Where to now for shareholder primacy?

Wednesday, 25 September 2019


    In a major policy change, the US Business Roundtable has rejected the principle of shareholder primacy in defining the purpose of the corporation. But what does this mean for Australian directors?

    It was big news from some of the biggest corporations in the world. In the United States, the Business Roundtable, an organisation for CEOs of large companies, made headlines in August with its revised Statement on the Purpose of a Corporation. Signed by 181 CEOs, the Statement calls for companies to serve all stakeholders.

    The Roundtable’s statement ran counter to long-standing US law which generally equates the duty of directors to act in the best interests of the corporation, with maximising shareholder value above all other considerations.

    The roundtable’s new statement on the purpose of a corporation was signed by CEOs including Australians such as Lachlan Murdoch, Executive Chairman and CEO of Fox Corporation and James Gorman, Morgan Stanley chairman and CEO. Other major signatories were Jeff Bezos, founder and CEO of Amazon and Larry Fink, the chairman and CEO of US investment giant BlackRock.While the news was welcomed in many quarters, it also met with some criticism. The Council of Institutional Investors (CII) in the US, a corporate governance advocate, criticised the roundtable statement. “CII believes boards and managers need to sustain a focus on long-term shareholder value. To achieve long-term shareholder value, it is critical to respect stakeholders, but also to have clear accountability to company owners. Accountability to everyone means accountability to no-one.”

    Debate about the purpose of organisations has heightened in Australia and overseas this year. At its core, it is about whether corporations exist to serve shareholders, or have broader stakeholder responsibilities, or both.

    The Assistant Minister to the Prime Minister, Ben Morton, this month criticised business for pandering to activist groups and “noisy elites” who push social agendas. He called for business to focus on providing the best product or service, and maximising profit, within the law.

    Business Council of Australia CEO, Jennifer Westacott, reportedly said days later that it is legitimate for business to make a virtue of being successful. She said it was “perfectly legitimate” for business leaders to take a stand on social issues and speak out.

    One of Australia’s top corporate law academics, who has published research on Shareholder Primacy, has weighed into the debate. Jason Harris, Professor of Corporate Law at the University of Sydney Law School, says the change in focus to stakeholders over shareholders in the US sends an important signal to Australian business leaders. We asked him to provide his view on what the developments mean for Australia.

    Some Australian CEOs were among the US signatories. Does this send a message to Australian CEOs and boards?

    Yes I think it does send a message. They are trying to lead by example. Of course, there is the counter-argument that if we truly embrace a form of stakeholder focus rather than a more narrow shareholder focus, the concern is that the problem is duties are owed to the company by directors. Shareholders have a variety of means to try and hold those boards to account by voting them off, bringing derivative suits, and exercising their rights as security holders under the Corporations Act.

    The big concern is that by extending accountability to stakeholders, stakeholders often lack legal mechanisms to enforce those kind of legitimate expectations that the CEOs are creating. So the cynics in the community have said really this is about making boards and senior managers less accountable because they can play off one stakeholder group against another. So they are accountable to no-one. I myself don’t agree with that but that certainly is the cynical counter-argument.

    What are the implications for Australia?

    We have seen with the Royal Commission the adverse consequences for business if they lose public trust and confidence, so I think the statement by the US Business Roundtable is to try to get on the front foot of that to remind those who are running our large businesses that those businesses need to be sustainable in a way that is more than just about shareholder primacy.

    I think there are implications for Australia in that we have certainly had vigorous debate lately about the extent to which companies can and should engage in social cause commentary and supporting social causes. Certainly the US Business Roundtable letter would I think endorse that.

    The job of boards and senior executives is not purely to conduct themselves to make profits for shareholders. They are supposed to be running sustainable businesses in the long-term and that means maintaining trust and confidence in their stakeholders.

    Is this a significant policy change in the US?

    Here we have some of the leaders of some of the largest economic enterprises on earth saying they believe that their business purpose is greater than just profits for shareholders and they are running their business to try and promote sustainable business for the benefit of all stakeholders. Even if that is just symbolism, it is significant.

    And it is certainly a change from what the US Business Roundtable has said in the past. Change has to start somewhere. I think this is an important step and what they are saying also needs to be viewed in terms of the context of declining public trust in our business community. That trust has to be rebuilt so this is an important step in the right direction. Because otherwise that public distrust of our institutions could well lead to adverse political changes that we have seen in some other jurisdictions.

    Changing the culture in these sorts of enterprises away from profit above all else to be more about stakeholders and long-term sustainability - as they say it is like trying to turn round the Queen Mary. It all takes time.

    Is Australia being left behind in governance developments in the UK and US?

    I don’t think we are behind. We have just taken a different approach. If we look locally at the revisions we have recently had to the fourth edition of the ASX Corporate Governance Principles, the implications of the US Business Roundtable letter I think are consistent with the guidance we are already seeing here for ASX listed entities.

    The revision to Principle 3 (Recommendation 3.1) talks about listed entities disclosing values, instilling and continually reinforcing culture across the organization, acting lawfully, ethically and responsibly. Then it (Recommendation 3.2) supports that and lists in terms of a company developing and disclosing a board code of conduct various stakeholders, acting honestly with the highest standards of personal integrity, complying with the law, acting reasonably, treating staff members with respect, dealing with customers and suppliers fairly, dealing and disclosing appropriate conflicts of interest and not take advantage of the property of others. So companies should be acting lawfully, honestly and ethically.

    And in terms of the Corporations Act, we are not taking a prescriptive approach. We are saying it is up to the board to exercise powers and discharge duties in good faith and in the best interest of the company.

    I am of the view that the law already does not require shareholder primacy. The current corporate law in Australia already allows for boards to take into account broader constituencies and acting in the long-term interests of the company as a whole.

    The ASIC Corporate Governance Taskforce report is expected to be released shortly. What do you think directors will be looking for in the report?

    What I am hoping we will see are examples of boards working well with management. I also think the report’s comments about the monitoring role of the board will be very interesting to see, in terms of the board challenging and questioning management.

    AICD View

    It’s important to note that directors’ duties differ between the US and Australia and the two systems should not be conflated. The issue was expressly examined in the Financial Services Royal Commission with Commissioner Hayne emphasising that acting in the best interests of the corporation demands consideration of more than the financial returns to shareholders.

    Commissioner Hayne remarked that this issue is a more complicated task than a binary choice between the interests of shareholders and the interests of customers, and over time the interests of different stakeholders will converge.

    The AICD strongly supports Commissioner Hayne’s framing of directors’ duties and the widely accepted view that the current formulation allows directors to consider stakeholders beyond shareholders, including customers and employees.

    This is a live issue in Australia and the AICD through our Forward Governance Agenda is examining how the best practice duty applies in practice. We are working with directors, legal experts, stakeholders and policy-makers to support measured and informed discussion and offer practical guidance on duties.

    The community needs to trust that directors take account of stakeholder, ethical and societal considerations as part of their duties.

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