Value Maximization, Stakeholder Theory, and the Corporate Objective Function.
This paper examines the role of the corporate objective function in increasing corporate productivity, social welfare, and the accountability of managers and directors. Because it is logically impossible to maximize in more than one dimension, purposeful behavior requires a “single-valued” objective function. Two hundred years of work in economics and finance implies that, in the absence of externalities and monopoly, social welfare is maximized when each firm in an economy aims to maximize its total market value. The main contender to value maximization is stakeholder theory, which argues that managers should attempt to balance the interests of all corporate stakeholders, including not only financial claimants, but employees, customers, communities, and governmental officials. By refusing to specify how to make the necessary tradeoffs among these competing interests, the advocates of stakeholder theory leave managers with a theory that makes it impossible for them to make purposef