tag:theconversation.com,2011:/us/topics/shareholders-1720/articlesShareholders – The Conversation2023-11-21T19:06:45Ztag:theconversation.com,2011:article/2164312023-11-21T19:06:45Z2023-11-21T19:06:45ZShould businesses consult shareholders before taking a stand on social issues?<p>In 2017 many businesses took a stand on the Australian marriage equality plebiscite. We saw a comparable trend in recent months, as <a href="https://www.reuters.com/world/asia-pacific/australias-top-companies-back-indigenous-voice-public-support-wavers-2023-06-16/">corporate Australia declared its position</a> on the Indigenous Voice to Parliament.</p>
<p>This included everyone from the Big Four banks to Wesfarmers, Telstra and Rio Tinto. It was not only most of <a href="https://www.afr.com/politics/federal/majority-of-asx-20-companies-publicly-support-voice-20230612-p5dfwq">the ASX top 20</a> declaring their support but also <a href="https://www.smartcompany.com.au/opinion/the-voice-parliament-small-businesses-vote-yes/">numerous small businesses</a>. Sectors as diverse as retail, publishing and education were represented.</p>
<p>Such public commitment is part of a wider movement towards “<a href="https://journals.sagepub.com/doi/10.1177/0743915620947359">brand activism</a>” through which companies take on issues by publicly supporting or opposing a product or cause.</p>
<p>Well-known examples include <a href="https://theconversation.com/woke-washing-what-happens-when-marketing-communications-dont-match-corporate-practice-108035">Nike’s</a> anti-racism ad campaign spotlighting Black NFL player Colin Kaepernick and <a href="https://theconversation.com/from-dylan-mulvaney-to-madonna-theres-a-long-history-of-backlash-to-celebrity-brand-endorsements-204102">Bud Light’s</a> promotional partnership with trans influencer Dylan Mulvaney. </p>
<p>Brands can adopt a progressive or conservative stance in their activist messaging. But, brand activism is most commonly called upon to challenge a problematic status quo. Indeed, <a href="https://www.reconciliation.org.au/large-diverse-support-for-the-voice-to-parliament/">organisations</a> overwhelmingly backed a “Yes” vote for the Voice referendum, to improve critical outcomes for Indigenous people. </p>
<p>This raises questions about the role of business in society and the tensions between commercial and moral imperatives.</p>
<p>Should businesses be accountable to shareholders when deciding to take a public stance on social justice issues? Is it their role to take a stand on social justice issues and will doing so win or lose them support? What are the implications of making businesses “moral leaders” in the current climate?</p>
<h2>Shareholders might be right to resist corporate activism</h2>
<p>To date, the view businesses exist to maximise shareholder value has prevailed. The corollary is managers are answerable to <a href="https://journals.sagepub.com/doi/abs/10.1509/jm.15.0013?journalCode=jmxa">shareholders</a> and all marketing decisions should protect their interests and augment profits. </p>
<p>A survey by the Australian Shareholders’ Association found <a href="https://www.smartcompany.com.au/business-advice/politics/shareholders-companies-yes-campaign-funding/">70% of shareholders</a> believed companies should not be funding the “Yes” campaign. Academic research validates shareholder concerns. Corporate activism provokes a <a href="https://journals.sagepub.com/doi/abs/10.1177/0022242920937000">negative reaction</a> from investors. It funnels company time, resources and attention away from revenue-generating activities.</p>
<p>In reality, shareholders are not involved in implementating a brand activism strategy. This would most commonly originate from the executive team and the company’s board would play an advisory role. Despite boards being able to make these decisions without referring to shareholders, they are still expected to act in shareholders’ best interests. </p>
<p>Furthermore, in taking a stand on a sociopolitical issue, company boards could and should anticipate shareholder outrage.</p>
<p>While the tension between profit maximisation and social responsibility has existed for decades, this is intensified when the focal issue has a partisan quality. The risks are greater and <a href="https://journals.sagepub.com/doi/abs/10.1177/0022242920937000">outcomes, uncertain</a>. This was the case with The Voice. </p>
<p>On the matter of supporting charitable versus political causes, the Australian Shareholders’ Association <a href="https://www.australianshareholders.com.au/Public/resource_centre/EQUITY/Equity_investor_magazine.aspx">stated</a>:</p>
<blockquote>
<p>[…] broad agreement for companies supporting charities that align with their purpose, strategy, and objectives, but strong opposition to throwing weight behind any political causes.</p>
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<p>In justifying their silence or neutrality on The Voice referendum, some companies including Orica and EnergyAustralia said it was <a href="https://www.afr.com/politics/federal/more-companies-to-stay-impartial-on-voice-as-referendum-approaches-20230605-p5de0u">not their place </a> to tell customers or employees how to vote. To the contrary, the contemporary academic view of business holds that brands have the potential to not only reflect but also <a href="https://journals.sagepub.com/doi/10.1177/0276146718755869">influence market and societal values</a>. </p>
<h2>Businesses answer to many more stakeholders than shareholders</h2>
<p>Social responsibility is no longer only the remit of not-for-profits and social enterprises.</p>
<p>Businesses today are accountable not only to shareholders but also a broader network of stakeholders. This includes customers, employees, investors, suppliers, governments, communities and more. Even the environment is a stakeholder.</p>
<p>When corporations orient themselves towards the interests of this diverse set of stakeholders, they must balance shareholder value with social responsibility. Recent research on “<a href="https://journals.sagepub.com/doi/abs/10.1177/02761467211043074?journalCode=jmka">transformative branding</a>” has highlighted the potential for brands to pursue a hybrid of business and societal goals. Brands that do this with purpose can make real change in the marketplace.</p>
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<a href="https://theconversation.com/qantas-throws-weight-behind-voice-with-travel-for-yes-campaigners-211523">Qantas throws weight behind Voice with travel for 'yes' campaigners</a>
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<p>Because activism ties a brand to a partisan issue, it also <a href="https://journals.sagepub.com/doi/10.1177/0743915620947359">divides public opinion</a>. Empowering Indigenous Australians is, shamefully, still a contested issue in this country. Taking a stand on social justice issues raises the stakes on <a href="https://journals.sagepub.com/doi/10.1509/jmkg.73.6.198">the low-risk initiatives companies</a> companies have traditionally favoured. </p>
<p>When brands seek out polarised spaces with their activist campaigns, they must anticipate backlash and carefully consider how to parlay this to advance the cause.</p>
<h2>Authentic brand activism is important for business and social outcomes</h2>
<p>Most integral is that <a href="https://journals.sagepub.com/doi/10.1177/0743915620947359">businesses back their position</a>. Many companies declared they backed a “Yes” vote in the Indigenous Voice referendum. But to seriously affect social issues, brands need to do more than correctly read the zeitgeist. </p>
<p><a href="https://www.theguardian.com/australia-news/2023/oct/04/qantas-rejects-suggestion-support-for-indigenous-voice-was-quid-pro-quo-for-qatar-airways-decision">Qantas</a> has historically supported Indigenous reconciliation. In 2014, Qantas put the “Recognise” logo on its aircraft and in 2019, the company pledged support for the Uluru statement. Yet, when Qantas joined the “Yes” campaign, they should have predicted the scepticism.</p>
<p>The <a href="https://www.abc.net.au/news/2023-08-24/alan-joyce-qantas-record-profits-covid-bailout-730/102772616">airline</a> was in the news this year for posting record profits but refusing to pay back the government bailout received during the pandemic. There are ongoing allegations poor treatment of employees and bad customer service. Consumer sentiment towards Qantas reached an all time low.</p>
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Read more:
<a href="https://theconversation.com/grattan-on-friday-same-sex-marriage-ballot-captures-attention-of-a-public-alienated-from-politicians-84456">Grattan on Friday: Same-sex marriage ballot captures attention of a public alienated from politicians</a>
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<p>By comparison, NRMA Insurance meaningfully buttressed a “Yes” message with their corporate actions. They announced a landmark partnership with <a href="https://mumbrella.com.au/nrma-insurance-to-increase-support-of-first-nations-media-with-new-nitv-partnership-798599">National Indigenous Television</a>, a channel owned by SBS. The funding was the largest investment by a single brand in the station and amounted to 3% of NRMA’s broadcast media spend for the year.</p>
<h2>It’s time business was held to account</h2>
<p>While many businesses backed a “Yes” vote in the Indigenous Voice to Parliament referendum, public opinion wasn’t swayed. The Voice was rejected by a majority in every state.</p>
<p>In the weeks, months and years after this disheartening outcome, we must hold businesses to account. Not just to their shareholders but to all their stakeholders. Did these brands just want to be at culture’s cutting edge or can they now demonstrate the intelligence to continue to advocate for social justice?</p><img src="https://counter.theconversation.com/content/216431/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Amanda Spry does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Shareholders accused companies that campaigned during this year’s Voice referendum of wasting time and energy that could be better used increasing their returns.Amanda Spry, Lecturer of Marketing, RMIT UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2034412023-04-19T16:57:12Z2023-04-19T16:57:12ZTax optimisation: when the banking sector challenges the spirit of fiscal law<figure><img src="https://images.theconversation.com/files/521612/original/file-20230418-764-d4etsc.jpg?ixlib=rb-1.1.0&rect=0%2C5%2C1908%2C1267&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">According to an investigation by a consortium of journalists, certain tax practices in banks have led to a loss of revenue of 150 billion euros over 15 years in Europe.</span> <span class="attribution"><span class="source">Ken Teegardin/Flickr</span>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span></figcaption></figure><p>On March the 28, 2023, in Paris, the offices of five major banks – <a href="https://www.bloomberg.com/news/articles/2023-03-30/french-banks-said-to-challenge-tax-authorities-after-cum-cum-raids#xj4y7vzkg">BNP Paribas, Société Générale, Natixis, HSBC and Exane (a subsidiary of BNP Paribas)</a>- - were raided as part of preliminary investigations opened in 2021 for suspected tax fraud and tax laundering. These investigations, ordered by the National Financial Prosecutor’s Office (<em>Parquet National Financier</em>), target dividend arbitrage practices widely used by banks: “CumCum” and “CumEx”.</p>
<h2>Dividend arbitrage: what is it?</h2>
<p>Dividend arbitrage is a common tax optimisation technique that benefits foreign shareholders. Just before the dividend payment period, banks temporarily transfer ownership of a client’s shares to another client residing in a <a href="https://www.wsj.com/articles/fed-questions-bank-maneuver-to-reduce-hedge-funds-dividend-taxes-1411952821">low-tax jurisdiction</a>. The bank and the client then share tax savings from the transaction. In France, tax authorities withhold up to 30% tax on dividends paid by companies to foreign shareholders, depending on the tax residence of the shareholder. This strategy makes it possible to reduce – or even completely avoid – French taxes on dividends. Taken to the extreme, it may even allow some foreign shareholders to request refund, from French authorities, of taxes that they did not necessarily pay.</p>
<h2>A legal but potentially abusive tax-optimisation practice</h2>
<p>The <strong>CumCum</strong> technique makes it possible to avoid all or part of the tax levied by France on dividends paid to foreign shareholders by a French company, through two types of financial arrangements.</p>
<ul>
<li><p><strong>Internal</strong>: This involves transferring the shares to a French resident – most often a bank – which collects the dividends before paying them to the foreign investor. Indeed, in some specific situations, banks (as companies) benefit from a more advantageous tax regime than individuals.</p></li>
<li><p><strong>External</strong>: Here, a foreign investor’s shares are transferred to another foreign investor, who could also be a bank, resident in a country with which France has signed a <a href="https://taxsummaries.pwc.com/france/corporate/withholding-taxes">favourable tax treaty</a>.</p></li>
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<p>Both types of arrangements, in which banks play a key role, allow the investor to make tax savings in exchange of a commission paid to the intermediary (the bank) for the service rendered.</p>
<p>While tax optimisation via CumCum does not necessarily violate the law, its abusive use <a href="https://wwnorton.com/books/Something-for-Nothing/">raises ethical issues</a>. Dispositions were taken in France in 2019 qualifying as abuse of law CumCum transactions having a “mainly” and not only “exclusively” fiscal purpose. Furthermore, France has ratified a multilateral convention developed under the aegis of the OECD, allowing the benefits of tax treaties to be denied when one of the main purposes of the financial arrangement is to obtain an <a href="http://www.senat.fr/compte-rendu-commissions/20211129/fin.html">undue tax advantage</a>. Carrying out a CumCum transaction with an essentially fiscal objective constitutes, at least since 2019, an “abuse of law” that is subject to sanctions.</p>
<h2>CumEx: from potentially abusive to certainly fraudulent</h2>
<p><strong>CumEx</strong> CumEx allows several foreign shareholders to claim tax refunds from the French tax administration (<a href="https://www.senat.fr/rap/r22-072/r22-07219.html">tax that was either never withheld or withheld only once</a>. CumEx is possible because of the high number of exchanges of shares between different individuals shortly before the payment of dividends, making it complicated, if not almost impossible, for the tax administration to identify the “true” owner of the shares. In 2018, the <a href="https://correctiv.org/en/latest-stories/2018/10/18/the-cumex-files/?lang=en">“CumEx Files” investigation</a>, conducted by an international consortium of journalists (including <em>Le Monde</em> and the German daily <em>Die Zeit</em>), exposed the CumCum and CumEx transactions. According to this investigation, the loss of revenue over 15 years for several European countries (including France and Germany) would amount to 150 billion euros. The damage to the French State amounted to 33.4 billion euros. However, given the complexity and multiplicity of the financial arrangements, particularly using short selling, CumEx remains <a href="https://www.tandfonline.com/doi/full/10.1080/00036846.2022.2141450">challenging to prove</a>.</p>
<h2>Between tax optimisation and outright fraud</h2>
<p>While the practice of CumCum is apparently legal, it can be considered borderline from an ethical point of view. Banks defend their use of CumCum transactions by arguing that they strictly comply with the tax rules in force. For Etienne Barel, deputy director general of the French Banking Federation, share lending also meets a real economic need for company financing or financial markets’ fluidity – imposing overly strict rules on French banks would weaken them in the face of their foreign competitors, thus deteriorating the competitiveness of the Paris marketplace.</p>
<p>While we can imagine that <a href="https://wwnorton.com/books/Something-for-Nothing/">dividend arbitrage done ethically</a> could benefit the French economy by allowing quick and easy access to resources and maintaining a certain competitiveness, this does not seem to constitute its <a href="https://www.abebooks.com/9781907444432/Tax-Arbitrage-Trawling-International-System-1907444432/plp">main motivation</a>. In this context, the question becomes how to distinguish what is legal from what is abusive, especially when a financial arrangement is mobilised throughout the year, and more particularly in the periods preceding the dividend payments. Does the government really have the means to distinguish between sales for tax purposes and others? And even if this mechanism is recognised as legal, is it ethical?</p>
<p><a href="https://www.elgaronline.com/display/book/9781800881020/book-part-9781800881020-22.xml">Our research</a> shows that compliance with the rules does not prevent more opportunistic objectives or using the <a href="https://www.researchgate.net/publication/225232587_Linking_Ethics_and_Risk_Management_in_Taxation_Evidence_from_an_Exploratory_Study_in_Ireland_and_the_UK">guise of technical compliance</a> to conceal rather different realities.</p>
<p>In the case of CumEx, the ethical issue is more than obvious because the practice is clearly fraudulent – it’s a straightforward swindle of the tax authorities. Here, the issue is more one of control: CumEx is possible because the speed and the complexity of technological tools, and the number of transactions and tax jurisdictions make it very difficult for the tax administration to identify the real owners of shares. How then to prevent or sanction CumEx? <a href="https://www.cairn-int.info/journal-accounting-auditing-control-2023-1-page-7.htm">Our research shows</a> that the digitisation of trading activities and their increasing complexity have complicated <a href="https://link.springer.com/article/10.1007/s10551-021-04741-3">their control and moral condemnation</a>.</p>
<p>While CumEx is illegal and unethical, banks or tax-optimisation firms may still perceive it as <a href="https://journals.sagepub.com/doi/abs/10.1177/0018726718799404">commonly accepted</a>. Furthermore, the limited aspect of controls raises questions about political will and the means necessary to limit these transactions. <a href="https://www.ncbi.nlm.nih.gov/pmc/articles/PMC7363599/">Research establishes</a> that some technological developments may help to reduce the incidence of financial fraud, but others – such as the anonymity offered by some blockchain applications – will reduce the cost and probably increase the profitability and innovation of fraud.</p><img src="https://counter.theconversation.com/content/203441/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Mouna Hazgui has received funding from the Social Sciences and Humanities Research Council.</span></em></p><p class="fine-print"><em><span>Aziza Laguecir ne travaille pas, ne conseille pas, ne possède pas de parts, ne reçoit pas de fonds d'une organisation qui pourrait tirer profit de cet article, et n'a déclaré aucune autre affiliation que son organisme de recherche.</span></em></p>Five major banks are now in the crosshairs of the French financial prosecutor’s office. Of what are they accused? Here’s the lowdown.Aziza Laguecir, Professeur, EDHEC Business SchoolMouna Hazgui, Associate professor, HEC MontréalLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1996352023-02-10T13:58:48Z2023-02-10T13:58:48ZWhat are stock buybacks, which critics are blaming for hastening Bed Bath & Beyond’s bankruptcy? A finance professor explains<figure><img src="https://images.theconversation.com/files/522689/original/file-20230424-1075-lx31id.jpg?ixlib=rb-1.1.0&rect=175%2C18%2C3850%2C2661&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Bed Bath & Beyond has spent billions in recent years on share buybacks.</span> <span class="attribution"><a class="source" href="https://newsroom.ap.org/detail/BedBathandBeyond/ea8ce516b7be471c88b518eef7cb9ec2/photo?Query=bed%20bath%20&mediaType=photo&sortBy=arrivaldatetime:desc&dateRange=Anytime&totalCount=117&currentItemNo=8">AP Photo/Ted Shaffrey</a></span></figcaption></figure><p><em>Bed Bath & Beyond <a href="https://www.marketwatch.com/story/bed-bath-beyond-bankruptcy-heres-what-happens-next-7697ed3d">filed for bankruptcy</a> on April 23, 2023, and <a href="https://wolfstreet.com/2023/04/23/after-wasting-11-6-billion-on-share-buybacks-to-return-value-to-shareholders-lol-bed-bath-beyond-goes-bankrupt-will-liquidate/">some analysts</a> <a href="https://news.yahoo.com/bed-bath-beyond-how-stock-buybacks-undermined-the-company-154202427.html">are blaming</a> the billions of dollars the retailer spent on share buybacks as one of the reasons for its downfall. In total, the company has spent nearly US$12 billion buying back its own stock since 2005, including $1 billion in 2021 alone – cash that could have potentially <a href="https://www.therobinreport.com/the-share-buyback-that-killed-bed-bath-beyond/">helped stave off bankruptcy</a>.</em></p>
<p><em>Bed Bath & Beyond is hardly alone in snapping up its own stock. Companies <a href="https://www.bloomberg.com/news/articles/2022-08-18/all-about-stock-buybacks-a-1-trillion-market-force-quicktake?sref=Hjm5biAW">have been buying back</a> record amounts of their own shares in recent years, which prompted President Joe Biden to <a href="https://www.nytimes.com/2023/02/08/us/politics/biden-state-of-the-union-transcript.html">propose quadrupling the tax on buybacks to 4%</a>.</em> </p>
<p><em>But what are stock buybacks, and why do some people consider them to be a bad thing? The Conversation tapped <a href="https://scholar.google.com/citations?user=VxWst50AAAAJ&hl=en&oi=ao">D. Brian Blank</a>, who studies company financial decision-making at Mississippi State University, to fill us in.</em> </p>
<h2>1. What are stock buybacks?</h2>
<p>Before we can answer that question, first we need to understand the basics of how stock works.</p>
<p>Stock <a href="https://www.investor.gov/introduction-investing/investing-basics/investment-products/stocks">represents an ownership interest in a company</a>, such that stockholders have a stake in the business. Companies use stock as one way to <a href="https://hbr.org/1989/11/everything-you-dont-want-to-know-about-raising-capital">raise capital</a> by selling their shares to investors, usually in an <a href="https://theconversation.com/investors-swoon-over-bumbles-ipo-but-what-exactly-is-an-initial-public-offering-155084">initial public offering</a>. </p>
<p>Most stockholders, however, obtain stock by buying it on a secondary market, like the New York Stock Exchange. In this case, <a href="https://thebusinessprofessor.com/en_US/investments-trading-financial-markets/primary-vs-secondary-market-definition">one person chooses to sell their ownership</a> in the company, while another person buys it.</p>
<p>As partial owners, shareholders see the value of their stock rise when the company does well. </p>
<p>One way investors can benefit from holding the stock is that some corporations <a href="https://www.investor.gov/introduction-investing/investing-basics/glossary/dividend">pay dividends</a>, which are payments made directly to shareholders. Another way that stockholders can benefit is by selling the stock for more than they paid for it. Together, this creates a return on investment.</p>
<p>And this brings us to share buybacks – and <a href="https://www.mckinsey.com/capabilities/strategy-and-corporate-finance/our-insights/how-share-repurchases-boost-earnings-without-improving-returns">why investors like them</a>.</p>
<h2>2. Why do companies buy back their own stock?</h2>
