VALUE MAXIMIZATION AND STAKEHOLDER THEORY: COMPATIBLE OR NOT?

Complicating the current corporate governance controversy is a major disagreement about the fundamental purpose of the corporation. There are two main views on what should constitute the principal goal of the firm. Most economists tend to endorse value maximization-that is, maximization of the value of the firm's debt plus equity-or a version of value maximization known as "value-based management" (VBM) that aims to maximize shareholder value. The main challenger is "stakeholder theory," which argues that the corporation exists to benefit not just investors but all its major constituencies-employees, customers, suppliers, the local community, and the federal government, as well as shareholders. Thus, whereas the success of a corporation under VBM could be assessed simply by its long-run return to shareholders, under stakeholder theory a company's success would be judged by taking account of its contributions to all its stakeholders. 2003 Morgan Stanley.