Q1 .What are the main arguments put forwards by Jensen in the paper, i.e. what is it about?
In Jensen’s paper “Value Maximization, Stakeholder Theory, and the Corporate Objective Function,” he discusses the aforementioned concepts in detail, discussing how they are applicable in the workplace world (if at all). Mostly, Jensen deals with just how viable these theories, as presented, are for workplace use, and how easy they are to replicate in individual offices. His overall thesis is that, due to the fact that you can only maximize productivity in one dimension at a time, you must choose one objective function to emphasize as you modify behavior around your office. It is the role of the managers to implement these changes, and as a result better strategies must be given to them to facilitate their responsibilities.
Value maximization, according to Jensen, is the concept in which you increase the company’s total market value. This involves managers and directors taking a more active interest in their work and the work of others, as well as everyone putting forth their best effort to further the profit of the company. As a result of the increase in market value, the employees and managers can receive a much higher level of fulfillment from their work, as well as greater social welfare on the part of the company. Total market value must be maximized as much as possible in order to boost social welfare to its highest levels.
Stakeholder theory posits that, instead of caring for the welfare of the employees first, the shareholders must be the top priority. This means making decisions and changes that would make sure that their stock goes up and stays up. However, Jensen pokes a hole in this theory, as those who propose it often do not have a real way for implementing it in a workplace environment. This leaves confused managers and directors with no choice but to attempt their own interpretation of stakeholder theory, which can certainly lead to disaster. At the same time, they might prefer this, as there is little to no accountability for their mistakes, given the lack of direction they are provided.
Stakeholders must also be taken into consideration when maximizing value; enlightened value maximization is a proposal Jensen puts forward in his paper in order to reconcile both value maximization and stakeholder theory. In this theory, the stakeholder theory remains, but value maximization is often seen as the means by which this theory can be serviced. Improving the firm and making it more valuable would, in turn, benefit the stakeholders. The objective of the company then becomes value maximization, instead of muddling the mission statement of a company with multiple objectives.
In addition to these concepts, the Balanced Scorecard is discussed; this is another way to operate a business, which is meant to please the stakeholders by weighing the managers against certain criteria to see if they are doing their jobs. However, given the same problems as stakeholder theory – there is no real barometer for success – it can be very difficult to actually grade managers and see how they do. As a result, Jensen eschews the Balanced Scorecard in favor of a new type of measuring score that is created by the individual managers themselves. Thus, they create their own criteria by which to measure their behavior and performance; this keeps them accountable to themselves, as well as the overall strategy and objectives of the company. If this were to be enacted, there would be no need for generalized and nonspecific theories for improving value and performance.
I believe there is a lot of sense in what Jensen is saying – he makes very strong arguments for the weakness of stakeholder theory and the Balanced Scorecard; managers need to be given all the tools required in order to succeed.
Q2. What are the main arguments put forwards by Jensen in the paper i.e. what is it about?
In Jensen’s paper “Paying People to Lie: The Truth about the Budgeting Process,” he talks about the flawed nature of the budgeting system, as well as using targets in order to gauge appropriate compensation and measure performance. According to him, it is far too easy to tempt people to lie about what they have done or are capable of doing in order to get these raises. There are two ways in which this damages the system; first, these lies lead to incorrect information being used to factor in the budgets in subsequent years, and secondly the value of the organization diminishes due to the inaccurate targets and budgets that can bring about discrepancies in the organization’s funding.
Jensen adds to this debate a more comprehensive look at the inside information going into determining compensation and promotions. By his admission, “these processes are a joke,” and detailed just how many hoops people have to run around in order to reevaluate budgets given an executive’s sudden self-administered rise in pay. The levels of ignorance as to the actions and motives of others within a company is made clear by Jensen, explaining why this pay issue has been such a problem of late. No one wants to do anything about it, because no one notices.
Jensen believes that, in order to solve this problem, the organizations must pay their employees differently. By removing targets and budgets from the formulas used for determining compensation, there are fewer incentives to lie about your job description or performance in order to get that promotion. Moving to a linear compensation formula would make for a more honest system, as Jensen believes. All of these factors have led to a culture in which lying is considered okay, because you are getting ahead without hurting anyone; just getting more pay. However, by starting the road to lying here, it is far too easy to start lying about other parts of your work, and lying to your coworkers about other things, leading to even greater problems down the road.