<p>When <a href="https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/us-companies-poised-to-prop-up-eps-with-share-buybacks-in-2023-72955469">companies have extra capital</a>, they might go into the secondary market and buy back stock from investors. This is often referred to as a stock repurchase or <a href="https://hbr.org/2001/04/is-a-share-buyback-right-for-your-company">buyback program</a>. Companies that are older and less focused on rapid growth tend to do them more often. </p>
<p>Companies do this for <a href="https://www.google.com/books/edition/Stock_Buyback_Motivations_and_Consequenc/bclgEAAAQBAJ?hl=en&gbpv=1">a variety of reasons</a>, <a href="https://doi.org/10.1111/j.1745-6622.2000.tb00040.x">such as because</a> they think their shares are undervalued and want to signal optimism to Wall Street, or because they simply want another way to distribute profits to shareholders – <a href="https://corpgov.law.harvard.edu/2018/05/23/why-shareholder-wealth-maximization-despite-other-objectives/">a key goal of any company</a> – <a href="https://doi.org/10.1111/j.1745-6622.2000.tb00040.x">other than through dividends</a>. </p>
<p>Shareholders like buybacks because companies <a href="https://corporatefinanceinstitute.com/resources/accounting/dividend-vs-share-buyback-repurchase/">often pay a premium</a> over market price. And when companies buy their own stock, this removes those shares from the market, which has the effect of lifting share prices as supply goes down, benefiting existing stockholders.</p>
<p>It’s estimated that American companies <a href="https://www.bloomberg.com/news/articles/2023-01-09/corporate-america-is-still-lining-up-to-buy-back-its-own-stock-shares?sref=Hjm5biAW">bought back a record $1 trillion</a> of their own stock in 2022. And Apple is the <a href="https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/us-companies-poised-to-prop-up-eps-with-share-buybacks-in-2023-72955469#:%7E:text=Apple%20Inc.%20is%20the%20biggest,of%20the%20S%26P%20500%20companies.">biggest user of buybacks</a>, having spent $557 billion over the past decade repurchasing its own shares. </p>
<figure class="align-center ">
<img alt="elderly white man with gray hair stands in front of lectern and appears to speak while gesticulating with his hands" src="https://images.theconversation.com/files/509315/original/file-20230209-23-aranpu.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/509315/original/file-20230209-23-aranpu.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/509315/original/file-20230209-23-aranpu.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/509315/original/file-20230209-23-aranpu.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/509315/original/file-20230209-23-aranpu.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/509315/original/file-20230209-23-aranpu.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/509315/original/file-20230209-23-aranpu.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">President Joe Biden said companies should ‘do the right thing’ and stop buying back their own shares.</span>
<span class="attribution"><a class="source" href="https://newsroom.ap.org/detail/BidenOil/e9009d5ff31a4a7792593c5974d1d79f/photo?Query=biden%20union&mediaType=photo&sortBy=arrivaldatetime:desc&dateRange=Anytime&totalCount=2242&currentItemNo=1">AP Photo/Patrick Semansky</a></span>
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</figure>
<h2>3. Why do Biden and others dislike buybacks?</h2>
<p>Critics like Biden contend that share buybacks represent short-term thinking that doesn’t actually create any real value. They <a href="https://www.wsj.com/articles/biden-to-urge-quadrupling-new-1-tax-on-stock-buybacks-11675723035">argue instead</a> that companies should use more of their profits to invest in more productive activities like business operations, innovation or employees.</p>
<p>Returning money that a company makes to stockholders does mean <a href="https://www.cfo.com/corporate-finance/2021/02/shareholder-distributions-vs-reinvestment-the-gap-grows/">less capital is available</a> for other investments. In his speech, Biden specifically <a href="https://www.nytimes.com/2023/02/08/us/politics/biden-state-of-the-union-transcript.html">called out “Big Oil” companies</a> for using the <a href="https://www.cnbc.com/2023/02/08/big-oil-rakes-in-record-annual-profit-fueling-calls-for-higher-taxes.html">record profits</a> they’ve earned from high energy prices to buy back their stock rather than investing in new wells to increase supply – and <a href="https://www.washingtontimes.com/news/2023/feb/7/biden-rips-outrageous-big-oil-profits-calls-quadru/">help reduce gas prices</a>. </p>
<p>But the decision whether to invest to increase domestic production is a complicated one. For example, the reason companies aren’t investing in new wells right now is not simply because they are buying back stock. The reason has more to do with how oil companies, and their shareholders, don’t think it is profitable to invest in more supply for a <a href="https://www.npr.org/2021/03/06/973649045/hold-that-drill-why-wall-street-wants-energy-companies-to-pump-less-oil-not-more">whole host of reasons</a>, including the global push for greener energy by both policymakers and consumers, which is bound to reduce demand for fossil fuels in the future.</p>
<p>It’s also worth noting that while share repurchases are becoming <a href="https://onlinelibrary.wiley.com/doi/full/10.1111/j.1745-6622.2000.tb00040.x">increasingly common</a> and controversial, they remain very <a href="https://noahpinion.substack.com/p/stock-buybacks-dont-really-matter">similar to dividends</a>, which don’t prompt the same concerns among politicians. </p>
<h2>4. Would increasing the tax result in fewer buybacks?</h2>
<p>The 1% tax on buybacks is actually brand new. </p>
<p><a href="https://www.mayerbrown.com/en/perspectives-events/publications/2023/01/1-stock-buyback-tax-us-treasury-irs-release-interim-guidance">Congress passed the tax</a> in 2022 as part of the Inflation Reduction Act. It took effect at the beginning of 2023 and only affects buyback programs of $1 million or more. </p>
<p>Usually when an activity is taxed, it happens <a href="https://www.americanexperiment.org/tax-something-you-get-less-of-it-policymakers-have-always-known-that/">less frequently</a>. So, I expect the tax to nudge companies to spend less on buybacks and more elsewhere. While politicians intend more of the money to be used to invest in their productive capacity, companies may simply spend more on <a href="https://www.wsj.com/articles/biden-to-urge-quadrupling-new-1-tax-on-stock-buybacks-11675723035">paying shareholders dividends</a>.</p>
<p>Since the tax is new, it’s hard to evaluate its actual impact. <a href="https://www.kiplinger.com/investing/stocks/why-stock-buybacks-could-accelerate-in-q4">Companies reportedly accelerated</a> their repurchase programs in 2022 to avoid paying the tax.</p>
<p>But early data from 2023 suggests the 1% tax isn’t significantly deterring buybacks. <a href="https://www.bloomberg.com/news/articles/2023-02-02/stock-buybacks-hit-132-billion-as-companies-snub-all-warnings?sref=Hjm5biAW">Companies announced $132 billion</a> in buybacks in January, three times as much as a year earlier and the most for the month on record.</p>
<p>Biden’s <a href="https://www.reuters.com/world/us/biden-address-bring-buybacks-billionaire-tax-investor-focus-2023-02-07/">proposal to boost</a> the tax to 4% may alter corporate behavior more. But again, it may just lead to greater dividend payments, not the other types of investments he and others hope for.</p>
<p>In addition, given that Republicans control the House, and Democrats have only a narrow majority in the Senate, this proposal <a href="https://www.cnbc.com/2023/02/07/biden-buyback-tax-isnt-working-in-state-of-the-union-he-wants-more.html">has little chance</a> of becoming law anytime soon.</p>
<p>The reasons why large corporations make the decisions they do about where to allocate capital – whether to build a factory, hire more workers or buy back stock – are complicated and, in my view, never taken lightly. These decisions have many <a href="https://www.google.com/books/edition/Stock_Buyback_Motivations_and_Consequenc/bclgEAAAQBAJ?hl=en&gbpv=1">facets and implications</a>, and are not necessarily bad. I believe this is something worth remembering the next time you hear <a href="https://www.barrons.com/articles/corporate-stock-buyback-tax-51675805358">politicians</a> <a href="https://ca.finance.yahoo.com/news/president-biden-calls-out-stock-buybacks-in-state-of-the-union-address-104810205.html">saying</a> “<a href="https://www.cnn.com/interactive/2023/02/annotated-fact-checked-president-biden-sotu/">corporations should do the right thing</a>.”</p>
<p><em>This is an updated version of an article originally published on Feb. 10, 2023.</em></p><img src="https://counter.theconversation.com/content/199635/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>D. Brian Blank does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The retailer has spent nearly $12 billion buying back its own stock since 2005, money that could have been used to invest in its business.D. Brian Blank, Assistant Professor of Finance, Mississippi State UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1927992022-10-27T12:28:35Z2022-10-27T12:28:35ZElon Musk takes Twitter private – here’s what that means for the company and its chances of success<figure><img src="https://images.theconversation.com/files/491994/original/file-20221026-19-1q1c4p.jpg?ixlib=rb-1.1.0&rect=40%2C62%2C2955%2C1931&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Elon Musk has said he intends to complete his purchase of Twitter after earlier trying to wriggle out of the deal. </span> <span class="attribution"><a class="source" href="https://newsroom.ap.org/detail/VaticanMusk/2f4d17cc351b4e52aa8558ae7304a946/photo?Query=elon%20musk&mediaType=photo&sortBy=arrivaldatetime:desc&dateRange=Anytime&totalCount=1321&currentItemNo=62">Patrick Pleul/Pool via AP</a></span></figcaption></figure><p>Elon Musk <a href="https://www.bloomberg.com/news/articles/2022-10-28/musk-completes-44-billion-twitter-deal-ending-months-of-enmity?srnd=premium&sref=Hjm5biAW">has finally completed</a> his US$44 billion deal to acquire Twitter and take it private. </p>
<p>The <a href="https://www.bloomberg.com/billionaires/">world’s richest man</a> has already begun putting his imprint on the social network by <a href="https://www.wsj.com/articles/elon-musk-completes-twitter-takeover-11666918031?mod=hp_lead_pos1">firing four of its top executives</a>.</p>
<p>While most people are likely familiar with the idea of <a href="https://www.statista.com/statistics/270290/number-of-ipos-in-the-us-since-1999/">taking a private company public</a> – the process that allows individuals to buy and sell a company’s shares in the stock market – the reverse process is not as well understood and <a href="https://corpgov.law.harvard.edu/2022/08/14/should-your-company-go-private/">happens far less often</a>. </p>
<p>As a <a href="https://michiganross.umich.edu/faculty-research/faculty/erik-gordon">business and law professor</a>, I have been analyzing mergers, privatizations and other corporate deals for over two decades. The most common question I have been getting from students and faculty colleagues is why would Musk want to take Twitter private? Or more simply, what does it mean to go private? </p>
<p>The answers to these question help address a more interesting one: Will he succeed? </p>
<h2>Public vs. private</h2>
<p>Let’s start with the basic differences between a public and private company.</p>
<p>For starters, a <a href="https://www.cooleygo.com/glossary/public-company">public company is widely held</a>, meaning it has a lot of shareholders. Anyone can buy shares of most public companies, their shares trade on stock exchanges, and their market price is widely available on websites and apps. </p>
<p><a href="https://www.sec.gov/education/smallbusiness/goingpublic/exchangeactreporting">Federal securities law requires</a> public companies to disclose a lot of information about their operations and financial condition in <a href="https://www.sec.gov/files/form10-k.pdf">reports that are posted on the Security and Exchange Commission website</a>. Basically, anything that happens to a public company that’s of consequence to investors must be disclosed publicly. </p>
<p>A private company, on the other hand, <a href="https://corporatefinanceinstitute.com/resources/knowledge/finance/private-company/">is closely held</a>. It has few shareholders – sometimes just one. It usually is impossible to buy shares of a private company. When it is possible, it is difficult because shares don’t trade on exchanges. You have to find someone who is willing and able under restrictive securities laws to sell you their shares.</p>
<p>In addition, a private company is not required to file disclosures or anything else with the SEC.</p>
<p>Another key difference is the power the chief executive has. While public company CEOs have a lot of power, that power is constrained by things like a board of directors and rules on compensation. </p>
<p>Private companies have no meddlesome boards or rules governing compensation or other issues. And with few or no pesky outside shareholders, leaders of private companies don’t have to worry about the effect their decisions might have on the share price. </p>
<h2>Going private</h2>
<p>Many, if not most, companies begin their lives as a private company – perhaps in a family garage, as <a href="https://www.businessinsider.com/google-apple-hp-microsoft-amazon-started-in-garages-photos-2019-12">seems to be the case in so many startup origin stories</a>. </p>
<p>As a young company grows, <a href="https://www.forbes.com/advisor/investing/initial-public-offering-ipo">it needs more funding</a>, a problem often solved by doing an initial public offering that pulls in a lot of cash and opens up ownership to anyone. </p>
<p><a href="https://www.investor.gov/introduction-investing/investing-basics/glossary/going-private">Taking a company private</a>, as Musk did, reverses the IPO. The Tesla billionaire paid Twitter shareholders $54.20 a share, which is a 64% premium over the price Twitter stock was trading at a few weeks before Musk’s offer was disclosed on April 14, 2022.</p>
<figure class="align-center ">
<img alt="A white man in a suit sits in front of an old computer in a dorm room, as two others in street clothes stand in the door opening" src="https://images.theconversation.com/files/491992/original/file-20221026-6305-el39uc.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/491992/original/file-20221026-6305-el39uc.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/491992/original/file-20221026-6305-el39uc.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/491992/original/file-20221026-6305-el39uc.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/491992/original/file-20221026-6305-el39uc.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/491992/original/file-20221026-6305-el39uc.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/491992/original/file-20221026-6305-el39uc.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Michael Dell, pictured wearing a suit in 1999 in the dorm where he started his eponymous computer company, took it private in 2013, later taking it public again for a huge profit.</span>
<span class="attribution"><a class="source" href="https://newsroom.ap.org/detail/RiseandFall/cf82774133a94ecabd3db2427cb2673c/photo?Query=Michael%20dell%20computer&mediaType=photo&sortBy=arrivaldatetime:desc&dateRange=Anytime&totalCount=28&currentItemNo=9">AP Photo/Harry Cabluck</a></span>
</figcaption>
</figure>
<h2>A success story</h2>
<p>So why would Musk or anyone want to take a company private? One key reason is control, which allows a buyer to impose his or her vision and singular strategy. </p>
<p>Now the shares have changed hands, Twitter is Musk’s to do with as he pleases – from reopening the accounts of <a href="https://www.cnbc.com/2022/05/10/elon-musk-says-he-would-lift-twitter-ban-on-donald-trump-after-deal-closes.html">former President Donald Trump</a> and Ye, <a href="https://techcrunch.com/2022/10/09/kanye-west-twitter-elon-musk">the artist formally known as Kanye West</a>, to <a href="https://techcrunch.com/2022/10/20/elon-musk-twitter-layoffs-wapo/">slashing the workforce</a> and firing executives.</p>
<p>That’s why Michael Dell decided to take the computer <a href="https://www.reuters.com/article/us-dell-buyout/dell-to-go-private-in-landmark-24-4-billion-deal-idUSBRE9140NF20130206">company that bears his name private in 2013</a>. </p>
<p>At the time, the <a href="https://www.investopedia.com/articles/markets/110915/dell-stock-doesnt-exist-here-why.asp">company was struggling</a> as personal computer sales slumped amid the rise of the smartphone. As <a href="https://www.sec.gov/Archives/edgar/data/826083/000119312513266621/d558010ddfan14a.htm">he explained in a securities filing</a>, Dell believed it was essential to quickly transform the company from primarily a PC maker to one focused on providing large organizations with entire information technology systems and managing them. </p>
<p>He said he couldn’t make the transformation as a public company because it would hurt short-term profits, which would likely cause the share price to fall. That in turn could harm consumers’ perception of Dell and lead to employee turnover.</p>
<p>In other words, Dell’s plan was perhaps too bold for a public company. But the strategy paid off – for him, his fellow investors and his company. </p>
<p>Dell himself <a href="https://www.forbes.com/sites/connieguglielmo/2013/10/30/you-wont-have-michael-dell-to-kick-around-anymore/">chipped in $750 million in cash</a> and over $3 billion in the form of his 16% stake in the company, with about $3.4 billion coming from other investors and $16 billion in debt.</p>
<p>By 2018, when the company went public for the second time, Dell’s <a href="https://www.ft.com/content/73ab2020-906c-11e8-b639-7680cedcc421">stake was worth $32 billion</a>, with similar large payouts for his co-investors. The <a href="https://www.statista.com/statistics/264911/dells-net-revenue-since-1996/">company thrived as well</a>, with sales and profits soaring after a period of low growth, as Dell predicted. Workforces often fall when a company goes private, but <a href="https://www.statista.com/statistics/264917/number-of-employees-at-dell-since-1996">Dell’s was up about 50%</a> in 2020 compared with 2013.</p>
<figure class="align-center ">
<img alt="a person in a coat walks past the front of a store with a Toys r Us sign over glass doors and signs reading clearance sale" src="https://images.theconversation.com/files/491993/original/file-20221026-23824-5gbu7p.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/491993/original/file-20221026-23824-5gbu7p.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/491993/original/file-20221026-23824-5gbu7p.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/491993/original/file-20221026-23824-5gbu7p.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/491993/original/file-20221026-23824-5gbu7p.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/491993/original/file-20221026-23824-5gbu7p.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/491993/original/file-20221026-23824-5gbu7p.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Toys R Us went bankrupt in 2017.</span>
<span class="attribution"><a class="source" href="https://newsroom.ap.org/detail/ToysRUsNewStake/fd082ebecdc643b78ff837b1e51bfd4a/photo?Query=toys%20r%20us&mediaType=photo&sortBy=arrivaldatetime:desc&dateRange=Anytime&totalCount=684&currentItemNo=17">AP Photo/Julio Cortez</a></span>
</figcaption>
</figure>
<h2>A classic fail</h2>
<p>But it doesn’t always end well. </p>
<p>In the early 2000s, Toys R Us <a href="https://www.latimes.com/business/la-fi-toys-r-us-leveraged-buyout-20180316-story.html">was in serious trouble</a>. Although e-commerce was still in its infancy, it was beginning to disrupt brick-and-mortar retailers, <a href="https://www.nytimes.com/2018/03/15/business/toys-r-us-bankruptcy.html">increasing competition</a> – especially in the market for children’s toys. A <a href="https://www.wsj.com/articles/SB113798030922653260">plan to sell its wares online via Amazon fizzled</a>, leaving Toys R Us way behind in e-commerce. Meanwhile, <a href="https://knowledge.wharton.upenn.edu/article/the-demise-of-toys-r-us/">its stores were growing old and shabby</a>, customer service was lousy and Target and Walmart were gaining market share.</p>
<p>In 2005, two buyout firms and a real estate trust <a href="https://www.businessinsider.com/the-tumultuous-history-of-toys-r-us-photos-2020-8#the-mounting-competition-led-to-the-eventual-closure-of-kids-r-us-14">won the bidding to take Toys R Us private</a> for $6.6 billion, using $5 billion in debt. Unlike Dell, who knew his business cold, Bain Capital, KKR & Co. and Vornado Realty Trust didn’t have much experience in the toy industry. And <a href="https://www.nytimes.com/2005/03/17/business/three-firms-are-said-to-buy-toys-r-us-for-6-billion.html">they followed a classic private equity strategy</a> of consolidation, closing marginal stores and cutting costs.</p>
<p>Also unlike Dell, Toys R Us never recovered. The <a href="https://www.theatlantic.com/magazine/archive/2018/07/toys-r-us-bankruptcy-private-equity/561758/">significant debt incurred</a> in the buyout saddled the company with large interest payments that <a href="https://www.washingtonpost.com/business/economy/analysts-toys-r-us-might-have-survived-if-it-did-not-have-to-deal-with-so-much-debt/2018/03/15/42752326-286a-11e8-874b-d517e912f125_story.html">left little money to invest</a> in remodeling stores or building a competitive online business. Toys R Us <a href="https://www.theatlantic.com/magazine/archive/2018/07/toys-r-us-bankruptcy-private-equity/561758/">filed for bankruptcy in 2017</a>, 12 years after going private.</p>
<p>As I see it, Dell had a plan that fit his company’s environment – a <a href="https://www.researchgate.net/publication/313924776_Strategic_Fit">key concept</a> in the study of business strategy. Toys R Us’ buyers did not. </p>
<p>**</p>
<figure class="align-center ">
<img alt="the Twitter bird logo appears in white on a large dark screen as people making trades at a stock exchange wander underneath" src="https://images.theconversation.com/files/491991/original/file-20221026-23859-h5s605.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/491991/original/file-20221026-23859-h5s605.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/491991/original/file-20221026-23859-h5s605.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/491991/original/file-20221026-23859-h5s605.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/491991/original/file-20221026-23859-h5s605.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/491991/original/file-20221026-23859-h5s605.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/491991/original/file-20221026-23859-h5s605.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Shares of Twitter had been trading far below Musk’s offering price until recently, with many believing it wouldn’t happen.</span>
<span class="attribution"><a class="source" href="https://newsroom.ap.org/detail/Musk-Twitter/bde3554cd27b43a79f448eb61f2e4b23/photo?Query=twitter&mediaType=photo&sortBy=arrivaldatetime:desc&dateRange=Anytime&totalCount=6361&currentItemNo=18">AP Photo/Seth Wenig</a></span>
</figcaption>
</figure>
<p>**</p>
<h2>Does Musk have a vision?</h2>
<p>So what does this all mean for Musk’s potential success at Twitter? </p>
<p>We still don’t know a lot about what he plans to do. </p>
<p>In <a href="https://www.sec.gov/Archives/edgar/data/1418091/000110465922045641/tm2212748d1_sc13da.htm">his April letter to Twitter shareholders</a>, he said, “I invested in Twitter as I believe in its potential to be the platform for free speech around the globe, and I believe free speech is a societal imperative for a functioning democracy.” One could ask whether that is a business model or a statement of sociopolitical philosophy.</p>
