**7. Stakeholders and sustainability**

worker-cooperatives (or unions) are examples of organizations where consumers or workers explicitly get the shared income from an operation. Confliction in the two theories comes from the main disputed questions which turn out to be: Who should be the parties that have such "rights" on the asset or property and: Who has the authority to allocate the shared income? Jensen and Meckling [53], Ross [67], Quinn and Jones [64], Jensen [51] all argued in favor of shareholders maximization theory based upon the ideal that shareholders are essentially the principals who invest their explicit capital and delegate their managerial rights to managers or agents to operate the firm using the single objective to maximize the wealth of shareholders. By contrast, Freeman [34], Donaldson and Preston [28], Kay [55], Blair and Stout [10], and Freeman et al., [37] are researchers in favor of the stakeholders' theory. Kay [55] argued that assets of the firms are in many forms and not just monetary capital provided by shareholders. Employees provide the skills, customers and suppliers' the willingness to purchase and sell; additionally, a better understanding from societal groups around the firm is also an important asset that in terms of its returns, should be maximized. Kay explains that managers are the

Stakeholder theory is called an incomplete theory by Jensen. Jensen argues that stakeholder theory is incomplete because it does not offer a maximization of value for stakeholders. He also points out the flaw in the theory is that it does not provide a single-objective, so that the management cannot have a long-term goal under the stakeholder concept. However, he accepts that a stakeholders-oriented policy is needed to couple with the objective function and is labeled the "enlighten value maximization" policy. According to Boatright [11], stakeholder theory is not inconsistent with the nexus-of-contract view of firms, in which shareholders are held to be the only group that should be allowed to maximize their value. Boatright [11] reconciled the theory of stakeholders and nexus-of-contract views and argues that stakeholder theory has the following perceptions: (1) all stakeholders have a right to participate in corporate decisions that affect them, (2) managers have a fiduciary duty to serve the interest of all stakeholder groups, and (3) the objective of the firm ought to be the promotion of all interests and not just those of shareholders alone. These three criteria are served as the essential concepts to understand how value and stakeholders are related. It is not uncommon for all stakeholders to participate in corporate decisions in this corporate governance structure. But, it is possible for some groups (employees or creditors) in some countries to have no such right [48].

According to the traditional concept, a firm is composed of contracts among interrelated groups within. The nexus-contract meaning of firms [4, 21, 32, 33, 53] views the value of firms as the value of explicit contracts among monetary stakeholders, such as shareholders and debt holders. Such meaning of the term "firm" is challenged by the increasing importance of nonmonetary and *implicit* stakeholders. From this perspective, values of firms can be increased because of the increasing value of implicit contracts [22, 75] and intangible assets [11, 51, 82]. Further, since each constituency can bargain with a firm over the effective means for protecting its interests, value of firms can be increased (or decreased), when each constituencies'

trustees of these assets.

12 Firm Value - Theory and Empirical Evidence

**6. Sustainability of a firm**

Corporate sustainability is a broad dialectical concept that combines economic growth with environmental protection and social equity. Originally, the term was used by the World Commission for Environment and Development or WCED in 1987, which defined sustainable development as *development that met the needs of present generations without compromising the ability of future generations to meet their needs.* The concept of sustainable development was originally created to enhance the implementation of macro-economic policy against the direction of country-development, which most countries often set in tandem with policies geared toward monetary growth (such as GDP). The concept has subsequently been used by businesses, who then labeled the term as "corporate sustainability" to differentiate from the macro-concept. Despite the lack of clarity as regards a working definition, there are still common concepts used to explain this term. The common concept usually documented is from the Global Reporting Initiative (GRI), which is the nonprofit organization that works toward a sustainable global economy. From the viewpoint suggested by the GRI, corporate sustainability comprises *three pillars*: the economic performance, the environmental aspect, and the sociological performance.

The three pillars concept is very much well known in connection with the name of the *triple bottom lines* delineated by Elkington [31]. Corporate sustainability is almost identical to the triple bottom lines and many businesses use and interpret it as if they are utilizing the exact self-same meaning. However, there are some different points that should be noted. The first point is the interpretation over the term "economic performance." Triple bottom lines interpreted "economic" as accounting for the profit of firms, whereas the corporate sustainability concept describes economic performance more broadly than just accounting for the profit of firms in this limiting fashion. The second point of difference is the perception of *value.* While the triple bottom lines separate the value from the environmental and the social by implying that management has to indulge extra activities to enhance economic profit [43], the corporate sustainability theory states that value can be created when resource-suppliers (or stakeholders) are maximized [43, 61].

got into trouble when their practices adversely affected various stakeholders, both extrinsic and intrinsic. In fact, their practices and standards did not meet the required ethical standards

Firm Value

15

http://dx.doi.org/10.5772/intechopen.77342

*"The nature of the firms is changing. Large conglomerates have been broken up, and their units have been spun off as stand-alone companies. Vertically integrated manufacturers have relinquished direct control of their suppliers and moved toward looser forms of collaboration. Human capital is emerging* 

The developmental learning of firm theory through its history is akin to what Isaac Newton (1675) alluded to when he claimed *If I have seen further it is by standing on the shoulders of Giants*. If we imagine the *theory of firm value* as a ride on a long journey, we can see a lot of changes along the way. Along the journey, the view from one side of the road is clearly different from that on the other side of the road. It moves from one belief in the theory of shareholders to the other side, or the emphasis upon stakeholders. Firm theory has to address these vacillations in financial knowledge. Zingales turns the spotlight onto the future of finance, when he writes that the new theory of finance should understand the relative effects of mergers, acquisitions, spin-offs, and diversification under the aegis of these new theoretical changes. In these new and changing circumstances, the concept of corporate governance must be addressed in order

for it to develop a new system to cope with these new market environments [65, 82].

Faculty of Business Administration, Chiang Mai University, Chiang Mai, Thailand

mance. The Review of Financial Studies. 2005;**18**(4):1403-1432

[1] Adams RB, Almeida H, Ferreira D. Powerful CEOs and their impact on corporate perfor-

I gratefully acknowledge the Thailand Research Fund (TRF) for providing the funding on the project number RSA5580020. This chapter is based on a partial study from this project.

Zingales [82] described the changing characteristics of modern firms by claiming that:

of a wide range of stakeholders.

*as the most crucial asset."*

**9. Conclusion**

**Acknowledgements**

**Author details**

Address all correspondence to: ravi.l@cmu.ac.th

Ravi Lonkani

**References**

The resource-based concept of corporate sustainability fits very well with the overall framework of stakeholders' theory [28, 34–36, 42], which has the main focus of sharing the value created in firms between all stakeholders—not just shareholders. As a consequence of this assumption, we use the terms "corporate sustainability" and "stakeholders" theory interchangeably in this chapter. Practically, it is very difficult to separate the sustainability strategy from a policy that is focused on the triple bottom lines theory.
