Practical analysis for investment professionals
22 April 2020

Not Everything That Counts Can Be Counted

How do you manage a company from a stakeholder value maximization perspective?

After I wrote about the excesses of shareholder value maximization, a reader asked me if I knew of any such methodologies. It is a legitimate question: How do you weigh the concerns of assorted stakeholders ranging from shareholders to clients to employees and the local community? 

And indeed, there is no formal approach that I am aware of. But then again, we all practice stakeholder value maximization in our daily lives.

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Think about your family. You may be married with children. You and your other half may have siblings as well as parents and inlaws, etc. 

In this family business, shareholder value maximization means doing what you like to do best and whatever you think is best for you. Who cares what your spouse and children eat so long as you can hang out at the pub with your mates?

Obviously, such an approach isn’t sustainable and your family business will likely end in divorce. So you engage in a form of enlightened shareholder value maximization: You consider the needs of your spouse, take on childcare duties, and support their professional endeavors, etc. 

That works better. But you still have to deal with conflicts among your stakeholders. Your children may want different and mutually exclusive things, a dog rather than a cat, say. Your mother-in-law may not think you’re good enough for her son or daughter and may not be shy about letting you and everyone know. And just watch what happens when the various siblings try to get their hands on an inheritance . . .

Yet, somehow, we all deal with these diverging interests all the time without studying them in business school or with any formal training in stakeholder management. Yes, some of us are better at it than others, but the same holds true for shareholder value maximization. 

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All of this is to say that there is no formal theory or universal guide to stakeholder value maximization. How could there be? There is no one method to weigh quantitative and qualitative aspects against each other. And that doesn’t lend itself to economic analysis. As George A. Akerlof nicely demonstrates in a forthcoming article in the Journal of Economic Literature, economics, and business sciences have always preferred hard problems over soft problems. What are hard problems in this context? Those that can be quantified and tackled with an equation. Soft problems are not so easy to define and may be altogether undefinable. The focus on hard problems has led to what Akerlof calls Sins of Omission and he gives several important examples:

  • The failure to predict the global financial crisis of 2008 due to our inability to understand the interconnections between different markets,
  • The failure to predict the actions of actors who act rationally, but not to optimize a given monetary utility function. 

The last point in particular goes to the core of the issue. What drives people to do A as opposed to B? We still have no real understanding of what motivates people. And because we don’t, we also have a hard time grasping how to deal with such concepts as environmental, social, and governance (ESG) investing, climate change, smoking, or socialism.

And as long as we don’t understand the motivations of different stakeholders, we will not be able to maximize stakeholder value. But then again, evolution has given us all the tools we need to practice stakeholder maximization: Empathy and the ability to put ourselves in someone else’s shoes.

For more from Joachim Klement, CFA, don’t miss 7 Mistakes Every Investor Makes (And How to Avoid Them) and Risk Profiling and Tolerance, and sign up for his Klement on Investing commentary.

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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.

Image credit: ©Getty Images / Giorez


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About the Author(s)
Joachim Klement, CFA

Joachim Klement, CFA, is a trustee of the CFA Institute Research Foundation and offers regular commentary at Klement on Investing. Previously, he was CIO at Wellershoff & Partners Ltd., and before that, head of the UBS Wealth Management Strategic Research team and head of equity strategy for UBS Wealth Management. Klement studied mathematics and physics at the Swiss Federal Institute of Technology (ETH), Zurich, Switzerland, and Madrid, Spain, and graduated with a master’s degree in mathematics. In addition, he holds a master’s degree in economics and finance.

1 thought on “Not Everything That Counts Can Be Counted”

  1. Savio Cardozo says:

    Joachim I am firmly shareholder centric in my views on corporate governance but love the way you have laid out how to think about other stakeholders. Some time back Jason Voss also elegantly described stakeholders through the income statement. Thanks for taking the time to write this – enjoyed it very much. Have a nice weekend.

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