<p>In any case, he said Twitter can’t “thrive nor serve this societal imperative” as a public company. He’s also tweeted that he would fight bots on the social network, let Trump and others rejoin and potentially let users <a href="https://thehill.com/homenews/ap/ap-technology/ap-musk-has-a-super-app-plan-for-twitter-its-super-vague">pay bills via tweet</a> – part of his <a href="https://evannex.com/blogs/news/elon-musk-s-long-term-goal-to-turn-twitter-into-a-super-app">“Project X” super app idea</a>. </p>
<p>More recently, The Washington Post <a href="https://www.washingtonpost.com/technology/2022/10/20/musk-twitter-acquisition-staff-cuts/">reported that Musk plans</a> to cut Twitter’s 7,500 employees by about 75% – though on Oct. 26 <a href="https://www.bloomberg.com/news/articles/2022-10-27/musk-tells-twitter-employees-he-doesn-t-plan-to-cut-75-of-jobs?srnd=premium&sref=Hjm5biAW">he told Twitter employees in San Francisco</a> that he wouldn’t get rid of that many. He also promised Twitter <a href="https://www.wsj.com/articles/elon-musk-will-face-an-early-twitter-challenge-preventing-advertiser-flight-11666871828">wouldn’t turn into</a> a “free-for-all hellscape.”</p>
<p>Musk understands the physics of launching rockets and the engineering behind building an electric car, but he doesn’t have deep experience running a social media platform or in building super apps. I believe he doesn’t have a thoroughly thought-out strategy that fits Twitter’s difficult environment.</p>
<p>What he does have a huge amount of debt. Last year, Twitter owed about $51 million in interest on its debt. After going private, the estimates are that Twitter will <a href="https://www.barrons.com/articles/things-to-know-today-51666781185">owe at least a billion dollars</a> annually on <a href="https://www.forbes.com/sites/dereksaul/2022/10/25/elon-musk-reportedly-tells-bankers-hell-buy-twitter-by-friday-deadline/?sh=72147cae4a4c">about $13 billion in new debt</a>. </p>
<p>In 2021, the <a href="https://www.sec.gov/ix?doc=/Archives/edgar/data/1418091/000141809122000029/twtr-20211231.htm#i2ad918c563304a7eb6717a12dcfcee58_76">company generated just $630 million</a> in cash from operations. That means Musk won’t have much cash to fund a super app or any other big ideas, unless he is able to attract additional investment in the company.</p>
<p>With the company in his hands, Musk can, of course, do what he likes. He can implement any free speech policy that suits his fancy. He can let Trump and Ye tweet. He can ban Tesla short sellers and anyone who questions his <a href="https://www.npr.org/2022/10/04/1126714896/elon-musk-ukraine-peace-plan-zelenskyy">foreign policy initiatives</a>. He can fire 75% of his staff in a heartbeat – something a public CEO would have a very hard time doing.</p>
<p>It’s too soon to tell if taking Twitter private will be a Dell-like success or a Toys R Us disaster. But <a href="https://techcrunch.com/2022/04/14/elon-musk-buying-twitter-ted-talk/">given Musk has said</a> he “doesn’t care about the economics,” it may not matter.</p>
<p><em>This article was updated to reflect deal was completed.</em></p><img src="https://counter.theconversation.com/content/192799/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Erik Gordon does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Completing the $44 billion deal, following six months of turmoil, may be the easy part.Erik Gordon, Professor of Business, University of MichiganLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1914902022-10-04T00:41:26Z2022-10-04T00:41:26ZNZ biggest firms will soon have to disclose their climate risk – but will it really curb climate change?<figure><img src="https://images.theconversation.com/files/487577/original/file-20221001-20-wfjnqz.jpg?ixlib=rb-1.1.0&rect=32%2C24%2C5423%2C3607&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Getty Images</span></span></figcaption></figure><p>Climate change has <a href="https://www.ipcc.ch/report/sixth-assessment-report-working-group-ii/">many catastrophic consequences</a>, including droughts, <a href="https://www.nytimes.com/article/flooding-climate-change.html">floods</a>, wildfires, heat waves, <a href="https://www.climate.gov/news-features/understanding-climate/climate-change-global-sea-level">rising sea levels</a> and <a href="https://www.gov.uk/government/publications/final-report-the-economics-of-biodiversity-the-dasgupta-review">biodiversity loss</a>. These all have adverse implications for social cohesion, economic development and financial stability. </p>
<p>Regrettably, the goals of advancing a better environment and a flourishing economy don’t always line up. Driving greater awareness of climate-related risks among large firms and powerful financial institutions is therefore of paramount importance and urgency. </p>
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Read more:
<a href="https://theconversation.com/green-investing-the-global-system-for-rating-companies-ethical-credentials-is-meaningless-179724">Green investing: the global system for rating companies' ethical credentials is meaningless</a>
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<p>Responding to this challenge, economists, environmentalists, activists and politicians have sought ways to ensure financial decisions <a href="https://www.ft.com/content/4bac715b-2812-4610-a528-dc8db9ecd635">factor in climate change</a>. To that end, policymakers are now considering the introduction of mandatory climate-related disclosures for firms and financial institutions. </p>
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<p>In essence, the idea is to employ disclosures to force large financial actors to consider their impact on climate change, and the impact of climate change on them. </p>
<p>For example, consider the potential exposure of a bank to climate risks. Home loans may not be recoverable if houses become uninhabitable because of rising seas. Other homes may become uninsurable because of increasing flood risks. </p>
<p>Likewise, agricultural loans may become riskier because of the increasing intensity of droughts. All of these risks are important not only to the bank’s profitability but also to the homeowners, farmers and manufacturers who borrowed money from that bank.</p>
<h2>Who should disclosures target?</h2>
<p>New Zealand’s recently published draft <a href="https://www.xrb.govt.nz/dmsdocument/4573">General Requirements for Climate-related Disclosures</a> defines climate-related disclosures as:</p>
<blockquote>
<p>disclosures about climate-related risks and opportunities that are useful to primary users when they assess, and make decisions about, an entity’s enterprise value, including information about its governance, strategy and risk management, and metrics and targets.</p>
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Read more:
<a href="https://theconversation.com/business-can-no-longer-ignore-extreme-heat-events-its-becoming-a-danger-to-the-bottom-line-188151">Business can no longer ignore extreme heat events – it’s becoming a danger to the bottom line</a>
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<p>The rationale behind the proposed framework is that consistent, comparable and understandable disclosures will encourage better climate-related decision-making and risk management. In turn, this will encourage firms to adopt more climate-resilient strategies, smoothing the transition to a net-zero economy.</p>
<p>The disclosures themselves seek to inform “primary users” – defined as “existing and potential investors, lenders and other creditors” – how companies <a href="https://www.fsb-tcfd.org/about/">respond to and consider</a> the impacts of climate change. Armed with this knowledge, primary users are then presumed to be able “to assess the merits of how entities are considering climate-related risks and opportunities”. </p>
<p>But the proposed framework regards only investors, lenders and other creditors as primary users. The definition does not include employees, customers or the public. This narrow definition represents a missed opportunity. </p>
<h2>Stakeholders versus shareholders</h2>
<p>Focusing on a relatively narrow range of primary users undermines the potential for disclosures to bring about change. Including employees, customers and the public would make the disclosures more powerful. By increasing their impact and relevance, the disclosures would better serve their goals.</p>
<p>This touches on the modern concept of stakeholders and “stakeholder capitalism” rather than only shareholders. Shareholders will mostly (or only) care about one limited dimension of the firm’s impact: profits. If they own only a small share of the entity through the stock market or their superannuation or pension fund, shareholders may not even pay much attention to what the firm does. </p>
<p>Stakeholders, however, include the firm’s employees, customers and everyone directly affected by its activities. Unlike shareholders, stakeholders often have a long-term perspective and a more immediate and direct interest in what the entity does. </p>
<h2>The public interest</h2>
<p>Stakeholders will therefore typically look beyond the firm’s profits to consider the broader social and community interests at stake. Stakeholders will desire, or indeed demand, more sustainable strategies that benefit a larger set of groups (rather than just the shareholders). </p>
<p>Interestingly, the European Union adopted a similarly broad perspective in its “<a href="http://ec.europa.eu/finance/docs/policy/190618-climate-related-information-reporting-guidelines_en.pdf">guidelines on reporting climate-related information</a>” in 2019. These require firms to adopt a “double materiality” standard: looking at what is material for both shareholders (the financial audience) and stakeholders (the environmental and social audiences). </p>
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Read more:
<a href="https://theconversation.com/sec-proposes-far-reaching-climate-disclosure-rules-for-companies-heres-where-the-rules-may-be-vulnerable-to-legal-challenges-179534">SEC proposes far-reaching climate disclosure rules for companies – here’s where the rules may be vulnerable to legal challenges</a>
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<p>Considering the public’s interest in financial disclosures about climate change also aligns with other recent regulatory efforts, such as the <a href="https://www.parliament.nz/en/pb/bills-and-laws/bills-proposed-laws/document/BILL_115953/plain-language-bill">Plain Language Bill</a> currently before parliament. This signals that citizens have a democratic right to receive comprehensible information from government organisations. </p>
<p>While the bill focuses on public service and Crown agencies, it illustrates the need to put citizens at the centre of laws and communicate with them effectively. </p>
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Read more:
<a href="https://theconversation.com/the-end-of-jargon-will-new-zealands-plain-language-law-finally-make-bureaucrats-talk-like-normal-people-189870">The end of jargon: will New Zealand's plain language law finally make bureaucrats talk like normal people?</a>
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<h2>Disclosure for all</h2>
<p>The New Zealand External Reporting Board, which is responsible for the proposed disclosure framework, has invited responses and is now considering the submissions. </p>
<p>This <a href="https://www.xrb.govt.nz/standards/climate-related-disclosures/consultation/exposure-draft">final review and consultation</a> stage provides a valuable opportunity to reconsider the definition of primary users. </p>
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<p>While New Zealand is a world leader in advancing these measures, just how effective and useful they will be remains to be seen. A revised definition that will encompass all stakeholders – including customers, employees and the public at large – will increase the disclosures’ efficacy. </p>
<p>In New Zealand and elsewhere, governments should adopt as wide a target audience as is feasible for climate-related disclosures. Otherwise, we risk undermining the promise of disclosures to mitigate climate change and contribute to a more climate-resilient future economy.</p><img src="https://counter.theconversation.com/content/191490/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors received funding from Toka Tū Ake-Earthquake Commission (EQC) to research the proposed climate-related risk disclosure framework. This article represents the authors' views; the EQC is not responsible for the content of this article and has not endorsed it.</span></em></p>The rules around climate-related financial disclosures are now being written. But the narrow definition of their target audience is a missed opportunity that can still be rectified.Ilan Noy, Chair in the Economics of Disasters and Climate Change, Te Herenga Waka — Victoria University of WellingtonSamuel Becher, Professor of Law, Te Herenga Waka — Victoria University of WellingtonLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1817732022-04-25T23:34:11Z2022-04-25T23:34:11ZElon Musk argues Twitter is better off without a board of directors – is he right?<figure><img src="https://images.theconversation.com/files/459609/original/file-20220425-2721-hz88wk.jpg?ixlib=rb-1.1.0&rect=108%2C54%2C5062%2C3225&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Twitter may soon be without the benefits – or the problems – of a public board of directors.</span> <span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/illustration/large-boardroom-business-meeting-royalty-free-illustration/508876372?adppopup=true">A-Digit/DigitalVision Vectors via Getty Images</a></span></figcaption></figure><p><a href="https://www.wsj.com/livecoverage/twitter-musk-deal/card/elon-musk-s-twitter-acquisition-a-timeline-fI3LhbZ0Q1koe3aUSKHZ">After a wild ride</a>, it looks like Elon Musk’s bid to buy Twitter <a href="https://www.nytimes.com/2022/10/04/technology/elon-musk-twitter-deal.html">may be back on</a>. </p>
<p><a href="https://investor.twitterinc.com/corporate-governance/board-of-directors/default.aspx">Twitter’s board of directors</a> had sued the Tesla billionaire in July 2022 when Musk tried to terminate the US$44 billion deal. The board has yet to drop its lawsuit, with a trial <a href="https://www.bloomberg.com/news/articles/2022-10-05/musk-twitter-judge-says-oct-17-trial-is-still-on-for-now?srnd=premium&sref=Hjm5biAW">still scheduled to begin Oct. 17, 2022</a>, which was intended to force Musk to complete the buyout. </p>
<p>The board has in fact been at the center of this saga since the beginning, when Musk launched his hostile takeover bid while <a href="https://www.barrons.com/articles/how-twitter-board-stock-ownership-compares-musk-tesla-51650304124">criticizing board members</a> for owning almost no shares of the company they oversee. Twitter founder Jack Dorsey <a href="https://www.cnbc.com/2022/04/18/twitters-ex-ceo-criticizes-board-musk-says-they-own-almost-no-shares.html">called the board the “dysfunction of the company</a>.”</p>
<p><a href="https://scholar.google.com/citations?user=j97Zw9IAAAAJ&hl=en&oi=ao">As experts</a> on <a href="https://scholar.google.com/citations?user=dvEc5eUAAAAJ&hl=en&oi=ao">corporate governance</a>, we believe this feud raised two important corporate governance questions: What purpose does a board of directors serve? And does it matter if a member owns company stock or not? </p>
<h2>‘A bad board will kill’</h2>
<p>“Good boards don’t create good companies, but a bad board will kill a company every time.”</p>
<p>Venture capitalist Fred Destin <a href="https://www.linkedin.com/pulse/valuation-vs-bad-vc-tradeoff-fred-destin/">wrote that in 2018</a>, citing what he called an “old Silicon Valley proverb.” The quote has been making the rounds on Twitter recently in light of Musk’s hostile bid. It even seemed to get a nod from Dorsey himself <a href="https://twitter.com/jack/status/1515536972995088385?ref_src=twsrc%5Etfw">when he replied to a tweet</a> containing the quote with “big facts.” </p>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/459601/original/file-20220425-116757-cd73cw.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="A white man with a long beard and gray suit stares straight ahead while appearing to open his mouth to speak" src="https://images.theconversation.com/files/459601/original/file-20220425-116757-cd73cw.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/459601/original/file-20220425-116757-cd73cw.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=393&fit=crop&dpr=1 600w, https://images.theconversation.com/files/459601/original/file-20220425-116757-cd73cw.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=393&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/459601/original/file-20220425-116757-cd73cw.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=393&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/459601/original/file-20220425-116757-cd73cw.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=494&fit=crop&dpr=1 754w, https://images.theconversation.com/files/459601/original/file-20220425-116757-cd73cw.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=494&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/459601/original/file-20220425-116757-cd73cw.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=494&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="caption">Twitter founder Jack Dorsey called the board the ‘dysfunction of the company.’</span>
<span class="attribution"><a class="source" href="https://newsroom.ap.org/detail/Twitter-Dorsey/f8c70619918548d3a8a2ebe581cbb948/photo?Query=jack%20dorsey&mediaType=photo&sortBy=arrivaldatetime:desc&dateRange=Anytime&totalCount=290&currentItemNo=6">Michael Reynolds/Pool Photo via AP</a></span>
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<p>This tweet and the general conversation that has emerged have important implications for understanding boards and their role in shepherding a company. </p>
<p>Broadly speaking, a <a href="https://www.boardeffect.com/blog/10-basic-responsibilities-board-members/">board’s most important roles</a> include hiring, paying and monitoring the chief executive officer.</p>
<p>Academic research suggests that board members at large companies – who <a href="https://work.chron.com/director-corporate-board-paid-19587.html">typically receive generous compensation packages</a> – may be limited in their ability to perform these tasks effectively. In our work, we found that <a href="https://doi.org/10.5465/19416520.2016.1120957">boards often find it impossible</a> to conduct adequate monitoring and rein in wayward CEOs because there’s just so much information for modern boards to process with their <a href="https://www.rhsmith.umd.edu/research/upside-having-busy-board-members">limited time</a>. And the social dynamics involved in the board also make it difficult for directors to speak up and oppose other directors.</p>
<p>In a separate study involving face-to-face interviews with directors, <a href="https://doi.org/10.1002/smj.3320">we were consistently told</a> that directors take their board service seriously and operate with their companies’ best interests in mind. But they do so with an eye toward collaborating with the CEO and the rest of the executive team rather than serving as impartial observers, as their “independent” status suggests they should. </p>
<p>While our work didn’t focus on this, if the board and the CEO fundamentally disagree about the direction of company – which was often the case <a href="https://nymag.com/intelligencer/2021/11/jack-dorsey-failed-twitter-parag-agrawal-will-be-way-better.html">between Dorsey and the Twitter board</a> – it would certainly be problematic and could lead to less than optimal decisions being made. </p>
<p>In other words, a board that isn’t functioning effectively can definitely destroy a company’s value. And <a href="https://www.newyorker.com/culture/infinite-scroll/why-would-elon-musk-want-to-buy-twitter">some reporting suggests</a> that’s what happened to Twitter, whose <a href="https://finance.yahoo.com/quote/TWTR/">shares were trading at less than half</a> their 2021 peak before Musk disclosed he had <a href="https://www.npr.org/2022/04/05/1090992306/elon-musk-takes-a-9-stake-in-twitter-to-become-its-largest-shareholder">amassed a 9% ownership stake</a>. </p>
<h2>A raider’s lament</h2>
<p>That brings us to the next question: Does not owning a significant stake in a company you oversee make it more likely that you’ll run it into the ground, as Musk seemed to suggest? </p>
<p>A few days after <a href="https://theconversation.com/elon-musks-bid-spotlights-twitters-unique-role-in-public-discourse-and-what-changes-might-be-in-store-181374">making his takeover offer</a> on April 14, the billionaire, <a href="https://twitter.com/elonmusk/status/1515403974802870279">responding to a tweet</a> showing how few shares Twitter board members own, posted that its directors’ “economic interests are simply not aligned with shareholders.”</p>
<p><div data-react-class="Tweet" data-react-props="{"tweetId":"1515403974802870279"}"></div></p>
<p>Musk’s arguments harked back to takeover bids from the 1980s in which activist investors – or “corporate raiders” – would argue that executives’ interests <a href="https://www.sciencedirect.com/topics/economics-econometrics-and-finance/activist-shareholders">did not align with those of shareholders</a>. As Gordon Gekko from the film “Wall Street” <a href="https://www.americanrhetoric.com/MovieSpeeches/moviespeechwallstreet.html">famously railed against executives</a> of a business he wanted to take over, “Today, management has no stake in the company!”</p>
<p>Musk’s words echo Gekko’s “greed is good” speech, except in regard to independent directors, who <a href="https://www.spencerstuart.com/-/media/2021/october/ssbi2021/us-spencer-stuart-board-index-2021.pdf">comprise the vast majority</a> of corporate boards. By definition, an independent or outside director is one who doesn’t hold an executive role in running the company, such as chief executive officer or chief financial officer. </p>
<figure>
<iframe width="440" height="260" src="https://www.youtube.com/embed/PF_iorX_MAw?wmode=transparent&start=0" frameborder="0" allowfullscreen=""></iframe>
<figcaption><span class="caption">‘Greed is good’</span></figcaption>
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<p>In reality, Twitter’s board share ownership is very similar to that of other companies. </p>
<p>Independent Twitter directors <a href="https://www.sec.gov/Archives/edgar/data/0001418091/000114036122014049/ny20001921x3_def14a.htm">held a median ownership stake of 0.003%</a> as of May 2022. For comparison, we looked at equity ownership of independent directors of companies listed in the S&P 500 stock index in 2021. We found the median stake was less than 0.01%, and all but a handful of directors held less than 1% of the company’s stock. Median ownership at Musk’s <a href="https://www.sec.gov/Archives/edgar/data/0001318605/000156459021044307/tsla-pre14a_20210813.htm">company Tesla is similarly minuscule, at 0.23%</a>. </p>
<p>Whether this makes a difference to a company’s success is hard to assess because research on the topic is rather sparse, in large part because board members have so little equity. </p>
<h2>Mixed research</h2>
<p>Academic researchers on effective corporate governance in the 1970s <a href="https://doi.org/10.1086/467037">argued that outside directors</a> should avoid owning many shares in the companies they oversee to maintain objectivity. More recently, <a href="https://doi.org/10.1177/0149206312460680">management scholars have suggested</a> that higher stakes could <a href="https://doi.org/10.5465/amr.2014.0066">provide a way to motivate</a> directors to monitor management and make decisions more in line with shareholder interests. </p>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/459604/original/file-20220425-22-6csb6l.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="A screenshot of a webpage depicting a round mug shot of a white man in sunglasses on a wide picture of planets and the words Elon Musk on his twitter page" src="https://images.theconversation.com/files/459604/original/file-20220425-22-6csb6l.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/459604/original/file-20220425-22-6csb6l.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/459604/original/file-20220425-22-6csb6l.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/459604/original/file-20220425-22-6csb6l.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/459604/original/file-20220425-22-6csb6l.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/459604/original/file-20220425-22-6csb6l.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/459604/original/file-20220425-22-6csb6l.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Elon Musk, who currently has about 108 million Twitter followers, has revived his offer to buy the social media giant.</span>
