Despite the empirical evidence that it matters, many firms do not make optimal investments in stakeholder engagement or higher purpose. One reason for this disconnect may be that stakeholder engagement and purpose are missing from agency-based models of the firm. This paper considers the consequences of integrating stakeholder engagement and higher purpose into a model of the firm. Engagement is an integral component of self-realization and emerges conditionally after stakeholder’s deficiency needs are met. The equilibrium value of the firm depends upon the strength of the connection between engagement and firm productivity as well as whether shareholders recognize this connection. The model illustrates how models that omit engagement may lead to ‘shareholder-limited’ thinking, creating self-limiting mindsets that leads to self-limiting value creation within the firm. Thus, this paper considers how worldviews embedded in economic models affect economic decision-making and then sketches a key change that occurs when a more fully Christian worldview is integrated into the model’s starting assumptions.
Most agency-based models of the firm are missing important determinants of firm value. Some of these important determinants include meaningful and engaging work, social relationships or a sense of transcendent mission or purpose. In spite of their documented impact on value, there is evidence that firms ignore or under-appreciate these determinants when making financial decisions. One reason for this is that most formal models omit these determinants and lead to decisions that ignore them.
A central thesis of this paper is that financial models affect our decisions, and our decisions help to shape social reality. This has an important implication for Finance: financial decisions may reflect embedded assumptions in the models and may produce decisions that ignore or under-appreciate key omitted factors. Self-limiting models may actually create self-limiting realities.
Quinn and Thakor (2018) describe a process of employee engagement that defies the either-or logic of conventional economic models. According to Quinn and Thakor (2018), one of the reasons that executives avoid focusing on purpose or engagement is because “it defies what they have learned in business school and, perhaps, in subsequent experience: that work is fundamentally contractual, and employees will seek to minimize personal costs and effort.”
This paper develops a model of the firm that incorporates engagement and higher purpose. The focus is upon the principal (shareholder) and agent (employee stakeholder) but the methodology easily generalizes to all primary stakeholders. Using the standard principal-agent model of Jensen and Meckling (1976) as a starting point, the model introduces an additional source of agent utility and firm productivity: stakeholder engagement. To understand the implications of this, at least three fundamental properties of engagement and higher purpose that are relevant. First, engagement produces a type of intrinsic motivation that is unrelated to external incentives or standard principal-agent concerns. Second, engagement emerges conditionally only after other needs are met, both collectively and individually. Third, engagement is a human growth need where a feeling of fulfillment is the motivation for further human action.
Key References
Bandura, Albert. Social Foundations of Thought and Action: A Social Cognitive Theory. Englewood Cliffs, NJ: Prentice Hall, 1986.
Cremers, M. 2017. What Corporate Governance Can Learn from Catholic Social Teaching. Journal of Business Ethics 145 (4): 711-724.
John Paul II. Laborem Exercens. Vatican City: Libreria Editrice Vaticana, 1981. http://www.vatican.va/content/john-paul-ii/en/encyclicals/documents/hf_jp-ii_enc_14091981_laborem-exercens.html.
Maslow, Abraham. Motivation and personality. New York: Harper & Row, 1970.
Quinn, R. and A. Thakor, 2019, The Economics of Higher Purpose, Berrett-Koehler.