economy for the common good, identifying and ranking firms according to their contribution to social well-being.

Firms are evaluated by means of the so-called common good matrix , which considers five variables: human dignity, cooperation and solidarity, environmental sustainability, social justice, and democratic participation and transparency.

These variables are analyzed with respect to five interest groups: suppliers, investors, employees including business owners , customers and business partners, and society at large. The matrix measures positive and negative criteria; this is, organizations must also consider any detrimental action against the common good, such as: violation of international standards related to labor, the environment, dumping prices, etc.

Firms will get a score out of 1, points. Good practices will add points, while negative ones will reduce them. A firm based on the traditional model would get between 0 and points. The objective for those firms interested in this movement would be to improve their score over time.

The economy for the CG promotes the transfer of firm ownership to employees and democratic decision-making considering employees and local stakeholders in fundamental strategic issues. This model also recommends the development of reporting processes for internal and external stakeholders Felber, B-Corp is a project that was originally launched in the US and has spread worldwide.

It is now legally recognized in many US states and in Italy as a new corporate form benefit corporation. B-Corp is a business certification awarded by a non-profit organization called B-Lab there are more than 1, certified B-Corps throughout the world. B-Lab studies if a company meets certain standards regarding social and environmental performance, accountability, and transparency. Any firm wishing to become a B-Corp must complete an assessment, write a report, and submit any necessary supporting documents.

Depending on the degree of agreement with the B-Corp principles, the company will earn points. It needs 80 out of approximately points to get the certification.

Any firm can complete the assessment and see what their strengths and weaknesses are Bcorp, One of the characteristic factors in B-Corps is that they specify in their mission and statutes other objectives apart from profit maximization, related to corporate social responsibility CSR.

They protect that mission legally; this is, directors and shareholders are legally protected to make decisions considering the interests of all stakeholders. B-Corps will be able to make decisions in favor of different stakeholders and not only shareholders. B-Corp firms are for-profit firms, with the usual corporate governance structure, private ownership, private funding, and market control. In addition, they develop transparency and accountability as key aspects, which are implemented through the publication of reports, available to the public, based on the triple bottom line approach social, environmental, and economic.

In this way, stakeholders investors, customers, or employees can identify companies with a long-term commitment to become a B-Corp Hiller, The main idea of ZERI was based on the notion of ecosystem and nature, which does not produce waste or emissions Pauli, The model seeks to achieve efficiency by following the logic of natural systems, making innovative products and services available to all, solving social problems without a negative impact on the environment, and enabling firms to be competitive in the market.

The objective of businesses in the BE is to use innovation to produce or to carry out their activity without generating waste. This does not mean that corporations should just use fewer chemical products, or renewable sources of energy, but shift towards a new production paradigm.

In this paradigm, industries would use the same physical patterns used by nature, e. Following the BE standard, firms carry out their activity without harming the environment, and in a sustainable way Pauli, Table 2 shows the comparison between the six alternative models presented above.

In this section, first, we will describe the methodology used to observe whether a group of experts share a consensus on the main characteristics of the new business models analyzed in the previous section section 3. Second, we will present the results obtained from the empirical exploration.

Finally, we will discuss those results. In order to contrast the differences between the models analyzed in section 3, we used the Delphi methodology as a comparative tool, specifically the fuzzy Delphi analysis Grisham, This tool benefits from a qualitative approach complemented with quantitative elements.

Both approaches of the fuzzy Delphi method qualitative and quantitative were used to analyze the opinions of a group of experts and combine those opinions in a common vision in this case, a closed numerical interval attached to each answer which is shared by the aforementioned experts. In order to achieve this common vision, the experts had to review the numerical scores given by the other experts regarding the questions provided see table 5.

The results were statistically analyzed in an aggregated way using different metrics, such as central tendency metrics median, mean , deviation interquartile range, standard deviation , and frequency distribution frequency histograms and polygons. In short, we carried out a fuzzy Delphi analysis in order to analyze whether these business models comply with the main characteristics of stakeholder theory as stated in section 2.

The results stem from a questionnaire that was delivered to a group of experts participating in the 3 rd permanent research seminar on the theory of the firm, held at the University of Deusto Bilbao, Spain in May This group of experts was composed of academics, practitioners, and policymakers from different European institutions universities, firms, and public agencies see table 3.

Firm Value

Skip to search form Skip to main content You are currently offline. Some features of the site may not work correctly. DOI: Abstract: 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. View on Cambridge Press.

The recent financial crisis has restarted the debate of the value of both shareholder and stakeholder theories. This paper aims to continue this discussion. The paper reviews existing literature and examines the benefits and problems associated with these frameworks through the lens of the recent events which have taken place during the financial crisis. The main assertion of this paper is that shareholder theory is in itself a sound theory. Yet, some executives following this theory could have brought disrepute to it. In contrast, the stakeholder theoretical framework has yet to assert its influence because the concept is not yet unambiguously defined, which makes it difficult for the framework to become operational in practical business settings. Future research should seek consensus on the scope and definition of the stakeholder model, as well as who the stakeholders should include.

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VALUE MAXIMIZATION, STAKEHOLDER THEORY,. AND THE CORPORATE OBJECTIVE FUNCTION. Michael C. Jensen. Abstract: In this article, I offer a.


Value Maximization, Stakeholder Theory, and the Corporate Objective Function

The first objective of this paper is to explain and compare new business models that are currently being successfully applied worldwide. The second objective is to carry out an empirical analysis to observe the perception of experts regarding these models, the differences between them, and their orientation toward the traditional theory of the firm or the stakeholder approach in some of the characteristic elements of the organizational structure of the firm. In a first step we conduct a literature review that compares the dominant theory of the firm neoclassical model with the stakeholder theory. Secondly, we present six additional business models and compare them with both the neoclassical and stakeholder approaches.

Reviewing the Stakeholder Value Creation Literature: Towards a Sustainability Approach

Social Responsibility and Sustainability pp Cite as. The purpose of this study is to examine distinctive narratives of stakeholder value creation and discuss how they consider sustainability.

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1 Comments

  1. Hilaire M.

    08.05.2021 at 05:57
    Reply

    This study aims to examine whether corporate social responsibility CSR reporting adds any value to the firm.

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