<span class="attribution"><a class="source" href="https://newsroom.ap.org/detail/TwitterMusk/f72e6080fc7c42ce98b2ba27802182d6/photo?Query=elon%20musk&mediaType=photo&sortBy=arrivaldatetime:desc&dateRange=Anytime&totalCount=1175&currentItemNo=6">AP Photo/Eric Risberg</a></span>
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</figure>
<p>Some researchers have found that boards with larger ownership stakes <a href="https://doi.org/10.1017/S0022109013000045">can improve</a> a <a href="https://doi.org/10.1086/497048">company’s operational performance</a> and <a href="https://www.doi.org/10.5465/256355">better align outside directors</a> with the <a href="https://doi.org/10.1016/0304-405X(89)90084-6">interests of shareholders</a>. </p>
<p>But other work that examined multiple studies shows the impact of director stock ownership <a href="https://www.pearson.com/us/higher-education/program/Larcker-Corporate-Governance-Matters-A-Closer-Look-at-Organizational-Choices-and-Their-Consequences-2nd-Edition/PGM265559.html">is mixed at best</a>, with some studies suggesting higher stakes potentially lead to negative outcomes, such as <a href="https://doi.org/10.1016/j.jcorpfin.2005.08.005">excessive executive and director compensation</a>.</p>
<p>Since the passage of the Sarbanes–Oxley Act of 2002 <a href="https://www.sarbanes-oxley-101.com/sarbanes-oxley-faq.htm">after massive accounting scandals</a> at Enron, WorldCom and elsewhere, corporate governance issues such as board oversight <a href="https://www.nyulawreview.org/wp-content/uploads/2018/08/NYULawReview-82-4-Brown.pdf">have become increasingly important</a>. This led to a number of changes intended to align the interests of managers and those of shareholders, including a focus on board independence and adjusting executive compensation. </p>
<p>Although our research shows boards are limited in their ability to monitor management, <a href="https://theconversation.com/elon-musk-argues-twitter-would-be-better-off-in-private-rather-than-public-hands-corporate-governance-scholars-would-disagree-181382">they’re still better than nothing</a>.</p>
<p>In his original letter to shareholders announcing his bid, Musk <a href="https://www.sec.gov/Archives/edgar/data/0001418091/000110465922045641/tm2212748d1_sc13da.htm">vowed to “unlock” Twitter’s potential</a> as a <a href="https://www.investopedia.com/ask/answers/05/publictoprivate.asp">private company</a>, without a public board. We may finally learn if he’s right.</p>
<p><em>This is article has been updated to reflect the changing status of the Twitter deal.</em></p><img src="https://counter.theconversation.com/content/181773/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Musk, who revived his bid for Twitter after the social media company’s board sued to enforce the deal, has been very critical of its board.Michael Withers, Associate Professor of Business, Texas A&M UniversitySteven Boivie, Professor of Management, Texas A&M UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1782572022-03-06T12:15:17Z2022-03-06T12:15:17ZCorporate taxes can be good for shareholders: Why some actually want their companies to pay tax<figure><img src="https://images.theconversation.com/files/449610/original/file-20220302-13-kbwrv2.jpg?ixlib=rb-1.1.0&rect=0%2C0%2C6240%2C4156&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">When it comes to shareholder credits, shareholders prefer their corporations pay the standard tax they owe — not a lower tax — to ensure higher cash flows.</span> <span class="attribution"><span class="source">(Shutterstock)</span></span></figcaption></figure><p>There is a prevailing assumption that, in the name of profit, shareholders don’t want their corporations to pay taxes. It’s easy to see how less taxes should mean more money in their pockets, but it turns out this is a common, yet understandable, misconception. </p>
<p>Contrary to this belief, shareholders (people who have invested money in a company in exchange for a share of the owndership) sometimes prefer their corporations to pay taxes to maximize cash flows. But, how can that be? Take common news stories about <a href="https://theconversation.com/the-pandora-papers-how-punishing-tax-cheats-can-serve-as-a-deterrent-170435">offshore tax schemes</a>, creative tax planning and <a href="https://www.cbc.ca/radio/day6/episode-363-apple-s-tax-shelters-marvel-vs-dc-london-s-wartime-stretcher-fences-lost-jewish-music-more-1.4391482/how-apple-managed-to-pay-almost-no-tax-on-billions-in-profits-1.4391505">corporations reducing their taxes</a>, for example. These stories all seem to imply that less taxes mean higher cash flows for both corporations and shareholders.</p>
<p>It turns out that isn’t always true. Certain incentives, like shareholder credits that reduce the amount of tax owed on dividends, actually <em>encourage</em> shareholders to prefer their corporations pay the standard tax they owe — not a lower tax — to ensure higher cash flows for themselves.</p>
<h2>A brief overview</h2>
<p>Some countries around the world, such as Australia and Canada, run what’s called an “integrated tax system.” This means that corporate income and individual income are only taxed once, together, as the money makes its way from the corporation to the shareholder. Other countries, like the United States, do not integrate corporate and personal tax, leading to <a href="https://www.investopedia.com/terms/d/double_taxation.asp">double taxation</a> where corporations and individuals end up paying tax twice on the same income. </p>
<p>Let’s take a closer look at why this is important.</p>
<p>Imagine three people: Person A is an employee, Person B runs an unincorporated business and Person C is the sole shareholder of a corporation. Each of these cases generates income of $100,000 for the same type of work. It makes sense that, because the economic activity is the same, taxes at the end of the day are the same. It shouldn’t matter which person you are or how you organize your work life. </p>
<p>But because Person C and their corporation pay taxes separately, that can change which of the three persons you’d prefer to be. To remedy this, we need some way to account for the difference in taxes each person pays. Integrated tax systems are designed to do just that, by ensuring all three individuals are taxed the same amount.</p>
<h2>Integration in action</h2>
<p>Now let’s consider how this works for the shareholder. </p>
<p>Shareholders pay taxes on the dividend payments they receive from a company. Dividend payments are monetary rewards shareholders receive for investing in a company. To accomplish tax integration, shareholders include their proportion of the corporation’s pre-tax income (also known as the dividend) in their individual taxable income as a dividend. The tax is then calculated and shareholders are able to reduce their individual tax liability with credit for taxes the corporation has already paid. </p>
<p>My colleagues and I <a href="https://doi.org/10.2308/accr-52315">developed a numerical illustration</a> to show the incentive this system creates. Shareholders want the corporation to pay taxes and to avoid spending money on <a href="https://www.investopedia.com/terms/t/tax-planning.asp">costly tax planning</a>. The <a href="https://www.penguinrandomhouse.com/books/304634/nudge-by-richard-h-thaler-and-cass-r-sunstein/">valuable tax credits nudge</a> shareholders into wanting their corporations to pay taxes, rather than paying for tax planning to reduce tax — all in the name of greater shareholder after-tax cash flows.</p>
<p>Next, let’s take this illustration into the real world.</p>
<p>In our study, we used a set of European countries that eliminated their integration systems, mostly in the mid-2000s. We compared these “eliminating” countries to other countries that did not change their tax policy and found that getting rid of the credits also got rid of tax incentives. After the change, corporations in these countries engaged in substantially more tax planning to reduce the standard tax they owed. </p>
<figure class="align-center ">
<img alt="A woman walks by the entrance to a building that says 'Cour de Justice de L'union Europeenne' on the front." src="https://images.theconversation.com/files/449931/original/file-20220303-6135-1h3jaqq.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/449931/original/file-20220303-6135-1h3jaqq.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=387&fit=crop&dpr=1 600w, https://images.theconversation.com/files/449931/original/file-20220303-6135-1h3jaqq.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=387&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/449931/original/file-20220303-6135-1h3jaqq.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=387&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/449931/original/file-20220303-6135-1h3jaqq.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=486&fit=crop&dpr=1 754w, https://images.theconversation.com/files/449931/original/file-20220303-6135-1h3jaqq.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=486&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/449931/original/file-20220303-6135-1h3jaqq.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=486&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">A series of rulings by the European Court of Justice in the late 2000s led several countries to eliminate their tax integration systems.</span>
<span class="attribution"><span class="source">(Geert Vanden Wijngaert)</span></span>
</figcaption>
</figure>
<p>Why? In the new tax system without integration, income could be taxed twice as it transferred from corporation to shareholder. So, to maximize shareholder cash flows, the new incentive was to minimize the amount of corporate income that was initially taxed.</p>
<h2>Hold your horses</h2>
<p>Long story short, shareholders can prefer their corporations to pay taxes. But don’t go overboard — no silver bullet exists to kill taxpayers’ inherent preference to minimize taxes. </p>
<p>Our research also showed that other important factors can limit the attractiveness of the shareholder credit incentive. The more a corporation operates in foreign jurisdictions (which do not offer credits), the fewer credits it generates and the more dispersed the shareholders are. This results in a weaker incentive to generate shareholder credits with higher corporate taxes.</p>
<p>In each of these cases, shareholders would rather the corporation minimize its taxes. Nevertheless, an integrated tax system with its shareholder credits might just change the way you, I or governments think about shareholder tax incentives. Typical shareholders want more cash flow, and they’ll do anything — including paying more tax — to get it.</p><img src="https://counter.theconversation.com/content/178257/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Andrew Bauer does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Incentives, like shareholder credits for corporate taxes paid, mean that shareholders want their corporations to pay taxes.Andrew Bauer, Assistant professor, Canada Research Chair in Taxation, Governance and Risk, University of WaterlooLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1657692021-08-09T11:22:38Z2021-08-09T11:22:38ZRecord numbers of UK firms are being swallowed by private equity – should we be worried?<p>Two big takeover battles in the UK are a sign of the times: supermarket chain <a href="https://www.ft.com/content/935745af-d952-45b4-96e2-e193f7d95fdd">Wm Morrisons</a> and respiratory medicines group <a href="https://www.ft.com/content/6f566bda-1a7c-402c-b04d-b3e0dcc2148e">Vectura</a> are both the subject of bids in the billions of pounds by private equity firms. In the case of Vectura, Carlyle Group is battling it out with Marlboro cigarettes giant Altria, while different private equity suitors are competing to land Morrisons.</p>
<p>It comes as private-equity buyouts of London-listed companies are their highest in <a href="https://www.ft.com/content/6f566bda-1a7c-402c-b04d-b3e0dcc2148e">20 years</a>, <a href="https://www.thetimes.co.uk/article/bidding-for-uk-firms-at-14-year-high-x8s82208r">contributing to</a> takeover deals worth £156 billion in 2021 to date. Big deals include aerospace firm <a href="https://www.defensenews.com/industry/2021/08/02/american-firm-to-take-over-britains-meggitt-in-88-billion-deal/">Meggitt</a> (bought by Parker-Hannifin for £6.3 billion), <a href="https://www.thisismoney.co.uk/money/markets/article-9227379/Spitfire-parts-maker-Signature-Aviation-agrees-3-5bn-takeover-consortium.html">Signature Aviation</a> (bought by a consortium led by Blackstone for £3.5 billion), and another supermarket chain: <a href="https://www.retailgazette.co.uk/blog/2021/06/issa-bros-push-ahead-with-asda-takeover-after-cma-accepts-petrol-station-sale/">Asda</a> (TDR Capital and the English billionaire Issa brothers for £7 billion). </p>
<p>Private equity firms have also bought motoring support group <a href="https://www.theguardian.com/business/2020/nov/25/aa-agrees-takeover-deal-private-equity-investors-motoring-uk">the AA</a> in recent months, marking its second stint in private-equity ownership; and a 10% stake in <a href="https://www.thetimes.co.uk/article/private-equity-firms-543m-deal-for-stake-in-liverpool-3q3kzjw0r">Liverpool</a> football club (whose majority owner, Fenway Sports Group, is essentially a specialist private equity firm anyway). With the exception of Asda’s private-equity owner, which is based in London, these buyers are all American. </p>
<p>Private equity firms are investment vehicles that are not listed on the stock market. Their objectives are no different to listed investment companies, namely increasing profitability by making businesses more efficient. But private equity has long <a href="https://hbswk.hbs.edu/item/do-private-equity-buyouts-get-a-bad-rap">had a reputation</a> for cost-cutting, job losses, hiking product prices and loading acquisitions with heavy debts, so a big influx of takeovers is always going to raise eyebrows. So why the surge, and what are the implications?</p>
<h2>Understanding the model</h2>
<p>Private-equity deals are a bit like a corporate version of buy-to-lets. Where a landlord would buy a property and get the tenants to pay the mortgage in the hope that the property goes up in value and can be sold at a profit, private equity does this with companies. </p>
<p>They take control of an “undervalued” publicly listed firm using their own money and substantial borrowings from financial institutions. The aim is for the acquisition to pay back the takeover price and all the interest payments on the loans. The remaining profits then compensate the private-equity owners for their risk, as well as being reinvested in the business. Most private-equity firms expect to sell acquisitions within three to five years, whether by public listing or a resale.</p>
<p>The current popularity of these buyouts has <a href="https://www.thetimes.co.uk/article/bidding-for-uk-firms-at-14-year-high-x8s82208r">been ascribed</a> to the effects of Brexit fears and COVID-19 on UK share prices (“bargain valuations”, according to The Times). Since the 12-month lows at the end of October 2020, the FTSE 100’s gain of 29% <a href="https://uk.tradingview.com">lags behind</a> that of the Dow Jones (33%) and the DAX (38%). </p>
<p>Yet the appreciation of sterling against the US dollar and euro has negated this difference to some extent, particularly for US-based investors. Rather than UK listed companies being undervalued overall, it is more that some businesses look cheap – particularly given the UK economic recovery, which is expected to be <a href="https://www.thetimes.co.uk/article/britains-economic-bounceback-set-to-outstrip-the-g7-v6g6r75f2#:%7E:text=The%20UK%20had%20been%20expected,%2C%20Germany%2C%20Canada%20and%20Japan.">the fastest</a> of the major economies. </p>
<p>Private-equity firms and institutional investors, which accumulated substantial cash during the worst of the pandemic because they saw deal-making as riskier than usual, aim to seize on these opportunities by taking advantage of historically low borrowing rates. </p>
<p>Most attractive are businesses with relatively stable income streams. Morrisons fits this profile well. Its pre-tax profits <a href="https://www.retail-systems.com/rs/Morrisons_Profits_Down_50pc_After_290m_Covid_Bill.php">fell 50%</a> in 2020, softening the share price. But grocery revenues are resilient and Morrisons has a £6 billion property portfolio, including most of its supermarkets.</p>
<h2>Reasons to be wary</h2>
<p>So how worried should we be about private-equity buyouts? Some might argue their reputation for asset-stripping is worse than is deserved. There have certainly been examples of this behaviour but the need to sell on a valuable asset in the three to five-year time-horizon is a strong incentive not to sweat a business too much. </p>
<p>Advocates of efficient markets would add that undervalued assets should be acquired by whoever values them more highly and can improve their efficiency and profitability. But while this may often be true, there is more inherent value in taking companies private than keeping them listed: </p>
<ul>
<li><p>Private-equity buyouts are generally heavily debt-laden. Public companies tend to be more conservative with debt given their duty to stakeholders and their reluctance to disclose commercial information to lenders. Highly indebted firms’ interest repayments are tax deductible as a cost of doing business, which reduces their debt-servicing costs and thus gives them a funding advantage. </p></li>
<li><p>Privately owned firms are not subject to the same financial reporting and accountability checks and balances. They are under no obligation to answer to all their stakeholders or the public. For example, they don’t need to disclose who ultimately owns them, or the remuneration of their directors. </p></li>
<li><p>Because private-equity ventures don’t have to reveal ultimate ownership, potential conflicts of interest can be obscured. For example, two companies in the same sector both owned by private equity could have the same ultimate owner and be quietly colluding without the competition authorities realising.</p></li>
<li><p>The <a href="https://www.frc.org.uk/getattachment/31dfb844-6d4b-4093-9bfe-19cee2c29cda/Wates-Corporate-Governance-Principles-for-LPC-Dec-2018.pdf">Wates Corporate Governance Principles</a>, introduced in 2018, are a voluntary code of governance for both public and private firms above a certain size. Principles include mitigating business risks and fostering good relationships with stakeholders. But there has been limited uptake to date, and since public listed companies are arguably expected to follow such principles regardless of Wates, private companies again benefit.</p></li>
</ul>
<p>With private-equity takeovers so popular, these advantages threaten the idea of <a href="https://thebusinessprofessor.com/en_US/business-governance/shareholder-democracy-definition">shareholder democracy</a> – namely that listed companies are more likely to do the right thing because shareholders can walk away at any time. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/415230/original/file-20210809-27-1lfjpms.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="An aerial shot of a shareholder AGM." src="https://images.theconversation.com/files/415230/original/file-20210809-27-1lfjpms.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/415230/original/file-20210809-27-1lfjpms.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/415230/original/file-20210809-27-1lfjpms.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/415230/original/file-20210809-27-1lfjpms.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/415230/original/file-20210809-27-1lfjpms.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/415230/original/file-20210809-27-1lfjpms.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/415230/original/file-20210809-27-1lfjpms.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Shareholder democracy is arguably worth protecting.</span>
<span class="attribution"><a class="source" href="https://unsplash.com/photos/3aVlWP-7bg8">Mikael Kristenson/Unsplash</a>, <a class="license" href="http://creativecommons.org/licenses/by-sa/4.0/">CC BY-SA</a></span>
</figcaption>
</figure>
<p>Private-equity buyouts may improve the efficiency and profitability of UK companies. But if firm does this by, for example, taking advantage of the reduced scrutiny to flout workers’ conditions or raise product prices, there will be adverse implications for society as a whole. And if, as many are predicting, interest rates soon have to rise to ward off inflation, more heavily indebted companies could mean more corporate collapses. </p>
<p>If adherence to the Wates’ principles is anything to go by, it will take more than voluntary codes of conduct to protect against these dangers. If we need new legislation to ensure private-equity owned firms are transparent about their ultimate ownership, avoid behaving anti-competitively and act in the interests of stakeholders, then so be it.</p><img src="https://counter.theconversation.com/content/165769/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Robert Read does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>After sitting on the sidelines in 2020, US private equity is moving in for the kill.Robert Read, Senior Lecturer in International Economics, Lancaster UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1624912021-06-16T12:39:41Z2021-06-16T12:39:41ZA court ruling on Shell’s climate impact and votes against Exxon and Chevron add pressure, but it’s the market that will drive oil giants to change<figure><img src="https://images.theconversation.com/files/406236/original/file-20210614-73420-m5npn0.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Fossil fuel stocks haven't kept up with the market in recent years.</span> <span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/photo/oil-pump-with-candle-stick-graph-chart-in-the-royalty-free-image/1213625754">Anton Petrus via Getty Images</a></span></figcaption></figure><p>From news reports, it might sound like the fossil fuel industry is on the defensive after a <a href="https://uitspraken.rechtspraak.nl/inziendocument?id=ECLI:NL:RBDHA:2021:5339">landmark court ruling</a> and two <a href="https://www.chevron.com/-/media/chevron/stories/documents/chevron-2021-shareholder-proposal-voting-results.pdf">shareholder</a> <a href="https://www.blackrock.com/corporate/literature/press-release/blk-vote-bulletin-exxon-may-2021.pdf">votes</a> challenging the industry’s resistance to curbing its greenhouse gas emissions.</p>
<p>But how much power do decisions like these really carry when it comes to pressuring the industry to change? As an academic who studies climate finance and is familiar with climate litigation, I think there’s something else at work here.</p>
<h2>Pressure from the courts</h2>
<p>This latest flurry of speculation about the future of the industry began on May 26, 2021, when a Dutch court <a href="https://uitspraken.rechtspraak.nl/inziendocument?id=ECLI:NL:RBDHA:2021:5339">ordered Royal Dutch Shell to cut its emissions</a> 45% by 2030 from 2019 levels. That includes emissions from vehicles that burn Shell’s gasoline, something for which the oil industry has never been held legally liable.</p>
