Business Ethics Quarterly


Value Maximization, Stakeholder Theory, and the Corporate Objective Function

Michael C. Jensen


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. Enlightened value maximization utilizes much of the structure of stakeholder theory but accepts maximization of the long-run value of the firm as the criterion for making the requisite tradeoffs among its stakeholders, and specifies long-term value maximization or value seeking as the firm’s objective. This proposal therefore solves the problems that arise from the multiple objectives that accompany traditional stakeholder theory. I also discuss the Balanced Scorecard, which is the managerial equivalent of stakeholder theory, explaining how this theory is flawed because it presents managers with a scorecard that gives no score—that is, no single-valued measure of how they have performed. Thus managers evaluated with such a system (which can easily have two dozen measures and provides no information on the tradeoffs between them) have no way to make principled or purposeful decisions. The solution is to define a true (single dimensional) score for measuring performance for the organization or division (and it must be consistent with the organization’s strategy), and as long as their score is defined properly, (and for lower levels in the organization it will generally not be value) this will enhance their contribution to the firm.

MICHAEL C. JENSEN is the Jesse Isidor Straus Professor of Business Administration, Emeritus, Harvard Business School and the Managing Director of Organizational Strategy Practice, The Monitor Company. He is an authority on organizational strategy and finance. He is the author of Foundations of Organizational Strategy (Harvard University Press, 1998), Theory of the Firm: Governance, Residual Claims, and Organizational Forms (Harvard University Press, 2000), among other works. Professor Jensen is the author of more than fifty published papers, comments, and articles on a wide range of economic, finance, and business-related topics in scholarly journals, books, and the popular and business press. He is editor of The Modern Theory of Corporate Finance (with Clifford W. Smith, Jr., McGraw-Hill, 1984) and Studies in the Theory of Capital Markets (Praeger Publishers, 1972). He founded the Journal of Financial Economics in 1973, and now serves as Founding Editor. From 1992 through 1998, he served on the steering committee of the Mind Brain Behavior Initiative at Harvard University. E-mail