value

In the broadest sense, the purpose of a business-organization is to produce value. Value produced is the difference between the selling price of the business's offering and what it cost to produce. This is the profit, the benefit to the firm. The market value of the firm, as measured in the stock price, is simply the long-term valuation of this expected stream of benefits. The highest level general objective of a business-organization is to have a competitive advantage in order to produce the highest value for its customers.

Social responsibility, value, and profits -- ""What is a firm to do? -- (Scott & Davis, 2007, p 331-333)
The stakeholder model holds that all persons or groups with legitimate interests deserve consideration, and that ""there is no prima facie priority of one set of interests and benefits over another"" (p. 68).

Some economists strongly dispute the idea that ""stakeholders"" who are not investors in the firm should receive special attention. The title of Milton Friedman's famous 1970 article in the New York Times Magazine conveys its conclusion bluntly: ""The social responsibility of business is to increase its profits."" Friedman states that those who talk about broader social responsibilities for business are ""preaching pure and unadulterated socialism. Businessmen who talk this way are unwitting puppets of the intellectual forces that have been undermining the basis of a free society these past decades."" Businesses are run for the profit of their owners, and if executives channel those profits to uses that do not benefit the business-without the consent of the owners- then they are imposing an unjust tax.

Organizational scholars responded by seeking to document a positive relation between corporate social performance-the extent to which firms engage in ""socially responsible"" actions, defined in a variety of ways-and corporate financial performance, arguing that companies can do well by doing good. Margolis and Walsh (2003) reviewed 127 such studies published between 1972 and 2002 and found that research tends to find a modest positive relation (although not always), but that methodological difficulties were widespread. What counts as ""socially responsible behavior""? How does one measure on the same scale such diverse initiatives as employee volunteer programs, dollars donated to support public television, or in-kind donations of water and logistic support for flood victims? And how does one disentangle cause and effect? A company that donates 5 percent of its profits to charity will, of course, have a perfect correlation between profits and social responsibility as measured by charitable donations (assuming its profits are greater than zero). Moreover, Margolis and Walsh (2003) point out that executives frequently justify their social responsibility not on bottom-line grounds, but because it is the ""right"" thing to do; thus, the question should not be, Does business benefit from being socially responsible? but, Why do they do what they do, and how does it help its intended beneficiaries (if at all)?

Jensen (2002) argues that the stakeholder model is either blandly unobjectionable-yes, businesses should take account of those affected by its operations, because it is unlikely to succeed otherwise-or a recipe for paralysis. Those running organizations need some way to make trade-offs and to recognize better and worse. ""Any theory of action must tell the actors, in this case managers and boards of directors, how to choose among multiple competing and inconsistent constituent interests"" ( Jensen, 2002: 241), but it is precisely this issue that stakeholder theories avoid. By asserting that no group's interests come first, it gives no guidance for how to make choices among competing ""goods."" Managing for profitability, on the other hand, gives clear guidance; furthermore, Jensen states,

200 years' worth of work in economics and finance indicate that social welfare is maximized when all firms in an economy maximize total firm value. The intuition behind this criterion is simply that (social) value is created when a firm produces an output or set of outputs that are valued by its customers at more than the value of the inputs it consumes (as valued by their suppliers) in such a production. Firm value [roughly proxied by share price] is simply the long-term market value of this stream of benefits. (2002: 239).

Suppliers and employees agree to sell their contribution at a particular wage (which is presumably the best price they could get), firms combine the inputs to produce a good or service, and customers voluntarily pay a price for this output. Assuming no externalities or monopoly power, everyone has voluntarily agreed to these exchanges, and profit-the difference between what customers paid and what it cost to produce the output-measures the net value created for society.

This argument suggests that firms should maximize shareholder value not because shareholders are specially privileged, but because profit over the long term is the best measure of a firm's contribution to social welfare, and share price is the best measure of expected long-term profit. As Gilson (1981) memorably concludes, ""[I] f the statute did not provide for shareholders, we would have to invent them."" Shareholders, or their share price-motivated agents, are ""residual claimants,"" meaning that they only get paid after all the other participants (""fixed claimants"") are satisfied-suppliers, employees, those that provided debt and, of course, customers. Shareholders thus bear the greatest financial risk. By hypothesis, this gives them the right incentives to make sure that all these other stakeholders are well taken care of.

Yet this story is also oversimplified. Blair (1995: chap. 6) points out that shareholders in general are highly diversified-most stock is held by institutional investors such as mutual funds, which hold stakes in dozens or, in some cases, thousands of companies, and who are thus relatively risk-neutral. If a company in their portfolio declines, they can always sell their stake and move the funds elsewhere. Employees, on the other hand, often have large specialized investments in their employer that they cannot redeploy elsewhere (see Chapter 10 on transaction costs and asset specificity). If the company fails, or if they lose their job, they suffer a much greater loss that cannot be easily diversified-especially if they own company stock as well, as did large numbers of Enron employees. And employees are often residual claimants too: both employment risk and compensation tied to firm performance leave them in a situation much like that of shareholders and, Blair argues, in a legitimate position to demand some influence in corporate governance. She redefines stakeholders as analogous to shareholders thus: ""all parties who have contributed inputs to the enterprise and who, as a result, have at risk investments that are highly specialized to the enterprise"" (Blair, 1995: 239). This definition narrows the problem of conflicting interests described by Jensen (2002), but unfortunately does not eliminate it. On the other hand, Blair, echoing Cyert and March (1963), points out that organizations have been balancing conflicting objectives for some time, and it does not appear to be quite as paralyzing as advertised.

Walsh (2005) points out a troubling aspect of stakeholder theory: based on the definitionsnew of ""stakeholders"" described above, businesses often have no responsibility to those with the greatest need. Kofi Annan visited the U.S. Chamber of Commerce in 2001 to encourage America's business leaders to join the international fight against the AIDS pandemic. AIDS is perhaps the greatest public health crisis in history and had already killed 24 million children when Annan spoke, primarily in sub-Saharan Africa where the disease has had its greatest impact. Millions of AIDS sufferers live in impoverished nations run by corrupt or failed states, and even when the public health system is functioning, drug therapies are often beyond the reach of most of those who need them. Yet Walsh points out that, according to any standard definition of ""stakeholder,"" most businesses have no particular obligation to answer Annan's call: after all, children with AIDS in Africa are not their stakeholders. Clearly, something is missing from a theory that yields this result.

Discussion --

Value is the worth of something by its possessor. Value must be provided by an organization to its environment or it will cease to exist. The value of an offering is determined by such factors as importance, worth, or usefulness as perceived by the buyer of the offering.

Unique value is value that is only obtainable from one source. If an organization is the source of that unique value, it has created a condition of imperfect competition, enabling it to generate economic profits above and beyond the cost of providing that value. Gasoline is of great value, but the market to supply it is highly competitive, making the price relatively low for the value provided. Coca-Cola, on the other hand, is only available from one source, commanding a premium price for the value it provides. Golf club manufacturers continually innovate their offerings in order to provide a unique value. Of course part of the value to the customer is the identity of the brand, including the golfer's sponsored by the club manufacturer.

Developing a unique value offering is the objective of strategy. The ability to produce a condition of imperfect competition is competitive advantage.