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Enlightened business

Shareholder value shouldn't be the only goal

July 2018

Lots of the business scandals we’ve seen in recent years point to the fundamental conflict between the interests of a business and those of its customers.

Volkswagen installing devices in its cars to produce fake emissions testing results; big financial advice firms charging customers for advice they never received; car manufacturers delaying warnings to customers about dangerous Takata airbags. They all come down to one thing: doing what’s right for customers often involves a hit to company profits.

Perhaps it’s not surprising that when forced to balance these interests, businesses are so often willing to throw their customers under the bus. At the highest levels, our law asks them to do this.

The Corporations Act says that one of the primary responsibilities of directors is to act in the best interests of the company. That’s commonly understood as maximising shareholder value.

This in itself isn’t surprising. People buy shares as an investment, so they expect a return in the form of dividends or an increased share price. We’re almost all share investors directly or via our superannuation, so we all depend on the system delivering returns over time.

But around the world there’s an increasing debate about whether shareholder value should be the primary factor that directors and executives consider when they’re making major decisions.

Over a decade ago, the UK changed the law to make company directors think about ‘enlightened shareholder value’. While they’re still required to act for the benefit of shareholders, directors must now have regard for a range of other interests – including those of employees, customers and suppliers. They’re also required to think about the long-term consequences of decisions, and the company’s impact on the community and environment.

If you think about the damage to community interests wreaked by the likes of Volkswagen and AMP, you have to wonder whether they would’ve made the same decisions if their directors were required to focus on more than shareholder value.

The banking royal commission is now exploring similar territory. Its terms of reference ask it to look beyond the current black letter law, to consider whether financial firms have engaged in conduct that falls below community standards and expectations.

We’re yet to see what the royal commission will recommend, but I hope that the evidence it’s revealing prompts a rethink of the obligations of company directors. Judging by what we’ve seen so far, I think that it’s time.

Alan Kirkland, CHOICE CEO
Twitter: @AlanKirkland