<p>Digging <a href="https://uitspraken.rechtspraak.nl/inziendocument?id=ECLI:NL:RBDHA:2021:5337">deeper into the court’s decision</a>, it is clear that the judges paid attention to science. The court agreed that greenhouse gas emissions pose a significant risk to the climate and that only so much more carbon can be released globally if the world hopes to avoid warming the planet by more than 1.5 degrees Celsius over preindustrial levels – the limit agreed to globally under the <a href="https://unfccc.int/process-and-meetings/the-paris-agreement/the-paris-agreement">Paris climate accord</a>. The court held Shell partly responsible for this increase. </p>
<p>The decision appears to hinge on a violation of the Dutch Civil Code’s “unwritten standard of care,” which, according to the court, means that “acting in conflict with what is generally accepted according to unwritten law is unlawful.” Shell “must observe the due care exercised in society,” the court wrote.</p>
<figure class="align-center ">
<img alt="Shell's CEO speaking in front of a photo of fossil fuel workers" src="https://images.theconversation.com/files/406238/original/file-20210614-126997-1ihyc3m.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/406238/original/file-20210614-126997-1ihyc3m.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/406238/original/file-20210614-126997-1ihyc3m.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/406238/original/file-20210614-126997-1ihyc3m.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/406238/original/file-20210614-126997-1ihyc3m.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/406238/original/file-20210614-126997-1ihyc3m.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/406238/original/file-20210614-126997-1ihyc3m.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">After the ruling, Shell CEO Ben van Beurden wrote on LinkedIn that his company would accelerate its emissions reduction strategy, but ‘for a long time to come we expect to continue providing energy in the form of oil and gas.’</span>
<span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/news-photo/ben-van-beurden-chief-executive-officer-of-royal-dutch-news-photo/482332074?adppopup=true">Justin Tallis/AFP via Getty Images</a></span>
</figcaption>
</figure>
<p><a href="https://www.spglobal.com/platts/en/market-insights/latest-news/electric-power/052621-dutch-court-tells-shell-to-cut-emissions-by-45-by-2030">Shell plans to appeal</a> the ruling in the Dutch court, and that doubtlessly will involve a protracted debate on what “unlawful” means in the context of the Dutch Civil Code. </p>
<p>I cannot imagine that the Dutch Civil Code will hold much sway with the U.S. federal court system. </p>
<p>Despite dozens of U.S. lawsuits by <a href="https://www.law.nyu.edu/centers/state-impact/issues/climate-action/local-suits-against-oil-companies">cities</a>, <a href="https://www.law.nyu.edu/centers/state-impact/issues/climate-action/suits-against-oil-companies">states</a> and people facing the consequences of climate change, the industry has not yet been held liable by the Supreme Court for producing and marketing fossil fuels, even though strong evidence attributes greenhouse gas emissions to oil and gas operations. In several cases, judges ruled that climate policy is the responsibility of the executive and legislative branches, <a href="http://columbiaclimatelaw.com/files/2018/06/oakland-v-bp-order-6-25-18.pdf">not the courts</a>. </p>
<p>Courts are also very slow to act. Recall that Exxon’s response to the Exxon Valdez oil tanker spill in 1989 <a href="https://www.adn.com/projects/article/exxon-valdez-case-timeline/2008/06/25/">tied up the courts for over a decade</a>. President Joe Biden’s <a href="https://storage.courtlistener.com/recap/gov.uscourts.lawd.179675/gov.uscourts.lawd.179675.140.0.pdf">ban on new oil and gas leases on federal land and water is now caught up in the courts</a> after a federal district judge issued a preliminary injunction on June 15, 2021, halting it. </p>
<p>So, while the lawsuits may add public pressure, the courts aren’t the major forces of change right now. </p>
<h2>Investors and the markets hold more power</h2>
<p>The same day the Dutch court ruled on Shell’s case, <a href="https://www.chevron.com/-/media/chevron/stories/documents/chevron-2021-shareholder-proposal-voting-results.pdf">Chevron shareholders</a> approved a resolution to require their San Francisco-based company to also curb “scope 3” emissions – the emissions created by the use of the company’s products. And Exxon shareholders, with the support of the world’s largest investment fund manager, Blackrock, voted to oust <a href="https://www.blackrock.com/corporate/literature/press-release/blk-vote-bulletin-exxon-may-2021.pdf">three board members</a> and replace them with experts in renewable energy and climate science.</p>
<p>With the Chevron and Exxon shareholder votes, it is important to recognize that the bulk of majority-vote proposals are either <a href="https://www.sciencedirect.com/science/article/pii/S0929119909000522">not implemented</a> or are watered down in multiple rounds of <a href="https://www.gibsondunn.com/wp-content/uploads/2020/08/shareholder-proposal-developments-during-the-2020-proxy-season.pdf">subsequent votes</a>. Whether they ultimately are successful depends much more on negotiations between the shareholders and the company.</p>
<p>It’s investors like Blackrock that can tip the scales. With Blackrock on the side of shareholders who are pushing for change, it is possible that the two oil majors will be forced to adopt a more climate-friendly investment strategy.</p>
<p>Blackrock, Vanguard and State Street have immense power in the boardroom. They are now the among the biggest shareholders in U.S. oil and gas companies, currently owning <a href="https://money.cnn.com/quote/shareholders/shareholders.html?symb=XOM&subView=institutional">18.5%</a> of Exxon and <a href="https://money.cnn.com/quote/shareholders/shareholders.html?symb=CVX&subView=institutional">19.4%</a> of Chevron. They also own around 20% of companies in the <a href="https://www.bloomberg.com/news/features/2020-01-09/the-hidden-dangers-of-the-great-index-fund-takeover">S&P 500</a>, including a <a href="https://www.citigroup.com/citi/investor/quarterly/2021/ar21p.pdf">large chunk</a> of shares in the big banks that finance these companies. </p>
<p>But their decisions are based on their own best interests. They are also often required to generate returns broadly equivalent to a fully diversified stock index such as the S&P 500. Blackrock said in <a href="https://www.blackrock.com/corporate/literature/press-release/blk-vote-bulletin-exxon-may-2021.pdf">explaining its vote</a>: “We believe more needs to be done in Exxon’s long-term strategy and short-term actions in relation to the energy transition in order to mitigate the impact of climate risk on long-term shareholder value.”</p>
<p>The strongest incentive for the fossil fuel industry to change may, therefore, be the discipline of large investors in the financial markets. When large investors such as Blackrock do not receive returns on their investments commensurate with the financial risk, they take action, either by cutting back their holdings or by using their voting power to effect change.</p>
<p>While I believe this is a step in the right direction, don’t count on this as an ideal solution, however, because Blackrock and the other large asset funds tend to <a href="https://static1.squarespace.com/static/59a706d4f5e2319b70240ef9/t/60a546a143620916d2b847d3/1621444259460/AsYouSow2021_ProxyVotingBiasReport_FINv9_20210518.pdf">promote corporate change</a> that benefits their investors, not necessarily the public at large.</p>
<h2>The market has started paying attention</h2>
<p>Several years ago, <a href="https://doi.org/10.1111/1911-3846.12298">I produced evidence</a> that when investors assessed firms with higher greenhouse gas emissions, they considered the potential costs of future lawsuits and regulation, both of which might affect stock prices. At the time, however, the market paid little attention to this liability, perhaps because of Exxon’s successful track record in defending against climate lawsuits.</p>
<p>In <a href="https://doi.org/10.1016/j.eneco.2015.08.028">another paper</a>, I showed that the market paid lip service to the carbon budget – the amount of carbon science shows can be emitted before the global temperature increase exceeds 1.5 degrees Celsius – and to evidence that fossil fuel assets might lose value in a warmer world.</p>
<p>That’s no longer the case. Markets are now paying close attention to both. The past decade has seen the <a href="https://www.cazenovecapital.com/uk/financial-adviser/insights/talking-points/the-longest-bull-market-in-history-in-five-charts/">strongest bull market</a> in 50 years. Yet investments in <a href="https://carbontracker.org/investors-shy-away-from-fossil-stocks-as-share-offerings-lose-billions/">fossil fuel stocks lost about 20%</a> of their value over the same decade. The price of carbon in Europe, meanwhile, <a href="https://carbonpricingdashboard.worldbank.org/map_data">has doubled</a> in the past 12 months.</p>
<p>Both trends have occurred, in my view, because of a greater realization of the high risks and consequences of climate regulation and lawsuits.</p>
<p><iframe id="eirBy" class="tc-infographic-datawrapper" src="https://datawrapper.dwcdn.net/eirBy/2/" height="400px" width="100%" style="border: none" frameborder="0"></iframe></p>
<p>Can energy firms produce higher returns by embracing the energy transition to clean energy? Given their large shareholdings, it is reasonable to conclude that Blackrock, Vanguard and State Street seem to think so.</p>
<p>So, in my estimation, it is not the courts that will force the fossil fuel industry to curb emissions. At least in the near term, it appears that what will make the difference will be a change in investors’ strategies, away from high-risk, high-carbon investments and toward cleaner products and services that can earn superior returns for shareholders.</p>
<p>Time will tell. But I would bet on Blackrock, Vanguard and State Street and the financial markets as better instruments to lower or eliminate the carbon emissions of the large oil and gas companies, not the courts.</p>
<p>[<em>Like what you’ve read? Want more?</em> <a href="https://theconversation.com/us/newsletters/the-daily-3?utm_source=TCUS&utm_medium=inline-link&utm_campaign=newsletter-text&utm_content=likethis">Sign up for The Conversation’s daily newsletter</a>.]</p><img src="https://counter.theconversation.com/content/162491/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Paul Griffin does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>When big investors like Blackrock get worried about their returns, they have the power and incentive to make fossil fuel companies take action.Paul Griffin, Distinguished Professor of Management, University of California, DavisLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1579512021-04-26T19:42:05Z2021-04-26T19:42:05ZCanada should embrace Québec’s simple incorporation system for small businesses<figure><img src="https://images.theconversation.com/files/397081/original/file-20210426-21-1grf4au.jpg?ixlib=rb-1.1.0&rect=0%2C441%2C5265%2C2908&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Canada should take cues from Québec on how it incorporates small businesses.</span> <span class="attribution"><span class="source">(François Gha/Unsplash)</span></span></figcaption></figure><p>The federal government’s 2021 budget is significant in at least two respects. </p>
<p>First, it affirms that small businesses are <a href="https://www.canada.ca/en/department-finance/news/2021/04/budget-2021-address-by-the-deputy-prime-minister-and-minister-of-finance.html">“the vital heart of our economy.”</a> Government support in times of extreme economic stress is therefore critical. </p>
<p>Second, the budget looks to policy innovation at the provincial level as inspiration for nationwide reform — Québec’s universal child-care system being the latest example. </p>
<p>While parliamentarians and provincial legislatures debate unprecedented fiscal measures to support Canada’s small businesses, they should also consider how to embrace another Québec innovation: <a href="https://law.queensu.ca/sites/default/files/Robert%20M.%20Yalden%20PDF%20QBCA%20Article%202021.pdf">its simplified incorporation model for small businesses</a>. With some minor refinements, Québec’s system of <a href="https://www.thebalancesmb.com/incorporation-2948235">incorporating businesses</a> can and should be deployed across the country. </p>
<p>The pandemic has reinforced the need to advance reform in an area where we lag behind the United States and many other members of the Organization of American States (OAS).</p>
<p>Small businesses employ <a href="https://www.ic.gc.ca/eic/site/061.nsf/eng/h_03114.html#a01">two-thirds of Canadian workers</a> and account for about half of Canada’s <a href="https://www150.statcan.gc.ca/n1/pub/11f0027m/2011070/part-partie1-eng.htm">private sector economy</a>. Yet some neglect to incorporate <a href="https://fbc.ca/blog/pros-and-cons-incorporating-small-business/">due to concerns about costs and paperwork</a>, even though constant regeneration of small business is critical to long-term prosperity. </p>
<h2>Access to capital</h2>
<p>Incorporation helps with this process. When businesses legally become corporate entities or companies, they increase their access to capital because they separate assets in a way that is attractive to those who finance early stage businesses. Business assets are set apart from personal assets that can be subject to claims from other creditors. </p>
<p>Incorporation also encourages entrepreneurs to keep creating new businesses. The limited liability that comes with incorporation caps a founding shareholder’s losses to the amount they invested in the business. This better enables a founder to manage insolvency risks.</p>
<p>Importantly, some of the newest providers of capital to small businesses now rely on algorithms to evaluate credit risk. They’re also increasingly prepared to invest in a corporation without asking <a href="https://www.theglobeandmail.com/business/article-michele-romanows-clearbanc-hits-unicorn-status-raising-us100-million/">for personal guarantees</a>. The ability to contain losses to what was already invested is critical to an entrepreneur’s ability to build other businesses. </p>
<figure class="align-center ">
<img alt="Two women stand in front of a bakery." src="https://images.theconversation.com/files/397107/original/file-20210426-15-1fuaz1q.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/397107/original/file-20210426-15-1fuaz1q.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/397107/original/file-20210426-15-1fuaz1q.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/397107/original/file-20210426-15-1fuaz1q.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/397107/original/file-20210426-15-1fuaz1q.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/397107/original/file-20210426-15-1fuaz1q.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/397107/original/file-20210426-15-1fuaz1q.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">The co-owners of a bakery in Hamilton, Ont., pose outside of their store in October 2020.</span>
<span class="attribution"><span class="source">THE CANADIAN PRESS/Tara Walton</span></span>
</figcaption>
</figure>
<p>But more than that, the pandemic has taught many small businesses that there are advantages to moving from the informal to formal economy. Incorporation can greatly assist in getting access to government support. </p>
<p>Demonstrating that a business satisfies eligibility criteria is easier when it is a distinct legal entity with financial statements. Government delivery of funds is also facilitated when dealing <a href="https://ceba-cuec.ca/">with corporations that already have business numbers and business bank accounts</a>. </p>
<p>Québec was especially focused on helping small business when it adopted a <a href="http://legisquebec.gouv.qc.ca/en/showdoc/cs/S-31.1">new Business Corporations Act (QBCA) in 2010</a>. To this day, the QBCA’s simplified incorporation structure remains highly innovative, allowing a sole shareholder to dispense with:</p>
<p>• Establishing a board of directors</p>
<p>• Adopting by-laws (for example, rules about internal governance)</p>
<p>• Appointing an auditor</p>
<p>• Holding shareholder meetings</p>
<p>• Keeping records of board and shareholder meetings</p>
<h2>Reduces costs</h2>
<p>More than 25 years as a business lawyer taught me that removing redundant administrative burdens would simplify incorporation for many small businesses. It would also reduce costs that can serve as a barrier to incorporating.</p>
<p>But it is one thing to innovate, and another for innovation to be embraced. To date, only a few hundred companies have opted into Québec’s <a href="http://www.finances.gouv.qc.ca/documents/Autres/en/AUTEN_loiSocieteActions.pdf">simplified regime</a>. In contrast, several OAS countries have adopted simplified incorporation systems, many of which have met with extraordinary success. Colombia alone <a href="http://revistas.pucp.edu.pe/index.php/agendainternacional/article/download/19368/19486/">has seen the creation of hundreds of thousands</a> of simplified corporations. </p>
<figure class="align-center ">
<img alt="A man stands in an empty ballroom." src="https://images.theconversation.com/files/397114/original/file-20210426-21-z111j5.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/397114/original/file-20210426-21-z111j5.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=398&fit=crop&dpr=1 600w, https://images.theconversation.com/files/397114/original/file-20210426-21-z111j5.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=398&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/397114/original/file-20210426-21-z111j5.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=398&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/397114/original/file-20210426-21-z111j5.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=500&fit=crop&dpr=1 754w, https://images.theconversation.com/files/397114/original/file-20210426-21-z111j5.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=500&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/397114/original/file-20210426-21-z111j5.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=500&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Colombian event organizers speak in their business’s ballroom in October 2020. Thousands of businesses in Colombia have been created after the country adopted a simplified corporation system.</span>
<span class="attribution"><span class="source">(AP Photo/Fernando Vergara)</span></span>
</figcaption>
</figure>
<p>The benefits have been significant and include increased employment and social security contributions and benefits and <a href="https://dx.doi.org/10.2139/ssrn.2357578">enhanced tax revenue for governments</a>.</p>
<p>What accounts for the difference in uptake? Québec’s approach could certainly be more user-friendly. For example, it could give a founder the option to dispense with a board and other formalities by ticking a box when incorporating, rather than the current practice of requiring more legal documents to be filed after incorporation. </p>
<h2>Efforts need to be publicized</h2>
<p>But the OAS and countries like Colombia have also put substantial effort into ensuring that the option is well known and its use actively encouraged. In contrast, Québec has done little to publicize its regime. Unfortunately, a strategy that relies on word of mouth is no strategy. </p>
<p>What is required is a sustained government communications plan that alerts small businesses to the system’s advantages, encouraging them to embrace it from the moment they go online to incorporate.</p>
<p>The QBCA’s adoption marked an important step in recognizing the value inherent in simplified incorporation processes. But more needs to be done for that value to be fully realized. </p>
<p>Other jurisdictions in Canada need to follow Québec’s lead, adjusting and perfecting its model. They then need to deploy communications strategies that will resonate with small businesses — all inexpensive but consequential steps that would help drive economic recovery for small businesses in the post-pandemic era.</p><img src="https://counter.theconversation.com/content/157951/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Robert Yalden does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The federal government should embrace Québec’s simplified incorporation model for small businesses. With some minor refinements, Québec’s regime can and should be deployed across the countryRobert Yalden, Stephen Sigurdson Professor in Corporate Law & Finance, Queen's University, OntarioLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1573832021-03-19T13:52:53Z2021-03-19T13:52:53ZDanone’s CEO has been ousted for being progressive – blame society not activist shareholders<figure><img src="https://images.theconversation.com/files/390395/original/file-20210318-21-p9ywue.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Mmmmmm. </span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/los-angeles-california-usa-12-june-1425790226">Il.studio</a></span></figcaption></figure><p>Danone’s chief executive and chairman, Emmanuel Faber, <a href="https://www.reuters.com/article/us-danone-management-idUSKBN2B60PN">is to step down</a> after activist shareholders called for his removal. In particular Artisan Partners and Bluebell Capital Partners, which together <a href="https://www.just-food.com/news/us-investor-artisan-partners-return-to-attack-on-danone_id145285.aspx#:%7E:text=In%20a%20letter%20to%20the,both%20currently%20held%20by%20Faber%2C">own less than 6%</a> of the Paris-based food giant, <a href="https://www.reuters.com/article/us-danone-m-a-bluebell-idUSKBN29N1VL">explicit requested</a> the board find a replacement.</p>
<p>They <a href="https://www.ft.com/content/2df158fb-357a-499a-b51c-025b4f1d5c97">blame Faber</a> for “a combination of poor operational record and questionable capital allocation choices”. <a href="https://www.ft.com/content/2df158fb-357a-499a-b51c-025b4f1d5c97">Bluebell</a> said that Faber’s Danone “did not manage to strike the right balance between shareholder value creation and sustainability”. </p>
<p>It was well known that for the chief executive of Danone, whose brands include Actimel, Alpro and Evian, the goal was to balance purpose with profit. “<a href="https://fortune.com/2020/07/07/for-danones-ceo-stakeholder-capitalism-is-a-fact/">Stakeholder Capitalism is a Fact</a>” was the title of a Fortune Magazine article published about him in July 2020. This was encapsulated in Danone’s logo, with a child looking up at a star next to the strapline, “One Planet. One Health”.</p>
<p>Unfortunately Danone’s share performance has been very weak compared to rivals Nestlé and Unilever. Danone is perceived to have cared more about people, the planet and social responsibility than its shareholders, and Faber is paying the price. If we measure a strategy’s success by the extent to which the shareholders accept it, “One Planet. One Health” has been a failure.</p>
<p>To many <a href="https://www.linkedin.com/search/results/content/?keywords=danone%20stakeholder%20capitalism%20&origin=CLUSTER_EXPANSION">it seems unfair</a> that old-fashioned capitalism, targeting short-term gains, has been defeated here by the idea of a new form of stakeholder capitalism in which companies pursue the interests of employees, society and future generations, at the expense of investors. They are partly right but partly wrong, and even insofar as they are right they are blaming the wrong people. Let me explain. </p>
<h2>Shareholders and the long term</h2>
<p>Doing what shareholders want is not incompatible with other stakeholders – rather, the opposite. Long-term shareholders are more long-termist than any other stakeholders in an organisation. Customers can take their business elsewhere; employees can change jobs when they do not share the company’s values. </p>
<p>Yes, there are so-called “short-term” shareholders. But they are not the majority of pension funds and mutual funds who hold most publicly traded shares and want to preserve the long-term value of a company. </p>
