Shareholder primacy: is there a need for change? Let the debate begin!

Governance Institute recently held a panel discussion to launch our new discussion paper, Shareholder primacy: is there a need for change?.

The paper sets out to canvass public views on whether the time-honoured corporations law principle that shareholder interests are paramount in business decision-making must change as community expectations demand higher levels of corporate responsibility.

Corporate responsibility is a growing challenge

The news on any given day — and on topics as varied as the acceptability of corporate tax minimisation, fracking, fast food marketing to children and the neglect of rural communities — all highlight that corporate responsibility is a live issue for company directors today. And it’s becoming more urgent as social media paves the way for more community voices to rally and be heard.

Is ‘shareholder primacy’ defensible? Three leaders debate the issue

Rod McGeoch: ‘It’s not about what you can do, but what you should do’

Prominent director Rod McGeoch kicked off the debate with the provocative statement that today, it’s no longer a question of what companies ‘can and can’t do’, but what they ‘should and shouldn’t do’. He observed that all the boards he was involved with had moved on from a narrow focus on shareholders’ interests and were now taking account of other stakeholder interests whether they were customers, staff, environment or the community in which the company operates.

As a director of gaming business, Sky City Entertainment, Mr McGeoch said that the company’s existence relied not just on its government-issued casino licence but also on a social licence to operate. That entailed maintaining an excellent relationship with the government and community through being a good corporate citizen.

Mr McGeoch made no secret of his view that the 2006 CAMAC and Parliamentary Joint Committee (PJC) conclusions that there was no need to change directors’ duties to accommodate non-shareholder interests were unsatisfactory. As an example, he pointed to the lack of community protections under current environmental laws which do not require companies to prepare a social impact report even when they are embarking on destructive large-scale projects such as open cut mining.

Tony D’Aloisio: ‘Current law does the job’

Tony D’Aloisio, Chair of Iress Limited argued that amending directors’ duties to require consideration of community interests could be a step too far. Mr D’Aloisio felt that the current duties were flexible enough for directors to take account of stakeholders other than shareholders provided there’s a causal connection between the public interest in question and a benefit to shareholders. But he maintained there would always be a limit on how far a company could prioritise the public interest under the current law. For instance, a board that said they were prepared to pay the maximum amount of tax to be seen as a good citizen would risk being voted out by shareholders. Arguably they would also be in breach of their duty to act in the best interests of the company to legitimately minimise tax and maximise revenue. And in the public interest debate, Mr D’Aloisio said it is the government’s role to step in where there are competing interests.

Leeora Black: ‘Companies must act in the best interests of society’

Dr Leeora Black, managing director, Australian Centre for Corporate Social Responsibility, took the view that it was in the best interests of the company to be more socially responsible. Society does not equate the duty to act ‘in the best interests of the company’ as a right to pursue self-interested or profit-seeking goals at all costs. Dr Black supported amending the corporations law to allow directors to act in the best interests of society, given that the historical purpose of the corporation was not to generate profit but to do something socially valuable. It is the community that gives the company a licence to operate, she noted.

She argued that when there’s a clash of competing interests, all parties should enter into a genuine dialogue and negotiate a solution. While companies may find it ‘terrifying’ to cede some power to other interest groups, this was important for the sake of securing their long-term future, she said.

What do you think?

The debate raised lively and passionate views from panellists and the audience on whether the ‘shareholder first’ focus of the corporations law should be upheld. Eight years after CAMAC and the PJC’s review and dismissal of the issue, and in light of the explosion of social media and communications in the intervening years heightening scrutiny of corporate activity, we think the issue deserves to be revisited.

Governance Institute invites you to consider our discussion paper here and to make a submission by Friday 5 December, 2014. Your feedback will determine the action we subsequently take, whether that be taking a proposal for legislative change to the government, developing some form of industry guidance or upholding the status quo.

We look forward to your submissions.

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