This article by Peter M. Senge is a critique and addition to the article ‘Value Maximization and Corporate Objective Function’ by Michael C. Jenson. The author in this article supports ‘Stakeholder Theory’. He builds up on M Jenson’s argument that organizations should strive for long term value creation.
Learning is important than optimizing because future is uncertain and the similar set of conditions may not give similar results rather if the set of conditions are totally different then the results are less wayward (the author here give ‘Monte Carlo’ simulation’s example of running several sets of values). Learning would result into better understanding of the consequences of our actions, especially understanding of how we may be unwittingly proceed opposite to where we intend.
The single focus as agued by M. C. Jenson on the goal of maximizing firm value will actually reduce the possibility of that goal being attained. The firm’s value maximization will almost always become, by default, short-term profit maximization.
If firm is looking for profit maximization with a myopic view and cutting on training its people and R&D, it is axing itself in the long term. Wealth maximization is dimensionless without attending upon the core problems.
Wealth maximization for organization as a whole would not be easy to understand. Balanced scorecard at organizational level which is further divided into sub level can provide a focused approach to various departments. The author gives example of Toyota’s philosophy of empowering the employees so that they can be intrinsically motivated. This motivation leads to commitment, involvement and perseverance at the employee level and further lead to organizational growth in the long term. He further adds up by providing human aspect to the organizational identity. According to author, the companies who have survived and thrived for a long time tend to see themselves more as human communities and less as machines.
For the organizational success clarity of shared purpose, common principles and strength of belief in them are important.