<p>Even institutions focused on short-term gains require stupid investors on the other side. If Artisan wants to hold Danone’s stock for just months, it will have to sell to someone. And if the stock has been inflated via a short-termist strategy, who will buy it?</p>
<p><strong>Food giants’ share performance</strong></p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/390404/original/file-20210318-13-1y0c67b.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/390404/original/file-20210318-13-1y0c67b.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=345&fit=crop&dpr=1 600w, https://images.theconversation.com/files/390404/original/file-20210318-13-1y0c67b.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=345&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/390404/original/file-20210318-13-1y0c67b.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=345&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/390404/original/file-20210318-13-1y0c67b.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=434&fit=crop&dpr=1 754w, https://images.theconversation.com/files/390404/original/file-20210318-13-1y0c67b.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=434&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/390404/original/file-20210318-13-1y0c67b.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=434&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Danone = blue, Nestlé = orange, Unilever = turquoise.</span>
<span class="attribution"><a class="source" href="https://uk.tradingview.com/chart/UajHAaVc/">Trading View</a></span>
</figcaption>
</figure>
<p>It is worth reflecting on Nestlé here. In July 2018, activist shareholder Daniel Loeb from US investor Third Point Management sent an <a href="https://www.10xebitda.com/wp-content/uploads/2020/03/Third-Point-Nestl%C3%A9-Presentation-July-2018.pdf">angry letter</a> to Nestlé’s chief executive, Mark Schneider, following a similarly dismal share performance. </p>
<p>Schneider, a newcomer to the largest consumer goods company in the world, had implemented a strategy based on diversifying away from Nestlé’s traditional business of coffee and chocolate into health science. <a href="https://www.reuters.com/article/us-nestle-thirdpoint-loeb-analysis-idUSKBN1JS2P8">Third Point wanted</a> Nestlé to sell off certain businesses, while arguing that it should take on more debt to take advantage of low interest rates. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/390401/original/file-20210318-21-7upzuw.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Nestle logo with an ice cream" src="https://images.theconversation.com/files/390401/original/file-20210318-21-7upzuw.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/390401/original/file-20210318-21-7upzuw.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/390401/original/file-20210318-21-7upzuw.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/390401/original/file-20210318-21-7upzuw.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/390401/original/file-20210318-21-7upzuw.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/390401/original/file-20210318-21-7upzuw.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/390401/original/file-20210318-21-7upzuw.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Nestle’s CEO changed tack to avoid being wafered.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/logstor-denmark-august-23-2017-nestle-1034893138">ricochet64</a></span>
</figcaption>
</figure>
<p><a href="https://www.euronews.com/2019/02/21/hedge-fund-third-point-praises-nestle-chief-in-letter-to-investors">Schneider complied</a> with this supposedly short-termist plan, and the share price has risen 32% since July 2018. In contrast, Danone is down 2% over the period, while Unilever has only gone up 3%. Today everybody at Nestlé, <a href="https://www.flagstaffbusinessnews.com/employees-love-working-nestle-purina/">including customers and employees</a>, is extremely happy with the changes imposed by Third Point. Seen in this light, perhaps we should be congratulating Danone’s activist shareholders. </p>
<h2>Sustainability</h2>
<p>If you want to do more for other stakeholders, such as future generations, the underlying problem is the rules of governance. They <a href="https://www.begbies-traynorgroup.com/articles/director-advice/understanding-a-company-directors-fiduciary-duties-and-consequences-of-failing-these-duties">stipulate that</a> shareholders’ interests must be given top priority by company directors. I remember an executive summit in Copenhagen a couple of years ago where the chief executive of a top European company, replying to concerns about the firm’s environmental policy, candidly said that if he made it greener, “my profit margin would fall 3% per year, my stock price would fall 15%, and I would get fired”. </p>
<p>Stakeholder capitalism ultimately needs enforced by politicians, and politicians are chosen by people. If western democracies are mostly run by political parties fostering traditional capitalism, it is our fault – it is because most people do not want to be sustainable.</p>
<p>Danone is not the last company whose shareholders are going to rebel when the company does not create value for them. If we want a new form of capitalism, but expect executives to change the system without politicians changing national and international regulation, we have two choices.</p>
<p>The first is that companies cater to different shareholders: if you want to have a higher purpose than profit, appeal to investors who are willing to lose money to preserve society and the environment. </p>
<p>Incidentally, don’t kid yourself that you can rely instead on investment giants like Blackrock who run index funds that exclude companies that don’t meet criteria around sustainability, while <a href="https://www.cnbc.com/2020/07/17/stakeholder-capitalism-set-to-become-more-and-more-important-says-blackrocks-fink.html">claiming that</a> stakeholder capitalists will be the winners of the future. </p>
<p>These institutions manage other people’s money, and transfer the burden of sustainability to the ultimate holders of the shares. Shareholders in the new capitalism will be those willing to sacrifice personal financial gains for a social benefit. Are you one of them?</p>
<p>The second choice is to rely on innovative executives to come up with new business models that find a way to generate shareholder returns while being sustainable. This is not easy. Most business models that I see either impose the cost of sustainability on shareholders by achieving lower returns, or on suppliers by paying them less, or on customers in the form of higher prices. </p>
<p>Only a few create truly sustainable business models. For example <a href="https://www.vestergaard.com/">Vestergaard</a>, a Swiss-headquartered company, patented a product to provide clean water to rural populations in Africa which was financed by selling carbon credits. <a href="https://hbr.org/2014/10/capture-more-value">In such a model</a> customers, users, suppliers, owners and government authorities won. A chief executive running a business like that should be safe from being removed for caring too much about sustainability.</p><img src="https://counter.theconversation.com/content/157383/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Arturo Bris does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Emmanuel Faber was trying to pursue a form of stakeholder capitalism.Arturo Bris, Professor of Finance, International Institute for Management Development (IMD)Licensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1499182020-11-12T02:17:41Z2020-11-12T02:17:41ZAn Australian man successfully sued his super fund over climate risk. Here’s what that means for your nest egg<figure><img src="https://images.theconversation.com/files/368958/original/file-20201112-15-qppb8t.jpg?ixlib=rb-1.1.0&rect=8%2C8%2C5982%2C2550&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>The A$57 billion Rest super fund last week <a href="https://www.abc.net.au/news/2020-11-02/rest-super-commits-to-net-zero-emmissions/12840204">pledged</a> to overhaul the way it manages climate risk, following a lawsuit by a 25-year-old member. The concession raises the bar for the way Australian superannuation funds respond to climate change.</p>
<p>The fact that Rest agreed to <a href="https://equitygenerationlawyers.com/cases/mcveigh-v-rest/">settle</a> the case before a trial is significant. It indicates that the proposition behind the case – that super funds have a legal duty to identify, manage and disclose climate-related risks – is no longer disputed.</p>
<p>Rest has agreed to align its investments with net-zero emissions by 2050 and to publicly disclose its holdings, among other undertakings.</p>
<p>This is an ambitious and much-needed step up. It will influence how Australia’s A$3 trillion superannuation industry invests, and how our retirement savings are protected from climate risk.</p>
<figure class="align-center ">
<img alt="A sign at a climate rally" src="https://images.theconversation.com/files/368961/original/file-20201112-23-xtaequ.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/368961/original/file-20201112-23-xtaequ.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=399&fit=crop&dpr=1 600w, https://images.theconversation.com/files/368961/original/file-20201112-23-xtaequ.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=399&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/368961/original/file-20201112-23-xtaequ.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=399&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/368961/original/file-20201112-23-xtaequ.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=501&fit=crop&dpr=1 754w, https://images.theconversation.com/files/368961/original/file-20201112-23-xtaequ.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=501&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/368961/original/file-20201112-23-xtaequ.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=501&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Australian companies, including super funds, are facing public pressure to respond to climate change.</span>
<span class="attribution"><span class="source">Shutterstock</span></span>
</figcaption>
</figure>
<h2>Climate: a risky business</h2>
<p>Brisbane man Mark McVeigh sued <a href="https://rest.com.au/">Rest</a> for failing to disclose how the fund was managing the financial risks posed by climate change. These risks fall into two main categories:</p>
<ul>
<li><p>physical risks from extreme events such as bushfires, storms and floods, which can damage assets and disrupt operations</p></li>
<li><p>risks arising from the transition to a low-carbon economy. These include new regulatory requirements to reduce greenhouse gas emissions, and associated market shifts.</p></li>
</ul>
<p>Climate risks are directly relevant for companies in many sectors, particularly energy and mining. But super funds, which pool capital and invest in these companies, are also exposed via reduced asset values and investment returns. </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/saving-for-retirement-gives-you-power-and-ethical-responsibilities-148349">Saving for retirement gives you power, and ethical responsibilities</a>
</strong>
</em>
</p>
<hr>
<p>The legal claim alleged Rest’s trustee directors failed to act with care, skill and diligence when investing for McVeigh, by not properly considering the risks climate change poses to the fund’s investments. </p>
<p>In a <a href="https://rest.com.au/why-rest/about-rest/news/rest-reaches-settlement-with-mark-mcveigh">statement</a> as part of the settlement, Rest acknowledged climate change “could lead to catastrophic economic and social consequences … Accordingly, Rest, as a superannuation trustee, considers that it is important to actively identify and manage these issues.”</p>
<p>Rest also committed to significant changes to its investment practices. I analyse four of these pledges below, drawing on recent <a href="https://www.monash.edu/business/blt/our-research/showcase/institutional-investors-and-climate-change">empirical research</a>.</p>
<figure class="align-center ">
<img alt="Cyclone damage to homes" src="https://images.theconversation.com/files/368972/original/file-20201112-14-1ooa6lw.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/368972/original/file-20201112-14-1ooa6lw.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=385&fit=crop&dpr=1 600w, https://images.theconversation.com/files/368972/original/file-20201112-14-1ooa6lw.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=385&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/368972/original/file-20201112-14-1ooa6lw.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=385&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/368972/original/file-20201112-14-1ooa6lw.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=484&fit=crop&dpr=1 754w, https://images.theconversation.com/files/368972/original/file-20201112-14-1ooa6lw.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=484&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/368972/original/file-20201112-14-1ooa6lw.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=484&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Climate-related natural disasters such as cyclones can damage assets.</span>
<span class="attribution"><span class="source">Dan Peled/AAP</span></span>
</figcaption>
</figure>
<h2>1. Net-zero emissions by 2050</h2>
<p>Rest pledged to align its portfolio to the Paris Agreement. In doing so, it joins a small number of other Australian superfunds such as <a href="https://www.smh.com.au/business/banking-and-finance/super-giant-hesta-divests-coal-commits-to-net-zero-investments-by-2050-20200625-p5562o.html">Hesta</a>, as well as high-profile companies such as <a href="https://www.abc.net.au/news/2020-10-29/anz-climate-policy-steps-away-from-coal-toward-carbon-neutrality/12825934">ANZ</a>, that have made <a href="https://www.smh.com.au/business/banking-and-finance/climate-lawyer-who-sued-super-fund-sets-sights-on-federal-government-over-bond-risks-20201103-p56b1d.html">similar commitments</a>.</p>
<p>Investors are still grappling with <a href="https://www.iigcc.org/our-work/paris-aligned-investment-initiative/">what it means</a> to decarbonise and align portfolios with the Paris Agreement. The agreement doesn’t allocate specific emissions reductions to nations, but it does allow for calculation of a global “emissions budget”. This can be used to develop scenarios involving various mitigation measures over different time frames. </p>
<p>All Paris-aligned scenarios involve, at a minimum, <a href="https://www.climatecouncil.org.au/resources/unburnable-carbon-why-we-need-to-leave-fossil-fuels-in-the-ground/">very significant reductions in fossil fuel use</a>. However, decarbonising existing portfolios is particularly challenging for Australian super funds. Many, including Rest, have substantial holdings in companies <a href="https://www.marketforces.org.au/campaigns/super/outofline/">actively pursuing</a> new fossil fuel projects such as Woodside Petroleum, Santos, Origin Energy, AGL and Caltex. </p>
<p>If Rest is serious about delivering on its pledge, it must divest from these companies, or secure a commitment to net-zero from these and the thousands of other companies in which it invests.</p>
<figure class="align-center ">
<img alt="Coal mining equipment at a coal mine" src="https://images.theconversation.com/files/368962/original/file-20201112-15-1mpz64j.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/368962/original/file-20201112-15-1mpz64j.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=377&fit=crop&dpr=1 600w, https://images.theconversation.com/files/368962/original/file-20201112-15-1mpz64j.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=377&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/368962/original/file-20201112-15-1mpz64j.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=377&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/368962/original/file-20201112-15-1mpz64j.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=473&fit=crop&dpr=1 754w, https://images.theconversation.com/files/368962/original/file-20201112-15-1mpz64j.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=473&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/368962/original/file-20201112-15-1mpz64j.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=473&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Rest may have to divest from high-risk assets such as coal mines.</span>
<span class="attribution"><span class="source">Shutterstock</span></span>
</figcaption>
</figure>
<h2>2. Publicly disclose portfolio holdings and climate risk exposure</h2>
<p>The Australian superannuation industry is known for its poor transparency. One <a href="https://www.fssustainability.com.au/majority-of-super-funds-not-disclosing-portfolio-holdings-rainmaker">recent analysis</a> found only a handful of Australian super funds publish a complete list of the companies in which they hold shares. Most only reported the top 10 or 20 holdings.</p>
<p>Disclosure of basic factual information, such as top holdings and assets under management, is highly variable between and within funds. It is very hard to find out which companies a super fund invests in, and to what extent. Funds’ disclosure of exposure to climate risks and their management is also <a href="https://www.apra.gov.au/sites/default/files/climate_change_awareness_to_action_march_2019.pdf">patchy</a>.</p>
<p>Rest has now committed to publicly disclose its full portfolio, as well as its approach to climate-related risks, in line with <a href="https://www.fsb-tcfd.org">international best practice</a>. This is a crucial step towards improvement across the industry.</p>
<h2>3. Better consider climate-related risks</h2>
<p>Super funds can address climate-related risks using a range of <a href="https://responsibleinvestment.org/what-is-ri/ri-explained/">responsible investment approaches</a>. These include negative screening, which involves excluding high-risk assets such as coal, oil or gas reserves.</p>
<p>Australian super funds already use this approach, but generally only apply it to “green” investment products which represent a tiny share of the overall portfolio. </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/unisuper-take-note-theres-no-retirement-on-a-dead-planet-132194">UniSuper take note: there's no retirement on a dead planet</a>
</strong>
</em>
</p>
<hr>
<p>Unlike other large industry super funds, Rest does not appear to apply a climate-related screen, and it does not offer a green-labelled investment option. While these are not the only ways to manage climate risk, they are clear and highly visible approaches. There appears to be considerable scope for Rest to better address climate risk in its investment strategy and asset allocation. At the very least it has now committed to better disclose its approach.</p>
<h2>4. Actively consider shareholder resolutions</h2>
<p>Proposals by shareholders have recently emerged as a way to pressure Australian companies to disclose climate risks and commit to the clean energy transition. Super funds hold significant shareholdings in Australian companies, and how they vote can influence how a company responds.</p>
<p>Rest and others have a <a href="https://www.accr.org.au/downloads/accr-vote-like-you-mean-it-2019-final.pdf">patchy record</a> when it comes to supporting shareholder climate resolutions – even those simply asking for better climate risk disclosure. This underscores the considerable gap between Rest’s new commitment and recent practice.</p>
<figure class="align-center ">
<img alt="Shareholders vote at a company AGM" src="https://images.theconversation.com/files/368975/original/file-20201112-22-1pb2s7.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/368975/original/file-20201112-22-1pb2s7.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/368975/original/file-20201112-22-1pb2s7.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/368975/original/file-20201112-22-1pb2s7.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/368975/original/file-20201112-22-1pb2s7.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/368975/original/file-20201112-22-1pb2s7.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/368975/original/file-20201112-22-1pb2s7.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Shareholder votes are used to pressure companies to act on climate.</span>
<span class="attribution"><span class="source">Richard Wainwright/AAP</span></span>
</figcaption>
</figure>
<h2>Raising the bar</h2>
<p>Rest’s new commitments are ambitious, and help consolidate an emerging “best practice” standard for superannuation funds on climate risk.</p>
<p>The commitments also underscore the key role super funds can play in society’s response to climate change. When climate is central to investment decision-making, funds can align capital and resources to the clean energy transition. </p>
<p>Because the case was settled out of court, Rest’s undertakings are not legally binding. However companies, regulators, interested members and NGOs will closely monitor whether the promises are implemented, and how the broader industry responds.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/nsw-has-joined-china-south-korea-and-japan-as-climate-leaders-now-its-time-for-the-rest-of-australia-to-follow-149731">NSW has joined China, South Korea and Japan as climate leaders. Now it's time for the rest of Australia to follow</a>
</strong>
</em>
</p>
<hr>
<img src="https://counter.theconversation.com/content/149918/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Anita Foerster does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The groundbreaking legal case has changed the game for how Australia’s $3 trillion superannuation industry invests, and how members are protected from climate risk.Anita Foerster, Senior Lecturer, Monash UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1491012020-11-02T19:07:08Z2020-11-02T19:07:08ZA rushed move to virtual AGMs would disempower shareholders<figure><img src="https://images.theconversation.com/files/366638/original/file-20201030-18-gu9szn.jpg?ixlib=rb-1.1.0&rect=0%2C108%2C3415%2C2108&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Westpac AGM, 2019.</span> <span class="attribution"><span class="source">Mick Tsikas/AAP</span></span></figcaption></figure><p>Treasurer Josh Frydenberg appears to have backed down. </p>
<p>An extraordinarily rushed timetable that would have allowed investors and others just 12 days to comment on draft legislation permitting companies to hold virtual rather than face-to-face annual general meetings has been <a href="https://treasury.gov.au/consultation/c2020-119106">extended by seven days</a>, to the end of this week.</p>
<p>And Frydenberg has suggested he no longer supports it. He <a href="https://www.afr.com/chanticleer/hybrid-solution-should-end-virtual-agm-push-20201030-p56a80">now says</a> “reforms to the regulation of AGMs should enhance the ability of shareholders to interact with the board, not diminish it”. </p>
<p>The idea took hold when it became apparent COVID-19 would stop companies being able to hold physical meetings of shareholders. </p>
<p>In May the federal government announced a <a href="https://ministers.treasury.gov.au/ministers/josh-frydenberg-2018/media-releases/making-it-easier-business-operate-during-covid-19">six-month temporary</a> relaxation of the Corporations Act rules to allow companies to hold online shareholder meetings. </p>
