Features Australia

Business/Robbery, etc.

Dumping shareholder capitalism

20 March 2021

9:00 AM

20 March 2021

9:00 AM

It has hardly rated a mention. But one of Joe Biden’s more controversial and potentially system-changing pre-election promises could soon have a significant negative impact on Australia’s free enterprise capitalism that has successfully brought Australians one of the world’s highest standards of living. His vow to ‘put an end to the era of shareholder capitalism’ rejects the long-standing principle of the primacy of shareholders in corporate responsibility. With the support of the powerful left wing of the Democratic party, replacing shareholder capitalism with ‘stakeholder capitalism’ is a likely early Biden administration initiative. This requires corporations to be accountable to all those touched in any way by their activities, from employees, customers, suppliers, neighbours, environmental activists and eventually the shareholder owners. Promoted by the US Business Roundtable and the Davos World Economic Forum in its Great Reset, it spreads accountability so wide that it is unenforceable without rigorous bureaucratic supervision. And it has worldwide objectives; Klaus Schwab, founder and executive director of the World Economic Forum and author of ‘stakeholder capitalism’ said a Biden-Harris administration is the ‘final boost’ for the world economy to take it on, with Biden’s climate envoy John Kerry asserting that the Great Reset ‘will happen with greater speed and with greater intensity than a lot of people might imagine’.

And in another bureaucratic intrusion into corporate independence, the British Academy’s Future of the Corporation project, led by Colin Mayer of Oxford University, seeks to further diminish the ‘free’ suffix of free enterprise by imposing a statutory ‘purpose’ of corporations which would be ‘to provide profitable solutions to problems of people and planet, while not causing harm’. Apart from enforcing an Environmental, Social and Governance agenda, the potential for legal harassment on the issue of ‘not causing harm’ puts in the shade Australia’s costly experience with anti-mining ‘lawfare’. In Australia, this regulatory enforcement of a corporation’s purpose has hit strong objections from the Commonwealth Bank’s chair Catherine Livingstone on the grounds that it undermines the entire concept of directors meeting their obligations to act in the best interests of the corporation. Among the unintended consequences would be the risk of institutional shareholders reacting to safeguard the primacy of their interests and directors feeling constrained when confronting challenging decisions. Plus the increased scope for class actions and a shift away from the corporate structure as a preferred vehicle for capital.

Clearly, Australian shareholder capitalism has not been without its problems, but these US and UK responses appear to push ‘woke’ agendas more than genuine solutions. Admittedly, making a quid rather than identifying as a part-owner has been the motivation prompting most beneficial shareholders to acquire their shares. The rapid growth of bureaucratic fund managers controlling the massive shareholdings that have resulted from tax-driven and compulsory superannuation, has been funded by investors and superannuees who have no say whatsoever in how the managers fulfil that ownership duty. The fact that neither of these have skin in the game simply confirms that modern Australian capitalism is, with the exception of the occasional risk-taking entrepreneur, dominated by largely risk-averse private sector bureaucrats running companies that operate under the aegis of an increasing volume of regulatory public sector bureaucrats.

And now, from the US and the UK, here come new methods of further diminishing what little was left of the capacity of beneficial shareholders to exercise their ownership function. Under this new phenomenon, making a quid is no longer to be the main purpose of corporate Australia, as ‘stakeholder capitalism’ and environmental and social governance are flavour of the year in increasingly ‘socially responsible’ local boardrooms – and the multi-national auditing firms that service our major companies..

But at least the money-managers, in seeking maximum returns from the companies in which they invest, have up to now shared a common interest with the owners whose investments they manage, with profits and dividends as the measuring sticks. What will be the measuring sticks under the new order? On what basis will individual investors and money managers be able to judge corporate success or failure when profitability is nudged aside by other criteria? Perhaps even worse, the comparable financial criteria for success or failure of the money managers which is currently a central element of regulatory supervision of superannuation fund performance, will become less relevant – at the cost of retirement incomes.

A consequence of the new order would inevitably be that corporate Australia, by having to be accountable to so wide a constituency, stands to be even less accountable to its owners; by spreading the criteria for success to more and more interest groups, few of which will be ‘owners’ and therefore have no legal entitlement to admonish boards of directors, what effective capacity to discipline boards that fail to meet these wide criteria will be available and to whom (apart from the inevitable multiplicity of appropriate bureaucratic regulatory bodies)?

This is in line with the intellectual demolition by two Harvard Law School Professors of the US Business Round Table ‘stakeholderism’ and the Davos ‘stakeholder capitalism’ as largely a rhetorical public relations move, rather than the harbinger of meaningful change, that would be detrimental not only for shareholders, but also for the economy at large. They conclude that ‘acceptance of stakeholderism would insulate corporate leaders from shareholder pressures and make them less accountable…. The support of corporate leaders for stakeholderism is motivated, at least in part, by a desire to obtain insulation from hedge fund activists and institutional investors. The increased insulation from shareholders, and the reduced accountability to them, would serve the private interests of corporate leaders (and explain their support for what appears to be an anti-capitalist initiative). It would also increase managerial slack and undermine performance.’

Their view is supported by a former chief justice of the Delaware Supreme Court (the state where most big companies are incorporated) that, ‘Declaring that directors consider other than shareholder interests without giving those interests voting or enforcement rights, or any real leverage to influence decision-making, is more an exercise in feeling good than in doing good. In fact, it largely shifts power to the directors to couch their own actions in whatever guise they find convenient, without making them more accountable to any interest.’ The question to whom would directors be accountable if not to shareholders remains unanswered. But whatever ultimately emerges, capitalism’s remarkable flexibility invariably enables it to cope with adversity. That’s what my money is on.

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