The Relation between Stakeholder Management, Firm Value, and CEO Compensation : A Test of Enlightened Value Maximization

Whether firms pursue shareholder value maximization or the maximization of stakeholder welfare is a controversial issue whose outcomes seem irreconcilable. We propose that firms are likely to compensate their executives for pursuing the firm's goal, either shareholder value maximization or the maximization of stakeholder welfare. In this paper, we examine the relation between firm value, stakeholder management, and compensation. We find that stakeholder management is positively related to firm value. However, firms do not compensate managers for having good relations with its stakeholders. These results do not support stakeholder theory. We also find an endogenous relation between compensation and firm value. Our results are consistent with Jensen's enlightened value maximization theory. Managers are compensated for achieving the firm's ultimate goal, value maximization. However, managers optimize relations with stakeholders to accomplish this objective