1While the authors were addressing the possibility of self-interested managers abusing absentee owners, they also argued - in relation to what is now termed shareholder primacy - that the needs of community were rather of paramount concern to large corporations (see Berle and Means, 1932, p354). There is a potential argument here that this was an idea ahead of its time.
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an expectation to meet the obligation even at the expense of its own existence. ‘Stakeholder theory would not support a “cut and run” approach’ (Smith, 2003). Shareholder and
stakeholder models are, therefore, very different conceptualizations and hence can produce very different potential outcomes.
Consequently, the integrated ideal is of a different form; and perhaps following in the tradition of a varied set of key developments in thinking concerning primacy (see Fig 2.7). Two similar1 models are in fact advanced, that together utilize stakeholder and shareholder concepts, though coming from slightly different angles. The first is that of ‘enlightened
value maximization’ (and its associated ‘enlightened stakeholder theory’), which places the
corporate objective at centre stage, and the second is that of ‘enlightened shareholder
value’, which is more regulatory driven and focussed on improving board and director
behaviour.
2.3.4 Enlightened value maximization: Companies must have a single objective (and one
that is measurable by a single monetary market metric2) and they should be value seeking as well as value maximising.3 These are the key points of Jensen’s (2002), approach. And it is in countering the seeming irreconcilability of these requirements that the concepts of ‘enlightened stakeholder theory’ (EST) and ‘enlightened value maximization’ (EVM) are offered.
1In this context, the similarity of names can be confusing. Enlightened value maximization, enlightened
stakeholder theory and enlightened shareholder value present similar nomenclatures. Whilst Keay (2013)
states that shareholder value may be referred to as shareholder primacy or shareholder wealth maximisation. Bainbridge (2003) argues, however, that shareholder primacy differs from shareholder wealth maximisation. 2Total market value is the ‘sum of the market values of the equity, debt, and any other contingent claims outstanding on the firm’.
3Value maximizing and value seeking taken individually say nothing about how managers should go about creating a vision or strategy – or the initiatives or projects that create value, or for that matter, how employees can be motivated to contribute to this process. Indeed, how to stop managers from maximizing the company’s share price exploitatively, to the exclusion of any value seeking behavior, so as to increase the value of their own stock options. This is an outcome that Jensen’s earlier work (Jensen and Meckling, 1976) on agency theory, failed to foretell could happen. And it was managerial and executive behaviour particularly prevalent during bull markets of the late 1990s and early 2000s (see Cassidy, 2002).
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EST seeks to address the objective function, integratively, recognising the contribution of a wide variety of stakeholders in companies achieving success; and where the company’s objective should be the actual focus of these stakeholders – eg building a plane. As a single objective, each division in a company then contributes their part to this one goal.
At the same time, the aim is to maximize a firm’s long-term market value – as opposed to short-term financial performance – which is where EVM comes in.And unlike
stakeholder theory, per se, based on the interests of different constituencies, value maximization is rather attainable over time through a carful delineation of the objective companies truly want to strive for – ie the focus is the corporate objective as opposed to the focus being the satisfaction of multiple stakeholders themselves. What EVM therefore tells companies is how to measure success in what they do. Indeed, when they are doing ‘better’ that goes beyond reference to multiple personal or vested interests and values.
But it is in the integration1 of EST with EVM that a more successful outcome is achievable, as it re-centres what managers need to do to generate real value within their companies – and how to hold them accountable either through their market performance or in comparison to other companies in their sector (Vinten, 2001; Kiarie, 2006). Hence, in furthering the objective function managers might specifically consolidate stakeholder skills (value seeking) and, all things being equal, thereby maximizing a company’s long-term market value (value maximizing) – as opposed to short-term financial gains. In doing this the role of stakeholder is reconceived (eg employees, CSR or community) to the corporate objective depending on their relative importance to market value, as an eventual measure2 of success. And it is not about balancing constituency interests (CSR-based or otherwise).
1Other researchers, it is worth noting, have attempted to integrate towards a single monetary objective function by using, for example, corporate mapping to bring disparate perceived value elements together, eg linking strategy to value (Lukac and Frazier, 2012), stakeholder value to shareholder value with an emphasis on CSR (Moir, 2007), and the importance of having a monetary goal as an encompassing metric in the form of shareholder value creation (Mauboussin, 2011)
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There is similarly a consideration of what the optimal corporate behaviour is that will extract the most from society’s limited resources (including varied constituencies), and how to then use these to best effect to achieve the corporate objective and, crucially, create value over the longer-term.
Through this approach, there is an important shift in the notion of value maximization alone to appreciating how carefully thought out corporate strategy and stakeholder
motivation underpins it. This is the essence of value-seeking behaviour. And in making this shift, Jensen moved the discussion from a simplistic financial and market-led understanding of how value creation occurs in companies into the realm of organizational theory (Braydon 2006).
2.3.5 Enlightened shareholder value: Similar to the notion of ‘enlightened value
maximization’ (Jensen, 2002) is the concept of ‘enlightened shareholder value’ (ESV). It is a notion deriving from statute embodied in s172 of the UK Companies Act 2006, legislation that aims to support the creation of a ‘long-term’ corporate governance culture (see Keay, 2013).
In that context, Williams (2012) observed how following the 2008-2009 financial crisis the desire of policy-makers to foster a long-term perspective in how business decisions were madegave rise to renewed interest in the enlightened shareholder value provisions of s172. There is a particular focus on the obligation of directors to take into account a range of interests, as s172d signifies, in discharging their ‘duty to promote the success of the company’ (see also Section 2.2.2). From an enlightened shareholder value perspective, it
meant not only employees but also broader constituencies with respect to CSR and the environment had a vital role to play. The production of profits, it was increasingly also stressed, could not be at the expense of these constituencies, even if some companies did not
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fully recognize the role they had, or even if in the short-term their exploitation was more profitable (see McLaren, 2004). Directors and senior executives were therefore to act for the company to the best of their ability ‘in good faith... for the benefit of members as a whole’. ‘The ESV principle’, as it has become known (see Keay, 2013), in fact took its cue from the work carried out to reform the business landscape by the Company Law Review
Steering Group (CLRSG) in developing the legal framework for the Companies Act 2006, and that aimed to be more encompassing of constituency interests. Yet as Keay (2013) pointed out: ‘what the CLRSG was concerned about was the fact that directors were managing their companies in order to achieve maximisation of shareholder wealth in a short-termist manner and that directors in fact have, in appropriate cases, an obligation “to have regard to the need to build long-term and trusting relationships with employees, suppliers, customers and others in order to secure the success of the enterprise over time” (CLR, 1999)’. If there was to be long-term corporate value creation, these types of stakeholder factors – along with their mediation, and their occasional negation, by short- term perceptions – had to be taken in to account. This was the view of the steering group. Indeed, it is thinking that reflects the many concerns companies appeared to push aside when pursuing shareholder maximization, such as favouring of short-term financial indicators rather than facilitating long-term R&D strategies, and for which a solution was necessary (see Salacuse, 2004).
To that end, the CLRSG felt overall that the advantages of utilizing a shareholder primacy approach, and hence an orientation favouring value maximization, outweighed that of a pluralist, stakeholder primacy one. Indeed, as previously discussed in relation to s172, (Section 2.2.2), how directors choose between different interests is based on the precedence of what will bring greater long-term shareholder value to the company, and less about the balance of stakeholders’ interests.
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