Every other day a corporate chief somewhere will declare, in sombre tones and often for applause, that business must take a stand on an issue for the sake of the community. These big-noting corporate chaps justify their grand plans for humanity in many ways. They claim businesses have a legitimate interest in matters affecting the wider community in which they operate. Political leaders are not doing enough, they say. Workers and consumers want us to do this, they assure themselves.
Source: Janet Albrechtsen, News Corp
Activist chief executives are ‘stealing’ from shareholders
While it is not evident how they canvassed the views of workers or consumers, it is patently clear these new activist chief executives are endearing themselves to other activists with the same visions for the planet.
These reasons for corporate activism were, more or less, laid out last week by John Denton, the first Australian to head the Paris-based International Chamber of Commerce. He waved away as “completely ridiculous” the notion that corporate leaders should stick to their knitting.
“This is our knitting,” Denton declared.
This is also the same tedious click-clacking sound emanating from many self-important business people who make up the Business Roundtable in the US, and swan around at Davos. They imagine their own beliefs are so brilliant they form a modern-day list of corporate commandments.
Like the harm that’s done to the human body from ingesting too much sugar, Denton’s attempt to encourage corporate bosses to be more activist is loaded with so much corporate saccharin it threatens to kill off the company as a vehicle to pool people’s money.
If activist chief executives, and their Paris-based spokesman, are impatient with politics, they could, of course, stand for parliament and spend other people’s money as a politician. In choosing much higher-paid gigs running companies and managing shareholders’ money, credibility comes from explaining how, at law, an activist chief executive fits in the company model. But this is where modern-day corporate preachers fall silent.
When was the last time any chief executive, let alone the bloke running the International Chamber of Commerce, discussed the agency costs of activist chief executives?
When did any of them last mention the importance of rules that govern how managers spend other people’s money?
Talking about such matters is painfully dull compared with setting out your vision for humanity. But the bigger reason they don’t address this dry issue of agency costs is that it might cramp their activist style. If chief executives admit to the agency costs they have created for shareholders by spending shareholders’ money on issues that have nothing to do with running a company, they might have to stop doing what earns them applause from their friends. It could even jeopardise them receiving an AO or an AC on Australia Day.
There is a deadly serious issue. Soon after the earliest companies were formed, separating the ownership of business ventures from management, agency costs were recognised as a critical issue.
How do the owners of a company stop management using shareholders’ money to feather their own nest? Or to put it more simply, how do owners stop employees stealing from them?
While some agency costs might be inevitable, others are entirely avoidable.
Doctrines of fiduciary duty evolved to regulate how managers use shareholders’ money. While managers learned they shouldn’t use shareholders’ money for their own benefit, they grew more creative about how they used shareholders’ money.
It was clearly wrong to take money from the petty cash tin and use it to buy yourself a new TV. And it was equally wrong for a manager to use the petty cash tin to pay for a romantic dinner with a lover. But what if the manager used shareholders’ money to pay for a big party for employees? This was probably legitimate because keeping employees happy makes for a more successful business. Similarly, using shareholders’ money to sponsor a local football or netball team might be good advertising, buying local goodwill that helps a business thrive.
But, of course, that way danger lay. As shareholders’ money began to be used in a wider range of ways, it became even clearer that some red-line rules were needed to separate legitimate uses of shareholders’ money from illegitimate ones.
To deal with these agency costs, company law established some sensible rules for managers, imposing duties on them to act in the best interests of shareholders, and the company, and basically preventing them from using other people’s money to line their own pockets.
Importantly, English and Australian common law dating back to the 19th century recognised that managers needed some flexibility to use shareholders money in a way that doesn’t directly benefit shareholders but does benefit the business, and thus shareholders, indirectly.
Courts apply the notion of shareholder primacy to separate legitimate from illegitimate uses of shareholders’ money by management. It means that the financial benefit to shareholders of expenditure for social purposes does not need to be immediate or direct or even terribly obvious — but it does need to exist, and be able to be demonstrated.
It is a deliberate furphy when activist chief executives and their spruikers claim that shareholder primacy must be dismantled because it requires managers to seek short-term profits. That is a straw man concocted by those who want no rules restraining chief executives from their glorious plans for the world.
The other straw man put up by activist chief executives is the claim that capitalism needs a clean-out. In fact, the clean-out is needed among the vainglorious chief executives, and their chamber of commerce boosters, who are creating a new, and egregious, set of agency costs for shareholders.
They want free rein to use other people’s money, not to line their pockets but to warm their hearts, and to earn kudos from other people like them.
Frankly, it is theft — idealistic theft, perhaps — but still theft. The fact Robin Hood stole money for noble purposes did not change the nature of his act: taking money from others without their consent.
Managers could ask shareholders to donate the profits they receive as dividends to a climate change fund. But to simply use company money on management’s pet causes without so much as a “by your leave” from shareholders is theft.
If activist chief executives think society should be putting more money into climate change or other noble causes, they should use their own money rather than shoving their sticky fingers into the retirement nest eggs of superannuants and investors.
And let’s be honest here. Much of the confiscation of shareholders’ money is done not for noble causes. There is a sizeable bullshit factor where chief executives seek self-aggrandisement rather than tangible outcomes.
It is not at all sexy to talk about rules that manage, and minimise, agency costs inherent in a public company where ownership is divorced from control. But this is a critical issue. And not just to protect today’s shareholders from a new form of theft.
If we allow chief executives and other activists to chip away at these foundations, they will end up destroying the company as a proven way to pool money from many people in order to do business.