<p>The six months was later extended until <a href="https://ministers.treasury.gov.au/ministers/josh-frydenberg-2018/media-releases/making-it-easier-business-operate-during-covid-19">March 22, 2021</a>.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/366915/original/file-20201102-13-1cinelj.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/366915/original/file-20201102-13-1cinelj.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/366915/original/file-20201102-13-1cinelj.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=272&fit=crop&dpr=1 600w, https://images.theconversation.com/files/366915/original/file-20201102-13-1cinelj.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=272&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/366915/original/file-20201102-13-1cinelj.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=272&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/366915/original/file-20201102-13-1cinelj.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=342&fit=crop&dpr=1 754w, https://images.theconversation.com/files/366915/original/file-20201102-13-1cinelj.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=342&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/366915/original/file-20201102-13-1cinelj.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=342&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="caption"></span>
<span class="attribution"><a class="source" href="https://cdn-api.markitdigital.com/apiman-gateway/ASX/asx-research/1.0/file/2924-02303227-2A1260683?access_token=83ff96335c2d45a094df02a206a39ff4">In 2020 Westpac's AGM will be virtual</a></span>
</figcaption>
</figure>
<h2>Temporary relief was to become permanent</h2>
<p>Then, in a surprising development two weeks ago (on October 19), the federal government published <a href="https://treasury.gov.au/consultation/c2020-119106">draft legislation</a> to permanently allow companies to hold virtual-only shareholder meetings, including annual general meetings. </p>
<p>The reaction was caustic.</p>
<p>There are two main criticisms. One is focused on the process adopted by the government. The other is focused on the proposal itself. </p>
<p>The process was undoubtedly flawed. Twelve days — in the midst of the AGM season — is an exceptionally short amount of time to consider such important reform.</p>
<p>The more fundamental criticisms relate to what’s proposed.</p>
<p>We believe it will undermine the role of shareholder meetings in making company directors answer to shareholders.</p>
<h2>Shorter questions, fewer questions</h2>
<p>There is evidence this has already been happening. </p>
<p>At some AGMs, shareholders’ questions have <a href="https://www.afr.com/markets/equity-markets/geoff-wilson-to-lead-investor-army-against-virtual-agms-20201026-p568iu">been ignored</a>. </p>
<p>Others meetings have been <a href="https://www.theaustralian.com.au/business/leadership/investor-groups-pushing-back-on-virtual-agm-proposal/news-story/dcfe57c041a2e9b8941bf7c78bed9cf6">much shorter</a>.</p>
<p>The Australian Shareholders’ Association says a good AGM is an opportunity for <a href="https://www.australianshareholders.com.au/common/Uploaded%20files/MEDIA%20RELEASES/MR_27102020_ASA%20-%20shortcomings%20of%20online%20only%20AGMs.pdf">healthy discussion</a> and exchange of information and views. In contrast, a virtual meeting “is a sterile format where companies are able to ignore questions, and gloss over details”.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/australia-is-ripe-for-shareholder-activism-69422">Australia is ripe for shareholder activism</a>
</strong>
</em>
</p>
<hr>
<p>In the US, the Council of Institutional Investors (representing institutional investors with more than US$45 trillion under management) <a href="https://www.cii.org/files/issues_and_advocacy/correspondence/2020/Virtual%20Meetings%20Letter%20_%20Corrected%20Copy_.pdf">has complained</a> to the US Securities and Exchange Commission about the virtual meetings held because of COVID-19 — calling them a “poor substitute for in-person shareholder meetings” that placed obstacles in the path of shareholders wanting to participate in a meaningful way.</p>
<h2>Hard evidence is emerging</h2>
<p>A <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3674998">study</a> published in August about virtual shareholder meetings during COVID-19 supports these concerns. </p>
<p>Research by Miriam Schwartz-Ziv examined the transcripts and audio recordings for 94 US corporations that held an in-person or predominately in-person meeting last year and a virtual meeting this year. </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/what-limits-shareholder-activism-is-the-free-rider-problem-127232">What limits shareholder activism is the free-rider problem</a>
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</em>
</p>
<hr>
<p>The move to virtual meetings shortened the average meeting by 18%, decreased the time dedicated to providing a business update by 40%, and decreased the average time spent on answering questions by 14%. </p>
<p>Schwartz-Ziv says these findings:</p>
<blockquote>
<p>may suggest that not having visibly present shareholders, and perhaps not observing shareholders’ responses throughout the meeting, ultimately leads to less information communicated by the company to the shareholders</p>
</blockquote>
<p>Among the tactics used were company officials incorrectly stating there were no more questions and limiting questions to resolutions being voted on. </p>
<h2>Shareholders are increasingly active</h2>
<p>Right now shareholders are more active than ever, using AGMs to put matters such as climate change on the agenda. </p>
<p>This year’s <a href="https://www.smh.com.au/business/companies/breakthrough-moment-woodside-investors-revolt-on-climate-change-20200429-p54oe8.html">Woodside Petroleum AGM</a> made history when, for the first time in a major Australian listed company, a shareholder resolution requesting the company take action on climate change received more than 50% support from shareholders, even though the resolution was opposed by the company’s directors. </p>
<p>This type of activism, which is occurring in more companies, can indeed present challenges for directors who oppose the wishes of shareholders. Some of them might welcome an opportunity to limit questions. </p>
<h2>There’s no rush</h2>
<p>But that’s no reason for the government to facilitate it. The government’s proposal was rushed and poorly justified. </p>
<p>It would be better to debate the merits of permanently allowing what are called “<a href="https://www.afr.com/chanticleer/hybrid-solution-should-end-virtual-agm-push-20201030-p56a80">hybrid</a>” AGMs. This would involve a physical meeting along with online facilities for those who can’t be physically present.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/how-westpac-is-alleged-to-have-broken-anti-money-laundering-laws-23-million-times-127518">How Westpac is alleged to have broken anti-money laundering laws 23 million times</a>
</strong>
</em>
</p>
<hr>
<p>This year’s AGM season will give us enough experience with virtual shareholder meetings to allow a more informed decision on their merits during 2021. </p>
<p>There’s plenty of time.</p><img src="https://counter.theconversation.com/content/149101/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Ian Ramsay receives funding from the Australian Research Council.</span></em></p><p class="fine-print"><em><span>Lloyd Freeburn does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Already, under this year’s temporary provisions, the meetings have been shorter with fewer questions.Ian Ramsay, Professor, Melbourne Law School, The University of MelbourneLloyd Freeburn, Research Fellow, Centre for Corporate Law, Melbourne Law School, University of Melbourne, The University of MelbourneLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1460422020-09-13T15:34:23Z2020-09-13T15:34:23ZClearing up a common misconception: shareholders do not get rich off dividends<p>On March 24, France’s minister of the economy and finance, Bruno Le Maire, urged the country’s firms to exercise the utmost restraint in paying dividends in 2020 and stated that companies in which the state is a shareholder would be asked not to pay dividends, at least not to private individuals, adding that sharing value is also an act of solidarity.</p>
<p>The government can legitimately urge or even compel companies to restrict or freeze dividend payments on the grounds of solidarity if these companies receive financial aid from the State. There is nothing unusual about governments imposing certain conditions before providing financial aid (although the pertinence of these conditions is debatable). Companies are free to choose whether they wish to benefit from a rescue package or not; if they do, as a trade-off they must agree not to pay dividends.</p>
<p>However, private companies that consider they have sufficient cash flow to pay dividends, such as Hermès or Total, are absolutely free to do so. It is up to the company and its shareholders to decide whether or not they wish to use their capital as an instrument of solidarity.</p>
<p>Moreover, withholding dividends is not the only way to show support. Total, for example, chose to provide 50 million euros of <a href="https://www.total.com/media/news/press-releases/covid-19-total-mobilized-support-hospital-healthcare-staff-france-providing-them-50-million-euros">fuel vouchers</a> to health workers.</p>
<p>The current crisis situation is especially conducive to heated debates about dividend payments. It would seem that a closer look at the financial theory is necessary to clarify certain points, particularly the following: a dividend distribution does not mean that the shareholders are systematically getting rich.</p>
<h2>Dividends are neutral for the shareholder</h2>
<p>Shareholders own a share of the company that is proportionate to the amount they invested in its capital. They bear all the risks (<a href="https://www.investopedia.com/terms/b/bankruptcyrisk.asp">risk of bankruptcy</a>, <a href="https://www.investopedia.com/terms/l/liquidityrisk.asp">liquidity risk</a> or <a href="https://www.lafinancepourtous.com/decryptages/marches-financiers/produits-financiers/actions-2/les-risques-associes-aux-actions/le-risque-de-perte-en-capital/">risk of capital loss</a>), in exchange for which they hope to obtain a return on their stocks and be paid dividends (as cash or stock) as the fruit of their investment.</p>
<p>One month after the crisis began, the benchmark index for French stocks, the <a href="https://en.wikipedia.org/wiki/CAC_40">CAC 40</a>, had lost <a href="https://www.latribune.fr/bourse/39-en-un-mois-le-plongeon-historique-du-cac-40-en-six-dates-842529.html">39% of its value</a>, which corresponds to the average loss suffered by shareholders. When you consider the losses suffered across all stock exchanges, a dividend payout seems symbolic.</p>
<p>Financial theory tells us that if the goal of a shareholder is to maximise their wealth, then whether a dividend is paid or not is of no importance. Indeed, all other things being equal, the price of the stock is reduced by the amount of the dividend paid.</p>
<p>If this were not the case, there would inevitably be an arbitrage: investors would buy shares that they anticipate are about to pay a dividend and then sell them right after. It would then be possible to make money without taking any risks. But any insider knows that there is no such thing as a free meal in the financial markets, otherwise they would not be efficient.</p>
<p>As the figures below show, shareholder wealth is not contingent upon dividend payouts.</p>
<figure class="align-center ">
<img alt="Stock price following a dividend payment in the case of a prior appreciation." src="https://images.theconversation.com/files/357679/original/file-20200911-14-13xsm7u.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/357679/original/file-20200911-14-13xsm7u.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=261&fit=crop&dpr=1 600w, https://images.theconversation.com/files/357679/original/file-20200911-14-13xsm7u.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=261&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/357679/original/file-20200911-14-13xsm7u.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=261&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/357679/original/file-20200911-14-13xsm7u.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=328&fit=crop&dpr=1 754w, https://images.theconversation.com/files/357679/original/file-20200911-14-13xsm7u.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=328&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/357679/original/file-20200911-14-13xsm7u.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=328&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Figure 1a: Stock price following a dividend payment in the case of a prior appreciation.</span>
</figcaption>
</figure>
<p>If no dividend is paid, the shareholder’s entire wealth is concentrated in the value of their shares. If a dividend is paid, their wealth is split between the dividend and the new value of the security.</p>
<p>The same is true whether the stock price appreciated (Figure 1a) or depreciated (Figure 1b).</p>
<figure class="align-center ">
<img alt="Stock price following a dividend payment in the case of a prior depreciation." src="https://images.theconversation.com/files/357680/original/file-20200911-16-14tgqga.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/357680/original/file-20200911-16-14tgqga.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=275&fit=crop&dpr=1 600w, https://images.theconversation.com/files/357680/original/file-20200911-16-14tgqga.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=275&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/357680/original/file-20200911-16-14tgqga.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=275&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/357680/original/file-20200911-16-14tgqga.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=345&fit=crop&dpr=1 754w, https://images.theconversation.com/files/357680/original/file-20200911-16-14tgqga.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=345&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/357680/original/file-20200911-16-14tgqga.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=345&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Figure 1b: Stock price following a dividend payment in the case of a prior depreciation.</span>
</figcaption>
</figure>
<p>In the case of publicly-traded companies, if the dividend is paid as stock, the total wealth of the shareholder <a href="https://theconversation.com/dividendes-et-rachats-dactions-nenrichissent-pas-les-actionnaires-56562">does not change either</a>. The total value of the shareholder’s shares is then spread across a greater number of shares.</p>
<h2>So what is the point of dividends?</h2>
<p>Although dividends do not maximise wealth, shareholders are still very attached to them. There are <a href="https://www.sciencedirect.com/science/article/abs/pii/0304405X84900254">three psychological reasons</a> for this.</p>
<p><strong>The theory of perspectives</strong>: if there is a gain (Figure 1a), the dividend payment is more highly valued because, <a href="https://www.andlil.com/theorie-des-perspectives-153648.html">psychologically</a>, the shareholder feels like they have made gains on two levels and they value each separately. Opening gifts that are wrapped individually always bring more satisfaction than when they are all wrapped together as a single gift.</p>
<p>If there is a loss (Figure 1b), a dividend remains the preference. Psychologically, it is regarded positively and seen as separate from the drop in value. A 12-euro drop followed by a 2-euro rise seems less of a bitter pill to swallow than a single loss of 10 euros.</p>
<p><strong>Mental accounting</strong>: <a href="https://www.investopedia.com/terms/m/mentalaccounting.asp">mental accounting</a> can be defined as a set of cognitive processes we use to organise, evaluate and process financial problems. We treat our income differently depending on its source. This gives rise to certain rules that help us to keep ourselves in check, such as “spend revenue from capital but don’t touch the capital”. Indeed, it is quite common to use our regular income to pay for our everyday expenses and to allocate our “bonus” income to recreational spending or luxury items.</p>
<p><strong>Regret aversion</strong>: for the shareholder, receiving a dividend is a way to make money without having to make the decision to sell their shares. If they were compelled to sell their shares for liquidity reasons, their <a href="https://www.letemps.ch/economie/produits-structures-theorie-regret-lacte-dinvestir">feeling of regret</a> would be all the more intense if the value of the stock were to later rise. Regret even more keenly felt for not having reinvested the dividend. Regret by omission is always less unpleasant than regret by commission!</p>
<p>To get back to the global crisis that is currently our biggest concern, it is also worth mentioning also that dividends and economic recovery are not incompatible. From the point of view of the economy as a whole, dividend payments or share buybacks by companies are a way to redistribute some money to shareholders that can then be reinvested in other companies with <a href="https://www.lesechos.fr/idees-debats/cercle/dividendes-et-enrichissement-des-actionnaires-attention-aux-amalgames-132904">better growth prospects</a>.</p>
<p>Shareholders can reinvest this money in growing companies that need funds to expand, and in so doing contribute to developing the economy. Dividend payouts are therefore one of the basic mechanisms that enable market economies to function efficiently.</p>
<hr>
<p><em>This article was <a href="https://knowledge.skema.edu/to-clear-up-a-common-misconception-shareholders-do-not-get-rich-off-dividends/">translated by SKEMA Business School</a> from the French original.</em></p><img src="https://counter.theconversation.com/content/146042/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Les auteurs ne travaillent pas, ne conseillent pas, ne possèdent pas de parts, ne reçoivent pas de fonds d'une organisation qui pourrait tirer profit de cet article, et n'ont déclaré aucune autre affiliation que leur organisme de recherche.</span></em></p>Financial theory shows that the dividend is economically neutral, although it helps to reassure the shareholder psychologically.Sabrina Chikh, PhD, Professeur Associé, SKEMA Business SchoolPascal Grandin, Professeur, Université de LilleLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1450212020-08-27T20:09:50Z2020-08-27T20:09:50ZVital Signs: No, we won’t change the corporate world with divestment and boycotts<figure><img src="https://images.theconversation.com/files/355018/original/file-20200827-24-gxqmhb.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Jacques Brinon/AP</span></span></figcaption></figure><p>Boe Pahari’s short reign as boss of AMP’s lucrative investment management division and the resignations this week of AMP chairman David Murray and board member John Fraser have shown the power of major shareholders in public companies.</p>
<p>There was, you may recall, public outcry about Pahari’s elevation to chief executive of AMP Capital on July 1, after it was revealed he had been reprimanded for alleged sexual harassment in 2017 and docked 25% of his A$2 million bonus that year.</p>
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<em>
<strong>
Read more:
<a href="https://theconversation.com/amp-doesnt-just-have-a-women-problem-it-has-an-everyone-problem-144937">AMP doesn’t just have a women problem. It has an everyone problem</a>
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<p>In any era – but certainly in the #metoo era – handing out a traffic ticket for (alleged) sexual harassment and three years later promoting the (alleged) wrongdoer to boss of AMP’s most important business was never going to fly.</p>
<p>In the end it was the company’s largest shareholder, <a href="https://www.allangray.com.au/b/">Allan Gray Australia</a>, that delivered Murray and AMP’s chief executive, Francesco De Ferrari, an ultimatum: go now or we’ll call a special general meeting to make it happen.</p>
<p>The only surprising thing in all of this is how AMP’s board could have been so stupid. </p>
<p>But it does raise some interesting broader issues. In particular, about the merits of the strategy Allan Gray used compared to a broader movement proposing “exit” or “divestment” of shares in companies that don’t act in accordance with investors’ wishes.</p>
<h2>Exit versus voice</h2>
<p>Throughout this saga, as far as we know, Allan Gray never threatened to sell its AMP shares. Rather, it told the board what it expected, and apparently got what it wanted – three heads on spikes. It made its voice be heard.</p>
<p>Compare this with threatening “divestiture” of shares. Divestment strategies have gained popularity in recent years, including a global movement pushing universities to <a href="https://theconversation.com/do-the-maths-bill-mckibben-argues-for-divestment-14894">divest from</a> fossil fuel companies. Just this week three climate activists in pursuit of this goal <a href="https://www.nytimes.com/2020/08/21/climate/havard-board-climate-change.html">gained seats on the Harvard Board of Overseers</a>, responsible for its US$40 billion endowment.</p>
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<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/do-the-maths-bill-mckibben-argues-for-divestment-14894">Do the Maths: Bill McKibben argues for divestment</a>
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<p>Divestment can be driven purely by ethical reasons – like the sustainability funds that avoid certain investments for environmental and social reasons – or it can come down to risk assessment. </p>
<p>This was highlighted by Larry Fink, head of BlackRock – the world’s largest fund manager with <a href="https://www.blackrock.com/sg/en/introduction-to-blackrock">US$6.84 trillion</a> in assets – in his annual January letter to the heads of major public companies.</p>
<p>Climate change, <a href="https://theconversation.com/vital-signs-a-3-point-plan-to-reach-net-zero-emissions-by-2050-132436">his letter said</a>, had become “a defining factor in companies’ long-term prospects”. BlackRock would stop investing in any company with “a high sustainability-related risk”.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/vital-signs-a-3-point-plan-to-reach-net-zero-emissions-by-2050-132436">Vital Signs: a 3-point plan to reach net-zero emissions by 2050</a>
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<hr>
<h2>Which strategy is better?</h2>
<p>So which of the two strategies – exit or voice – is better for an investor wanting a company to change its ways?</p>
<p>This question was taken up in a <a href="http://papers.nber.org/tmp/37341-w27710.pdf">paper published this month</a> by the US National Bureau of Economic Research. </p>
<p>In the paper, authors Eleonora Broccardo, Oliver Hart and Luigi Zingales assume some investors and consumers are socially responsible, in the sense that they consider the well-being of others in making decisions. But other investors and consumers are purely selfish.</p>
<p>Their model applies to any type of business that can do harm, but the authors use environmental concerns as their working example. Consider a company that can choose to be clean or dirty. Suppose the environmental damage the dirty business produces could be avoided at a cost.</p>
<p>In this framework, divestment is meant to cause the market value of that company to fall, encouraging even “selfish” managers to invest in cleaner technology. </p>
<h2>Selfishness and social responsibility</h2>
<p>The problem, the authors note, is other players in the market weaken the effect.</p>
<blockquote>
<p>The reason is that purely selfish agents will partially offset the effects of divestment/boycotting by increasing their investment/purchases in companies shunned by socially responsible agents. </p>
</blockquote>
<p>The magnitude of that offsetting effect, the authors say, “is driven by agents’ risk tolerance for investors and by the utility of the good for consumers”. In other words, it depends on demand.</p>
<p>Furthermore the authors suggest, in line with <a href="https://academic.oup.com/qje/article-abstract/117/3/817/1933015?redirectedFrom=fulltext">evidence from experimental economics</a>, unless the pollution is extremely harmful, it is not in the interests of any shareholders to actually exit.</p>
<p>So most shareholders won’t exit – or at least not enough to get companies to “behave”.</p>
