Three Perspectives

Three distinct perspectives on corporate governance can be discerned in the existing literature. Each perspective is a way of approaching the issues related to governance of corporate bodies and of deciding the right solutions. These perspectives are:

1. Shareholder – or capital market – control perspective

2. Organization – or management – control perspective

3. Stakeholder – control perspective

Differences in these perspectives are summarized in the following table: According to the first perspective, shareholders as providers of risk capitals, have final control over resource allocation decision. However, in reality, managers take this control away and their self-interest leads them to pursue growth rather than profits. Instead of returning free cash flow to shareholders, managers invest it in avenues which are not the most profitable ones and then sloth sets in. To prevent the resultant decline in company performance, stock market must enable shareholders to loosen managers' control over excess funds. This will serve to limit managers' power and to achieve greater efficiency in resource allocation in the corporate economy.

Organization-control perspective believes that managers who coordinate the efforts of different factors of production and who contribute their skill and creativity to the production process are primarily responsible for generating surplus. They invest in R & D and organizational learning and they locate new markets. Their specialized grasp of operational matters and their professionalism are of vital importance. It is they who create profitable opportunities to add value. Therefore resource allocation decision should rest with them.