Topic : Stakeholder theory and firm value

Whilst the objective of shareholders' wealth maximization states that managers should make decisions to maximize the present value of the future expected cash flows to the shareholders of the firm, the principle of maximizing the stakeholders' wealth reflects the most optimal use of society's economic resources as this results in a society's economic wealth. This approach considers that firms are an integrated part of the community and society as a whole. So, it is moral and ethical responsibility of the firm to take care of and protect the interest of all the components of the firm as well as the society. This approach suggests that firms should not only maximize the returns of their shareholders, but also adopt a wider perspective of stakeholders which include employees, suppliers, community, customers, and environment. Corporate social responsibility (CSR) and stakeholders' interest are partly related to each other. You must have heard a lot about "going green", "sustainable firms", and "socially responsible corporations". Firms should have relationship with stakeholder groups, and the processes and outcomes in association with these relationships of interest ought to be meaningful both to the firm and the society. These days, firms have started giving increased emphasis on returning some benefits to the society and many firms have taken initiatives to make contribution to the government in building social amenities and to offer voluntary programs to educate under privileged children, etc. A growing number of magazines, activist groups and websites publish such news, suggesting that one can distinguish the good firms from the bad. Nevertheless, corporate social responsibility is not such a clear-cut issue. Ranking firms by ethics is popular, however telling the good ones from the bad is not straightforward. People are hardly consistent in their ethical behaviours. An individual can cheat on his spouse and report an honest income tax return, or become a model employee and an irresponsible parent. Andrew Carnegie and John Rockefeller were ruthless businessmen yet also generous philanthropists. Interestingly, the actions of the Bill and Melinda Gates Foundation, which was criticized in The Times recently for "irresponsible" investing, worked so well on Microsoft that the firm topped the Wall Street Journal's Reputation Quotient survey. Just as difficult it is to judge the overall ethics of an individual, it is certainly more so in the case of complex business organizations. Few firms widely regarded as socially responsible consistently demonstrate ethical behaviours, while even the most criticized ones are not without virtues. Consider, for example, American Apparel, an icon of corporate responsibility. This firm has been well praised for manufacturing all of its products in the United States and for the high wages and other benefits it provides employees at its Los Angeles factory. However, the firm's marketing uses images of women that border on soft pornography, and its founder and chief executive has been repeatedly accused of sexual harassment. How, then should we rank American Apparel's overall responsibility record? Wal-Mart, another corporate villain, is widely condemned for its low wages and unwillingness to provide adequate healthcare coverage for its employees. Nevertheless, thanks to using its low costs to lower products' prices, Wal-Mart is estimated to save American consumers $30 billion a year - the equivalent of a gift of $270 to every household in the United States. These examples are not atypical. Few virtuous firms are without sin, and few corporate villains have no good qualities. It is usually shades of grey. That does not mean we should give up comparing companies' social or environmental performance. Find and read the relevant literature in this regard (stakeholder theory or corporate social responsibility), and provide your own findings and critiques on how the corporate social responsibility (CSR) affects the firmperformance; i.e. whether the CSR contributes to creating the value of the firm or not.