When directors of Australia’s leading companies start questioning the profit motive on which their success was based, then the system that has brought such prosperity to Australia is under serious threat. With mounting worldwide pressure for corporations to relegate the best interests of shareholders (the owners) to behind those of ‘stakeholders’ (almost everyone else), the issue has become a hot topic in our boardrooms. The problems it creates for local boards of directors, as indicated in a perceptive article by David Walker in the journal of the Australian Institute of Company directors, have not deterred some of our biggest companies from enthusiastically embracing the ‘stakeholder priority’ concept; those owners who provide the capital to fund companies are no longer to be head of the reward queue.
Walker notes that ‘2019 has seen a debate across the world on what the purpose of the corporation should be’. Milton Friedman’s 50-year old admonition is that companies should be run ‘in accordance with the owners’ desires which generally will be to make as much money as possible while conforming to their basic rules of the society, both those embodied in law and those embodied in ethical custom’. This ‘Friedman doctrine’ of shareholder primacy has been increasingly criticised since the global financial crisis and replaced with what the US Business Round Table (of major US corporation CEOs) earlier this year endorsed as a ‘fundamental commitment to all of our stakeholders’. Investor bodies rejected this as ‘undercutting the notion of managerial accountability to shareholders’; to whom would directors then be accountable is a question ‘reformers’ have yet to answer.
The campaign for governments to impose new stakeholder requirements on companies was given a run at October’s NSW Supreme Court Corporate and Commercial Law Conference, with claims by British academic and ‘corporate revolutionary’ Colin Mayer that the Friedman doctrine was ‘no longer tenable as a framework for business in the 21st century’. Creating a new ‘corporate purpose’, he argued, would include public purposes with social goals, so resolving the problem that ‘an over-concentration on profit had led to inequality, environmental damage and a mistrust of business’. At the same conference, CBA’s chair Catherine Livingstone, whose bank has the new ‘feel-good’ purpose of ‘improving the well-being of customers and communities’ (no mention of making a quid for shareholders), nevertheless opposed regulatory enforcement of a ‘corporate purpose’ because of the prospect of unintended consequences, like constraining directors from taking difficult decisions for fear of straying from their legally defined purpose and ‘a shift away from the corporate structure as a preferred vehicle for capital’.
While many Australian boards have gone along with this sanctimonious virtue-signaling fad, they have so far resisted calls for legislation requiring companies to adopt these (unenforceable?) subjective ‘social objectives’. There is plenty of scope within the present system for boards to acknowledge contemporary issues while retaining their traditional legal responsibilities to their owners. Australia’s Corporations Act of 2001 requires directors to act in the best interests of the company. As ‘the company’ is a continuing entity, while shareholders come and go over time, directors clearly are required to take account of the best interests not only of current owners, but also of future shareholders by ensuring their actions do not damage the company’s prospects. This requirement allows consideration of the interests of stakeholders like employees and customers, but only if this serves the best interests of the company and therefore its present and future shareholder owners. Commissioner Hayne in his banking Royal Commission report emphasised that acting in the best interests of the corporation demands consideration of more than the financial returns to (current)shareholders and that there is really no long-term conflict between the best interests of shareholders and customers, as their interests ultimately converge.
Despite cynics saying that ‘long-term investors’ are only waiting for the share price to hit their selling target and that ‘shareholders do not act as owners in any meaningful sense’, corporations’ pursuit of profit for the benefit of their owners remains the basis of our economic growth.
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