In my opinion, this will still not provide an adequate solution to the problem. Budgets and targets must be factored in order to determine peoples’ worth within a company; a strict linear compensation formula would not be sufficient to determine this. An employee must be ranked and paid according to their skill and value to the company. The problem of lying is certainly present, but there surely must be a better system for determining realistic pay than removing budgets and targets from consideration altogether. Perhaps better accountability and oversight is the solution; allowing employers to have a realistic picture of the work that employees do would help them gain a more realistic perspective on how to pay them, and not leave it up to the greedy employee to make up numbers to get higher commissions.
This argument is not entirely convincing, however, as Jensen fails to adequately go into why a linear compensation formula would be better. By using this particular type of formula, you then remove many employees’ incentive for working harder; despite the fact that some people game the system, some people also deserve to be paid more for their work. By switching to a linear formula, you lessen the chances of rewarding a hard working employee adequately in order to prevent some others from gaming the system. He makes an argument for the problem existing very well – demonstrating the clear reason why people lie in order to game the system – but his solution requires more adequate explanation if it is to be convincing as a viable alternative.
Q3. What are the characteristics of the public sector which differentiate it from the private sector?
The public sector and the private sector have very distinct differences that must be understood in order to fully comprehend their nature. In the public sector, employees serve the people in a plethora of varied services, from state administration to infrastructure, to even schools. Multiple values have to be considered in public service, and coproduction must occur wherein a third party is required to fill in the blanks to form a complete service (Bruijn, 2007). For example, a school is meant to both educate and provide a safe environment for children; these are multiple values. What’s more, the parents as well as the teacher are expected to provide for a portion of the child’s education, the teacher not taking on the whole endeavor him or herself. While this makes for a more comprehensive system, it can often be quite difficult to determine just who is accountable for an action or a mistake. If the child does not learn adequately, for example, is it the teacher’s or parent’s fault?
The private sector, on the other hand, involves companies that are owned by private businesses – not at all a part of the government or state infrastructure. They are able to have single values if they like, and are often responsible for the entirety of a product or service, not relying on coproduction at all. This makes accountability much more important, but a lot easier; an employee of a company is entirely responsible for an action that takes place on his or her watch, as they were the only person tasked to perform that particular function. This is important for managers to realize, as managing a private company allows you to have the right to keep track of your employee’s movements and actions. While this is certainly true in the public sector as well, it is slightly more difficult to assign blame when it is uncertain who should be doing what. What’s more, it is harder to punish an employee than it is someone they are coproducing with.
The public sector is unique, in that it can often employ the services of the private sector in order to further its goals. Often, private companies are contracted out to perform work for the public sector, as the public sector alone does not carry sufficient equipment or trained personnel for the job. This is particularly true with construction and manufacturing jobs. What’s more, the public sector is much more integrated than the private sector – the private sector consists of several independently running companies who hardly share a collective money pool. With the public sector, on the other hand, state and federal governments all work together to provide joint services to the people, offering a collective budget with which to work in the end. While there are state budgets, federal budgets also exist to supplement that.
On the other hand, the government can also sponsor private sector enterprises, if they perform an absolutely vital function. Amtrak, for example, is a private organization, but due to its importance in ferrying Americans and cargo across the country, the government provides them with assistance in order to take advantage of these services themselves. This is still cheaper than doing it themselves, and it allows them to support a business who will handle most of the overhead and personnel, not to mention equipment (Waal, 2007).
While the public sector is forced to work with the people in its jurisdiction, a private sector reserves the right to not provide services or goods to anyone if they so choose. This may be counterintuitive to their mission statement, but it is possible to cut off services to those who are abusing it. The public sector, on the other hand, must toil to work for the common man.
Bruijn, J. A. (2007). Managing performance in the public sector (2. ed.). London: Routledge.
Jensen, M. (2001). Value Maximization, Stakeholder Theory, and the Corporate Objective Function. Harvard: Monitor Company.
Jensen, M. (2003). Paying People to Lie: the Truth about the Budgeting Process. European Financial Management, 9(3), 379-406.
Waal, A. (2007). Strategic performance management: a managerial and behavioural approach. Basingstoke [England: Palgrave Macmillan.