Published here December 2003. 

PART II | Reason 3 | Shareholder Value | Stakeholder Value
Finding the Right Metrics | Metrics as "Observables" and the Clairvoyant Test
Don't Forget Financial Metrics | Be Careful Using Balanced Scorecards
Each Organization Needs Its Own Metrics | PART IV

Stakeholder Value

An alternative view, more popular outside the U.S., is that firms should create value for all stakeholders, not just shareholders. Stakeholder value includes value for employees, suppliers, customers, and the local community. Proponents of more narrow shareholder value argue that organizations that pursue self-interest and economic efficiency will, in fact, be socially responsible and serve all stakeholders.

However, this argument carries the implicit assumption that the markets within which the firm operates are "perfect", with the result that stakeholders other than shareholders are unaffected by the firm's actions. For example, if people are hired, they are merely paid market wages, and if they are laid off, they can immediately get equivalent jobs elsewhere. Similarly, suppliers and consumers can switch to other firms, and taxes to all layers of government will be the same regardless of the firm's operations.

The U.S. economy is well diversified, which makes the "perfect market assumption" a pretty good approximation. However, the recent well-publicized accounting scandals have caused politicians and some U.S. business leaders to question absolute reliance on shareholder value. It may be reasonable, therefore, for even a private sector company to want to explicitly consider impacts on all stakeholders when making company decisions. Including stakeholder value further weakens the argument for using financial metrics as the sole basis for evaluating projects.

Shareholder Value  Shareholder Value

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