Business Strategy & Sustainability: Paper Summaries
Week 4: Stakeholders: companies and nongovernmental organizations
4.1. Mitchell, Agle & Wood (1997) Toward a theory of stakeholder identification and salience:
defining the principle of who and what really counts
Stakeholder theory offers variety of signals on how questions of stakeholder identification might be answered
o Needed theory of stakeholder salience that can explain to whom and what managers actually pay
attention
Stakeholder in theory
o Freeman: ‘’any group or individual who can affect or is affected by the achievement of organ’s
objective
o Classes of stakeholders can be identified by possession of one, two or three of following:
1) stakeholder’s power to influence firm
2) legitimacy of stakeholder’s relationship with firm
3) urgency of stakeholder’s claim on firm
o To achieve certain ends, managers pay certain kinds of attention to certain kinds of stakeholders
Argument proceeds as follows
o 1st review stakeholder literature
show positions on ‘’Principle of Who or What Really Counts?’’
o 2nd defense of three key attributes (power, legitimacy, urgency) as identifiers of stakeholders
o 3rd introduce managers and salience into the discussion and present analysis of the stakeholder
classes that result from possession of 1, 2 or 3 of these attributes
o 4th illustrate theory’s dynamic qualities by showing how stakeholders can shift from one class to
another
4.2. Jensen (2001) Value maximization, stakeholder theory, and the corporate objective function
Governance at lvl of individual organ: What are we trying to accomplish? How do we keep score?
o social lvl: If we could dictate the criterion or objective function to be maximized by firms, what would
it be?
How do we want firms in our economy to measure their own performance?
Normal corporate objective value maximization (LT market value of firm)
o Main contender = stakeholder theory (account for interests of all stakeholders in a firm)
o Should not be viewed as contender, fails to provide complete specification of purpose or objective
function
o Maximization = a single objective, stakeholder = ‘’many masters’’
Stakeholder will lead to confusion, too many objectives, conflict, inefficiency…
United – to maximize value, managers have to satisfy and enlist support of all stakeholders
o Top management plays critical role for company’s strategic vision
New corp objective function:
o Enlightened value maximization = much of structure of stakeholder theory, but accepts
maximization of LR value of firm as criterion for making requisite tradeoffs among its stakeholders
o Enlightened stakeholder theory = focus attention on meeting demands of all important corp
constituencies, specifies LT value maximization as firm’s objective
Clear way for managers to think about and make tradeoffs among corp stakeholders
Logical Structure of Problem
1. Purposeful behavior requires existence of a single-valued objective function
o at some point increases in MS come at expense of profits (R&D, ads, price reductions…)
can’t maximize profits and MS at same time
no purposeful way of deciding balance
o logically impossible to maximize in more than one dimension at the same time
Week 4: Stakeholders: companies and nongovernmental organizations
4.1. Mitchell, Agle & Wood (1997) Toward a theory of stakeholder identification and salience:
defining the principle of who and what really counts
Stakeholder theory offers variety of signals on how questions of stakeholder identification might be answered
o Needed theory of stakeholder salience that can explain to whom and what managers actually pay
attention
Stakeholder in theory
o Freeman: ‘’any group or individual who can affect or is affected by the achievement of organ’s
objective
o Classes of stakeholders can be identified by possession of one, two or three of following:
1) stakeholder’s power to influence firm
2) legitimacy of stakeholder’s relationship with firm
3) urgency of stakeholder’s claim on firm
o To achieve certain ends, managers pay certain kinds of attention to certain kinds of stakeholders
Argument proceeds as follows
o 1st review stakeholder literature
show positions on ‘’Principle of Who or What Really Counts?’’
o 2nd defense of three key attributes (power, legitimacy, urgency) as identifiers of stakeholders
o 3rd introduce managers and salience into the discussion and present analysis of the stakeholder
classes that result from possession of 1, 2 or 3 of these attributes
o 4th illustrate theory’s dynamic qualities by showing how stakeholders can shift from one class to
another
4.2. Jensen (2001) Value maximization, stakeholder theory, and the corporate objective function
Governance at lvl of individual organ: What are we trying to accomplish? How do we keep score?
o social lvl: If we could dictate the criterion or objective function to be maximized by firms, what would
it be?
How do we want firms in our economy to measure their own performance?
Normal corporate objective value maximization (LT market value of firm)
o Main contender = stakeholder theory (account for interests of all stakeholders in a firm)
o Should not be viewed as contender, fails to provide complete specification of purpose or objective
function
o Maximization = a single objective, stakeholder = ‘’many masters’’
Stakeholder will lead to confusion, too many objectives, conflict, inefficiency…
United – to maximize value, managers have to satisfy and enlist support of all stakeholders
o Top management plays critical role for company’s strategic vision
New corp objective function:
o Enlightened value maximization = much of structure of stakeholder theory, but accepts
maximization of LR value of firm as criterion for making requisite tradeoffs among its stakeholders
o Enlightened stakeholder theory = focus attention on meeting demands of all important corp
constituencies, specifies LT value maximization as firm’s objective
Clear way for managers to think about and make tradeoffs among corp stakeholders
Logical Structure of Problem
1. Purposeful behavior requires existence of a single-valued objective function
o at some point increases in MS come at expense of profits (R&D, ads, price reductions…)
can’t maximize profits and MS at same time
no purposeful way of deciding balance
o logically impossible to maximize in more than one dimension at the same time
