The Effect of Agency Problems in Value Maximization

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THE EFFECT OF AGENCY PROBLEMS IN VALUE MAXIMIZATION Siti Balkish Roslan ZP01796 Financial Management 2/2013 According to HBS Professor Michal C. Jensen, many managers are caught in between the desire to maximize the value of their companies and the demands of “stakeholder theory” to take into account the interests of all the stakeholders in a firm. It is already agency problems arise within a firm whenever managers incentives to pursue own interests at the shareholder expense. This is common knowledge in the business world. There have also been devises and mechanisms that have been created to reduce these problems such as managerial shareholdings, concentrated shareholdings by institutions or by block holders, which can increase…show more content…
A firm cannot maximize value, Jensen writes, if it ignores the interests of its stakeholders. But a melding of new interpretations of both value maximization and stakeholder theory is necessary, he writes, to make possible the "long-run maximization of the value of the firm as the criterion for making the requisite tradeoffs among its stakeholders." He calls this the ENLIGHTENED VALUE MAXIMIZATION and the ENLIGHTENED STAKEHOLDER THEORY. Enlightened value maximization as understood in a new light and explained is that it recognizes communication with and motivation of an organization's managers, employees, and partners is extremely difficult. What this means in practice is that if we tell all participants in an organization that its sole purpose is to maximize value, we would not get maximum value for the organization. (Jensen, 2000) Enlightened stakeholder theory is explained as follows. It can take advantage of most that stakeholder theorists offer in the way of processes and audits to measure and evaluate the firm's management of its relations with all important constituencies. Enlightened stakeholder theory adds the simple specification that the objective function of the firm is to maximize total long-term firm market value. In short, changes in total long term market value of the firm are the scorecard by which success is measured. (Jensen, 2000) In conclusion, none of the above arguments depend on value being easily observable. Nor do they depend
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