Tuesday, July 06, 2010

Theory of the firm and Stakeholder Theory

My post earlier touched on the question of whether firms have an interest in the efficiency of the markets in which they compete.

A possible counter to that is that profit maximising firms cpossibly would, but ever since Berle and Means wrote The Modern Corporation and Private Property it has been known that managers can be driven by other values like revenue maximisation.

At the same time the field of Stakeholder Theory has gathered significant academic research. Ultimately this is the view that the firm owes obligations to multiple stakeholders not just equity investors.

Ultimately though this can resolve to the points raised by John Kay in Obliquity that the best way to deliver return to shareholders is to manage to the interests of all stakeholders. You don't maximise profit by planning to maximise profit, you maximise profit by serving your customers well, caring for your environment and developing your human resource base.

Which makes one think of poor BP - who tried to go green with their Beyond Petroleum logo, but now are reportedly at risk of collapse from the problem in the Gulf. Personally I can't believe that as there must both be insurance of some kind, and I'd have thought some liability from Halliburton who actually performed the work that failed.

It should however be a reminder to all that risk management and stakeholder analysis are as or more important than financial planning and developing the dividend policy.

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