Shareholder Value Maximization - Is There a Role for Corporate Social Responsibility?

11 Pages Posted: 4 Jul 2009

See all articles by John Martin

John Martin

Baylor University

William Petty

affiliation not provided to SSRN; Baylor University

James S. Wallace

Claremont Colleges - Peter F. Drucker Graduate School of Management

Abstract

Nevertheless, the importance and difficulty of balancing stakeholder interests against the overarching goal of efficiency and value maximization cannot be overstated. As with any corporate investment, each dollar of investment in a corporate stakeholder group should be justified by at least a dollar of expected return over a finite time horizon. By practicing this kind of “enlightened value maximization,” to borrow Michael Jensen's phrase, management is likely to end up increasing not only its returns to shareholders, but the size of the corporate pie that is divided among all its stakeholders. Viewed in this light, CSR and value maximization have the potential to be complementary undertakings that result in a virtuous circle in which “doing good” helps companies do well, and doing well provides the wherewithal to do more good. Although often viewed as inconsistent with the corporate goal of value maximization, the corporate social responsibility (CSR) movement can add value by helping companies develop and maintain their reputations for fair dealing with each of their important non-investor stakeholder groups, including employees, suppliers, and local communities. Such “reputational capital” in turn helps reinforce the commitment of those stakeholders through what amount to informal or implicit contracts - contracts that are often critical to a company's long-run success.

Nevertheless, the importance and difficulty of balancing stakeholder interests against the overarching goal of efficiency and value maximization cannot be overstated. As with any corporate investment, each dollar of investment in a corporate stakeholder group should be justified by at least a dollar of expected return over a finite time horizon. By practicing this kind of “enlightened value maximization,” to borrow Michael Jensen's phrase, management is likely to end up increasing not only its returns to shareholders, but the size of the corporate pie that is divided among all its stakeholders. Viewed in this light, CSR and value maximization have the potential to be complementary undertakings that result in a virtuous circle in which “doing good” helps companies do well, and doing well provides the wherewithal to do more good.

Suggested Citation

Martin, John and Petty, William and Wallace, James S., Shareholder Value Maximization - Is There a Role for Corporate Social Responsibility?. Journal of Applied Corporate Finance, Vol. 21, Issue 2, pp. 110-118, Spring 2009, Available at SSRN: https://ssrn.com/abstract=1428135 or http://dx.doi.org/10.1111/j.1745-6622.2009.00232.x

John Martin

Baylor University

Waco, TX 76798
United States

William Petty

affiliation not provided to SSRN

No Address Available

Baylor University

Waco, TX 76798
United States

James S. Wallace

Claremont Colleges - Peter F. Drucker Graduate School of Management ( email )

The Drucker School of Management
1021 North Dartmouth Avenue
Claremont, CA 91711
United States
(909) 607-6063 (Phone)

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