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A crusade to save capitalism from itself?

24 January 2020

10:00 PM

24 January 2020

10:00 PM

My merchant banker son tells me I’m wrong. He rejects my criticism of Australian corporate boards that respond to noisy activist pressure to become ‘socially responsible’ instead of concentrating on earning a quid for shareholders. He says that in the changing political and social environment of the 21st century, companies make more quids by appearing to be ‘socially responsible’ and getting involved in issues that pay off – as long as the commercial benefits outweigh the costs, like Qantas and the same-sex marriage campaign.

But is he living in the past? The capitalist world’s biggest companies no longer accept the long-standing principle that ‘the paramount duty of management of boards of directors is to the corporation’s shareholders, with the interests of other stakeholders being relevant only as a derivative of the duty to shareholders’. So, in what leftists described as a sudden burst of conscience and a concession that corporations had failed to serve the public good and the right saw as a deplorable concession to left activists, the very purpose of a corporation is being significantly changed. A new standard of corporate responsibility that rejects shareholder primacy and puts all stakeholders on an even footing was created last August by 181 CEOs of the world’s largest companies through the Business Roundtable. Australian boards are following their lead even though this clearly subverts the legal duty of directors to act in the company’s best interests. Under the new objectives, ‘The purpose of a corporation is not just to serve shareholders but to create value for all stakeholders’ encompassing customers, suppliers, employees (fostering diversity and inclusion, dignity and respect) communities and the environment (sustainable practices). Welcoming the changes, Fortune magazine said: ‘This is about business achieving commercially sustainable social impact’. So corporations are to become not merely value-driven but values-driven.

But under the heading ‘Is the Business Roundtable Statement Just Empty Rhetoric?’, the Harvard Business Review said while the shareholder-obsessed system was no longer fit for purpose and that business leaders had been feeling pressure to rethink the role of business in society, the Roundtable statement was only a nice start, with its commitment to long-term, rather than short-term, value being the critical element. And the Washington Post, under the heading ‘A Crusade to Save Capitalism from Itself’, said: ‘By disavowing shareholder primacy and embracing a broader vision of corporate purpose, the Roundtable has now enhanced the political legitimacy of change in US corporate management’.

Nonsense. The political impact of success for this brave new world of socially-responsible capitalism is inevitably one of increasing governmental control of business. At least shareholder primacy does provide, inadequately, an element of accountability as shareholders do have some capacity to punish or reward directors.

To whom will corporate boards be accountable for these new stakeholder responsibilities? When cynics suggested that the reason the 181 top CEOs favoured stakeholder governance was to avoid accountability, the Roundtable insisted that shareholders would still hold directors accountable for corporate growth, but said nothing about accountability to stakeholders. This looming accountability vacuum will be filled by the only available candidate – government. Already Australian regulatory authorities are seeking, and obtaining, greater powers to intervene in company matters, largely as a result of the corporate scandals revealed in recent enquiries. Not only are regulatory officials to be embedded in corporate boardrooms, ASIC also plans to oversee a ‘revolution in the management of non-financial risks’. And the interventions are no longer to be limited to breaches of the ever-increasing law; ASIC’s aim is to help detect cultural, organisational and management failings that could lead to conduct problems, legal breaches and unfair outcomes. While the private sector bureaucrats who run the big self-perpetuating corporate bureaucracies may feel more comfortable being accountable to public bureaucrats than pesky shareholders, is this really the same free market system on which our prosperity depends?

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