Value Maximization and Corporate Social Responsibility; Why or Why Not?

Value Maximization and Corporate Social Responsibility (CSR); Why or Why Not?

By Sean Erik Holm

In my words: Value maximization is the concept that by working toward an increasingly positive corporate sum total (its value minus claims against), over an extended period, will provide the best return to those seeking a consistent gain in value. It is sometimes called stakeholder theory, which takes into account more than just shareholders, it includes all the stakeholders; owners of the company, its suitors, customers, government, and the multitude of environments where corporations compete. It is important to note that this list of stakeholders is not exhaustive and it can be argued that many more stakeholders exist, but for the purpose of this paper I will concentrate on the cornerstones of value, along with the impacts to stakeholders mentioned above. The strategy a manager should employ is to enhance the long-term upward value of their company that takes into account ALL the stakeholders in its sphere of influence, employing the four cornerstones of value in their decisions, creating real value as the primary principle.

I believe that the value maximization principle is the primary corporate objective. Growth and return on investment capital (ROIC) is the first major cornerstone of finance according to, “Value: The Four Cornerstones of Corporate Finance” by McKinsey & Company. I think stakeholders benefit with this approach, the environments excluded: Shareholders make dividends, managers see an increase of share price and business value, creditors receive payments on time, customers’ needs are met at the right price, government maintains infrastructure through taxation, and so forth. Doing this induces the “value cycle spiral” as described on page 28 of the Reyes PowerPoint presented on August, 6th, 2012.

Cornerstone two is to maintain the existing value at hand ferociously. The author calls it the conservation of value. Edward Mason’s Structure-Conduct-Performance (SCP) model suggests never ending refinement of business performance within the five forces. To only maintain a business at its current level is shown to be a fool’s errand as competitors will always compete for market share. I have struggled personally with this, as I have always thought, “Why can’t a business just be happy with what they have now?” I now know this cannot and will not happen. Competition will put a quick end to your means. Core value must be maintained and preserved in concert with company growth and ROIC.

Cornerstones one and two together derive the overall value of a business. The first two cornerstones mentioned above work together to form the foundation of business value. They are the base from which to build the final two values.

The author identifies the third cornerstone of value as the expectations treadmill. When