A firm cannot maximine value if it ignores the interest of its.{Journals}eufm/7_3/c200/makeup/ . {Journals}eufm/7_3/c200/makeup/. increase market share reduce this years profit. . | {Journals}eufm/7_3/c200/makeup/ European Financial Management, Vol. 7, No. 3, 2001, 297±317 Value Maximisation, Stakeholder Theory, and the Corporate Objective Function Michael C. Jensen1 The Monitor Group and Harvard Business School e-mail: MJensen@ Abstract This paper examines the role of the corporate objective function in corporate productivityand efficiency,social welfare, and the accountabilityof managers and directors. I argue that since it is logicallyimpossible to maximise in more than one dimension, purposeful behaviour requires a single valued objective function. Two hundred years of work in economics and finance implies that in the absence of externalities and monopoly'and when all goods are priced), social welfare is maximised when each firm in an economymaximises its total market value. Total value is not just the value of the equitybut also includes the market values of all other financial claims including debt, preferred stock, and warrants. In sharp contrast stakeholder theory, argues that managers should make decisions so as to take account of the interests of all stakeholders in a firm 'including not only financial claimants, but also employees, customers, communities, governmental officials and under some interpretations the environment, terrorists and black- mailers). Because the advocates of stakeholder theoryrefuse to specifyhow to make the necessarytradeoffs among these competing interests theyleave managers with a theorythat makes it impossible for them to make purposeful decisions. With no way to keep score, stakeholder theorymakes managers unaccountable for their actions. It seems clear that such a theorycan be attractive to the self interest of managers and directors. Creating value takes more than acceptance of value maximisation as the organisational objective. As a statement of corporate purpose or vision, value maximisation is not likelyto tap into the energyand enthusiasm of employees and managers to create value. Seen
