What is a Shareholder-Centric Perspective?
Corporations that consider the interests of shareholders as paramount while making governance decisions are said to have Shareholder-Centric Perspective. This perspective has a significant impact on the growth, direction, and strategic planning of a business.
How to Use a Shareholder-Centric Perspective
When Shareholder obligations and wealth creation take centre stage in corporate governance, Shareholder-Centric Perspective drives the decision making. Shareholder primacy in this scenario overrides other considerations like corporate social responsibility, consumer demands and employees and corporate stakeholders interests. While advocates of Shareholder-Centric Perspective demand that corporates focus on maximizing the profits for shareholders, the Stakeholder-Centric Perspective advocates for equal emphasis on other factors like quality, corporate culture, social mores, etc.
The Factors Influencing Shareholder-Centric Perspective
This perspective stems from the answer to the question, Who owns a corporate?. As investors, shareholders are partial owners of the business and their interests should supersede those of other stakeholders even as they should be accorded greater control in the operating of said business. Other stakeholders like board members, employees, and executives are there to serve the business – which in turn serves shareholder interests, ergo, everyone involved should work towards maximizing profits for shareholders. Since wealth creation is one of the most significant parameters of measuring growth, it provides the Shareholder-Centric approach a solid framework of reasons to advocate its goals.
Criticism of the Shareholder-Centric Perspective
Critics of the Shareholder-Centric Perspective argue that a corporate cannot be owned and serves a myriad of purposes. Besides being responsible for its shareholders wealth, it also has obligations towards its clients, consumers, stakeholders, community and society at large. It is a legal entity that is not bound by ties of investments alone. Within this larger context, shareholders are just a part of the sum and not the prime focus of its existence. This view has been gaining ground post the economic recession of 2008.
Disadvantages of the Shareholder-Centric Perspective
- Long term strategies are adversely affected by short term goals that look at immediate profits, jeopardizing the long term sustainability of the firm.
- Focus on profits alone diminishes the will to take risks, isn’t conducive to the spirit of entrepreneurism, and trades in forward thinking, risky measures for small and short term goals, adversely impacting the firms market dominance and relevance.
- Research and development require capital that is apportioned from dividends. These are expenditures that do not provide immediate gains but are imperative for the long term survival and thriving of a business. Limiting this resource to please shareholders is bad for the business.
Although corporations are moving on from this approach to managing businesses, it will be a long time before concrete steps are taken to make corporates more conducive to stakeholder-centric governance policies.
