What Is the Shareholder Theory?

The shareholder theory is the viewpoint that the shareholders of a company are the primary group the company should be responsible to and as such, should maximize their profits and return a portion to the shareholders as a reward for investing in the firm. In this approach, the duty is to maximize shareholders’ returns. The shareholder theory is an idea that has been predominate in American business practices for the last 25 years as of 2015, according to The Economist.

Operating business for the ultimate benefit of the shareholder is challenged by the stakeholder theory, which considers shareholders and other parties involved, including the customers and employees. Shareholder theory became a standard philosophy introduced in 1976, according to Harvard Business Review.