<h2>Getting to vote</h2>
<p>What about the “voice” strategy? Here the authors consider a scenario where shareholders get to vote on whether a company should be clean or dirty.</p>
<p>Basic economics says an individual shareholder’s vote only matters if it is pivotal (i.e. it affects the outcome). In such cases a vote will be based on weighing the net social benefit from the clean technology, and the importance of others’ well-being, against their individual financial loss resulting from choosing the cleaner, costlier technology. </p>
<p>But here’s the key thing. If shareholders have diversified investments, a vote about one company will make a minor difference to their overall returns. So as long as the shareholder cares at all about the welfare of others, they will likely vote for the socially optimal goal – in this case, clean technology.</p>
<h2>Corporate reforms</h2>
<p>All of this suggests that making sure shareholders get to express their voice is important to achieving socially optimal goals. </p>
<p>That might involve more pro-shareholder measures, such as the opportunity to vote on issues the board traditionally decides (a kind of Athenian corporate democracy). Their ultimate power is voting out directors who don’t listen to them.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/social-licence-the-idea-amp-should-embrace-now-david-murray-has-left-the-building-145029">Social licence: the idea AMP should embrace now David Murray has left the building</a>
</strong>
</em>
</p>
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<p>There is a catch to this in practice, though. Most shareholders in Australia are represented by their superannuation funds, which <a href="https://www.afr.com/opinion/its-members-money-not-greg-combet-and-big-supers-20190304-h1bz6y">don’t always do so</a>. </p>
<p>This issue is known in economics as the “principal-agent problem” – something one of the authors of this paper, Oliver Hart, wrote about in <a href="http://idv.sinica.edu.tw/kongpin/teaching/micro/GrossmanHart.pdf">a seminal 1983 paper</a> co-authored with economist Sanford Grossman.</p>
<p>Perhaps the next step in our understanding of voting in corporate settings is to probe the limits of corporate democracy when shareholders’ interests are represented by fund managers who may not fully share those interests.</p><img src="https://counter.theconversation.com/content/145021/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Richard Holden does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The AMP saga, and new research, shows the power of ‘shareholder voice’.Richard Holden, Professor of Economics, UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1291042020-07-29T13:38:24Z2020-07-29T13:38:24ZIt’s a myth that companies must put shareholders first – coronavirus is a chance to make it stop<figure><img src="https://images.theconversation.com/files/350201/original/file-20200729-27-1pgdn94.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">'At your service'. </span> <span class="attribution"><a class="source" href="https://unsplash.com/photos/3aVlWP-7bg8">Mikael Kristenson</a>, <a class="license" href="http://creativecommons.org/licenses/by-sa/4.0/">CC BY-SA</a></span></figcaption></figure><p>The COVID-19 crisis has led many to argue that the current crisis has exacerbated the inequalities inherent in the current economic order. There is a general sense that a new form of social contract is urgently required, even from places where you might not have expected to see such arguments, such as <a href="https://www.economist.com/briefing/2020/07/25/the-covid-19-pandemic-is-forcing-a-rethink-in-macroeconomics?fsrc=newsletter&utm_campaign=the-economist-today&utm_medium=newsletter&utm_source=salesforce-marketing-cloud&utm_term=2020-07-23&utm_content=article-link-1">The Economist</a> and the <a href="https://www.ft.com/content/7eff769a-74dd-11ea-95fe-fcd274e920ca">Financial Times</a>. </p>
<p>But what has tended to be overlooked is how such a new social contract may also require fundamental changes to the nature of companies. Concerns about this are part of a broader discussion that is more than a decade old. </p>
<p>Many argue that companies need to focus more on the long term, and take account of all their stakeholders’s interests. We’ve heard this, among others, from BlackRock chief executive <a href="https://www.blackrock.com/corporate/investor-relations/larry-fink-ceo-letter">Larry Fink</a>, Bank of England chief economist <a href="http://www.hrmaturity.com/wp-content/uploads/2015/08/BoE-speech-Who-owns-a-company.pdf">Andy Haldane</a>, and the <a href="https://www.businessroundtable.org/business-roundtable-redefines-the-purpose-of-a-corporation-to-promote-an-economy-that-serves-all-americans">US Business Roundtable</a>. </p>
<p>What is at stake in this debate is the notion that the corporation’s purpose is to maximise shareholder value – sometimes known as the “shareholder primacy model”. As the <a href="https://www.ft.com/content/774f3aef-aded-47f9-8abb-a523191f1c19">current calls</a> for social reform in the wake of the COVID-19 crisis again show, it is widely felt that this model induces managers to focus on enhancing short-term market value at the expense of the longer term. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/350204/original/file-20200729-29-1vpbij3.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Book with cubes spelling 'short term' between the pages." src="https://images.theconversation.com/files/350204/original/file-20200729-29-1vpbij3.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/350204/original/file-20200729-29-1vpbij3.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/350204/original/file-20200729-29-1vpbij3.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/350204/original/file-20200729-29-1vpbij3.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/350204/original/file-20200729-29-1vpbij3.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/350204/original/file-20200729-29-1vpbij3.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/350204/original/file-20200729-29-1vpbij3.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">The problem with companies.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/phrase-short-term-written-wooden-blocks-1114958030">WindNight</a></span>
</figcaption>
</figure>
<p>This enables companies to prioritise short-termist shareholder payouts in the form of dividends and share buybacks. Not only is this short-termism likely to damage the corporation’s long-term viability, it also creates a situation in which upside gains are typically allocated to shareholders, while downside risks are pushed onto employees and states. </p>
<p>This short-termism has also been routinely identified as one of the main contributing factors in the global financial crisis of 2007-09, as well as rampant inequality, climate change and the collapse of ecosystems around the world. </p>
<h2>The shareholder myth</h2>
<p>The notion that a corporation’s primary purpose is to look after its shareholders is widely believed and taught, but <a href="https://scholarship.law.cornell.edu/cgi/viewcontent.cgi?article=2311&context=facpub">is in fact</a> a myth with no basis in corporate law. The corporation is a separate legal entity. Because ownership of assets and liabilities are attributed to this entity, corporations are not “owned” by shareholders. </p>
<p>Instead, shareholders have limited legal rights, which do not include the right to directly control directors’ or managers’ behaviour. Indeed, shareholders have no special claim on a corporation’s economic returns. Their right to dividends is the same as a waiter’s right to tips: an expectation that is unlikely to be enforceable in court. </p>
<p>When you realise these things, it gives you a different view of company ownership and control. The idea that the authority structure does not originate with the shareholders delivers a picture in which boards balance interests between many stakeholders – with different agendas, time horizons, powers and responsibilities – all connected to the distinct legal entity that is the corporation. Importantly, this allows us to reimagine the corporation, its supporting institutions, and the processes by which stakeholders can meaningfully be represented. </p>
<p>The pandemic has shown how reforms are possible in the corporate world. The unprecedented government financial support has come with conditions such as companies <a href="https://www.ft.com/content/58c63f45-9bb0-437b-8ba4-c50820c5eae2?emailId=5ef50d717bd72400049ddb14&segmentId=3d08be62-315f-7330-5bbd-af33dc531acb">not using it</a> for dividends or share buybacks, and having to <a href="https://www.businessinsider.nl/france-coronavirus-bailout-tax-haven-registered-subsidies-ineligible-020-4?international=true&r=US">be domiciled</a> and <a href="https://www.thelondoneconomic.com/news/poland-and-denmark-exclude-tax-haven-companies-from-coronavirus-relief-schemes/20/04/">make tax payments</a> in the country in question. Regulators and company law specialists have also responded with impressive speed to the needs of companies during the crisis, adapting insolvency rules and enabling virtual annual general meetings. </p>
<p>Meanwhile, responsible investors have <a href="https://www.icgn.org/covid-19-and-capital-allocation">stepped up to the plate</a> by stating that their long-term interest is with healthy companies, rather than immediate dividends and buybacks. Funds that trade indices of companies with good environmental, social and governance (ESG) rankings <a href="https://www.hedgeweek.com/2020/05/19/285741/new-blackrock-research-points-esg-resilience-during-coronavirus-downturn">have been</a> doing well during the crisis. This has led some <a href="https://www-wsj-com.cdn.ampproject.org/c/s/www.wsj.com/amp/articles/esg-is-risk-management-not-an-asset-class-11593453762">to argue</a> that socially responsible investment is not just necessary for sustainability, but also an effective strategy for managing risk. </p>
<h2>What next</h2>
<p>On the back of these welcome developments, it is now time to comprehensively rethink corporate governance. One example is the <a href="https://eur03.safelinks.protection.outlook.com/?url=https%3A%2F%2Fpapers.ssrn.com%2Fsol3%2Fpapers.cfm%3Fabstract_id%3D3502101&data=02%7C01%7Cj.veldman%40nyenrode.nl%7C4780eb7205084ec7460d08d82ecf464c%7C672799eb10ac4a8baeaee288e053f500%7C0%7C0%7C637310815082382366&sdata=pLWpiYW%2B%2FEHzcELUU6TZYckG0Eo3VIxSNgtQK1%2Fbi%2BI%3D&reserved=0">Corporate Governance for Sustainability statement</a> that was published earlier this year by a group of leading academics, including Jeroen Veldman. The statement proposes, for example, that companies would be legally required to implement a corporate sustainability strategy and disclose risks around not meeting ESG standards, and that directors would have a duty to meet these obligations.</p>
<p>Beyond theory, we also need to identify viable institutions that allow such reforms to be implemented in practice. The good news is that we see <a href="http://openaccess.city.ac.uk/21996/">intriguing initiatives</a> emerging to deal with disputes around corporate governance. </p>
<p>The <a href="https://www.workplacerelations.ie/en/">Workplace Relations Commission</a> in Ireland is an independent, statutory body that promotes good workplace relations by offering mediation, conciliation, facilitation and advisory services to companies. Where disputes do escalate, Ireland’s <a href="https://www.workplacerelations.ie/en/WR_Bodies/Labour_Court/">labour court</a> seeks to ensure they do not go to a court of law by providing impartial, non-binding adjudication based on employment law.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/350167/original/file-20200729-23-sxjf9d.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="People at an employment tribunal" src="https://images.theconversation.com/files/350167/original/file-20200729-23-sxjf9d.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/350167/original/file-20200729-23-sxjf9d.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/350167/original/file-20200729-23-sxjf9d.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/350167/original/file-20200729-23-sxjf9d.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/350167/original/file-20200729-23-sxjf9d.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/350167/original/file-20200729-23-sxjf9d.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/350167/original/file-20200729-23-sxjf9d.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">The house of ill disputes.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/consult-lawyer-business-financial-litigation-between-1155579718">Morakot Kawinchan</a></span>
</figcaption>
</figure>
<p>In the Netherlands, the <a href="https://www.ejcl.org/143/art143-17.pdf">Enterprise Chamber</a>, which is part of the Amsterdam court of appeal, adjudicates in disputes between corporate stakeholders including the board, corporate officers, shareholders and employees. Works councils can bring a case before the chamber if they are not informed in a timely manner about important changes. Stakeholders, including trade unions, shareholders and the company, can all request that the chamber carry out an inquiry. </p>
<p>When no agreement can be reached, the chamber has far-reaching powers to solve the problem. It can nullify company resolutions, suspend or dismiss directors, appoint temporary directors, allow temporary deviations from a company’s articles of association, temporarily transfer shares, and even dissolve the company. </p>
<p>Both are examples of institutions that help acknowledge stakeholder interests and get directors to fulfil their fiduciary duties to the corporation as a whole. If we are to create a new social contract as we emerge from COVID-19, institutions like these will be important building blocks.</p><img src="https://counter.theconversation.com/content/129104/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Whatever we’re told about shareholder primacy, their rights to control companies are actually very limited.Donncha Kavanagh, Professor of Information & Organisation, University College DublinJeroen Veldman, Senior research fellow, City, University of LondonLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1274732019-12-03T15:01:20Z2019-12-03T15:01:20ZWhy putting workers on boards is better than inclusive ownership funds<p>Labour has <a href="https://labour.org.uk/wp-content/uploads/2019/11/Real-Change-Labour-Manifesto-2019.pdf">promised</a> “to give workers a stake in the company they work for” and a share of their profits. Companies with 250 or more employees will be expected to transfer between 1% and 10% of their ownership into “Inclusive Ownership Funds” (IOFs) that will pay out dividends to employees. </p>
<p>The proposal sits alongside another major plan in the manifesto to require one-third of company boards to be reserved for elected worker directors. To some extent these proposals may be in competition, particularly because not all manifesto proposals will become policy after the election. </p>
<p>The idea of employees having legal ownership rights over company assets is <a href="https://www.ier.org.uk/blog/workers-boards-and-inclusive-ownership-funds-how-should-it-be-written-law">increasingly viewed as an antidote to inequality</a>. Labour first mooted introducing IOFs in 2018 and a similar scheme has been put forward <a href="https://www.vox.com/2019/5/29/18643032/bernie-sanders-communist-manifesto-employee-ownership-jobs">by US presidential candidate Bernie Sanders</a>. They reflect a view that business owes it to society to finance wealth transfers and fund initiatives like a citizen’s income, social care, housing renewal or a green new deal.</p>
<p>Certainly, Labour’s IOFs represent the most radical change to corporate governance since a similar plan by economist John Maynard Keynes in the 1940s <a href="https://link.springer.com/chapter/10.1007/978-1-349-59072-8_27">for war-time savings</a>, which he argued would result in “economic equality greater than any we have made in recent times”. IOFs would give employees the direct benefit of sharing some of the wealth they help create for their companies. </p>
<p>Workers would, in some sense, own the IOFs and receive a dividend capped at £500 a year from ownership. While the shares would not be tradable, they would be collectively managed with voting rights held by a trust of worker representatives. Any excess dividends would be used to fund social projects or projects that contribute further to inclusive ownership. In fact, the IOF aims go beyond income redistribution to include increased worker motivation and productivity as well as higher private and public investment – objectives that are crucial to any progressive economic transformation. </p>
<p>The financing of IOFs via share transfers is a welcome challenge to the <a href="https://www.oxfordscholarship.com/view/10.1093/oso/9780198805274.001.0001/oso-9780198805274">“shareholder first”</a> concept that has been a tenet of liberal capitalism worldwide since the 1980s. That doctrine was defended by the argument that shareholders are uniquely vulnerable to their wealth being diverted by self-serving company bosses. By contrast, other stakeholders, such as workers, are less vulnerable as they are protected by contracts. </p>
<p>Increasingly this view <a href="https://theconversation.com/the-rise-fall-and-rise-again-of-businesses-serving-more-than-just-their-shareholders-124618">is seen as absurd</a>. Under the legal framework of limited liability, the public ends up paying for environmental damage or pension fund failures if these costs exceed shareholder capital. And apart from cyclical downturns, shareholders can sell out at any time, whereas worker contracts are set under shareholder-centric rules that often fail to fully reflect their work and commitment.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/304942/original/file-20191203-67011-1w5ieqq.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/304942/original/file-20191203-67011-1w5ieqq.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=401&fit=crop&dpr=1 600w, https://images.theconversation.com/files/304942/original/file-20191203-67011-1w5ieqq.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=401&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/304942/original/file-20191203-67011-1w5ieqq.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=401&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/304942/original/file-20191203-67011-1w5ieqq.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/304942/original/file-20191203-67011-1w5ieqq.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/304942/original/file-20191203-67011-1w5ieqq.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Has shareholder primacy had its day?</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/banker-stands-on-pedestal-coins-looks-251435347?src=8115f27a-9d78-42b2-aa42-91387eb8bf13-1-34&studio=1">Shutterstock</a></span>
</figcaption>
</figure>
<h2>The best remedy?</h2>
<p>While there is no denying that shareholder control needs countering, this does not mean IOFs are the best remedy. Control rather than ownership is the crucial issue. Stakeholder theory in management research suggests that <a href="https://www.tuc.org.uk/publications/beyond-shareholder-value-reasons-and-choices-corporate-governance-reform">control should be shared</a> – including with employees. </p>
<p>Northern Europe has an alternative model of shared control known as <a href="https://www.etui.org/Publications2/Reports/Board-level-employee-representation-rights-in-Europe">co-determination</a>. Here, workers sit on boards of directors and have full decision rights. This disperses power among employees, without the need for formal ownership. </p>
<p>While co-determination is a tried and tested system in several countries, the IOF scheme has a less developed history. It is modelled to some extent on <a href="https://www.cambridge.org/core/journals/contemporary-european-history/article/origins-and-myths-of-the-swedish-model-of-workplace-democracy/9BC3465BED4345ABCC64289DF6B6ACB9">a version</a> introduced by Swedish Social Democrats in the early 1980s. </p>
<p>But there are significant differences. In the Swedish case, the funds were financed by joint taxation of workers and businesses and it had some support from both sides of industry. Its broad intention was to encourage business investment in a context of strong trades unions where high profits sparked demand for higher wages.</p>
<p>Employers saw an opportunity to contain wage demands by agreeing to invest profits. The eventual demise of the system was put down to the threat of capital flight in the changed political circumstances of the 1990s after which the funds were privatised.</p>
<p>Supporters of the British IOF scheme say that it has several <a href="https://www.ippr.org/research/publications/our-common-wealth">advantages</a>. First, it should have broader support than the Swedish scheme since it is not just linked to trade unions. Second, it chimes with previous schemes for widening share ownership within workplaces, which have received support from across the political spectrum and from employers in the UK and US. </p>
<p>Proponents also argue it would improve productivity through a sense of ownership. And finally it would improve equality both via the annual dividend to workers and the use of the income generating capital that would be diverted to public use.</p>
<h2>Weighing the evidence</h2>
<p>It is an important question whether these claims stack up in a way that makes IOFs a preferable policy to co-determination. On productivity, it has been shown that firms with higher levels of trust <a href="https://www.sciencedirect.com/science/article/pii/S0167268115001365">perform better</a>. </p>
<p>But there is little evidence that trust is generated by employees holding a small fraction of company shares. Trust is most effectively generated by agreements between workers and employers to <a href="https://blog.oup.com/2019/11/how-firms-with-employee-representation-on-their-boards-actually-fare/">share control</a>. And the proposal for one-third worker representation on large company boards is based on <a href="https://www.researchgate.net/publication/327861085_A_Better_Future_for_Corporate_Governance_Democratising_Corporations_for_their_Long-Term_Success">solid research</a> by senior academics for the front bench. </p>
<p>Other effects on the economy and equality can also be argued to favour co-determination. For starters, wealth taxes – which is effectively what IOFs are – work best for non-productive and immobile assets such as land or housing. </p>
<p>Then there are concerns that IOFs will scare off investors. They may fear further extensions of the scheme above the modest capped rate of 10% of ownership being transferred to the funds. By contrast, a rise in corporation tax could achieve the same effect without the hit to investment if matched by conditional tax relief measures that are worth more to firms, the higher the tax rate. </p>
<p>Plus, paying dividends to workers out of capital transferred to public control is likely to be offset through lower wages, blunting any redistributive effect and possibly pressuring firms to declare dividends – <a href="https://eprints.soas.ac.uk/31970/">already excessive</a> in the UK – with further dangers for investment.</p>
<p>IOFs are not the worst possible policy and they do confront the nonsense of shareholder primacy. But it is reasonable to ask whether their desired effects could all be produced more simply and effectively by a combination of workers on boards, higher but exemptible corporation tax and a wealth tax on non-productive assets – many of which are in the Labour Party 2019 manifesto in some form and should be the focus.</p><img src="https://counter.theconversation.com/content/127473/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Ciaran Driver is a member of the Labour party and a trustee of the New Economics Foundation.</span></em></p>There is no denying that the shareholder model of business needs countering, but this doesn’t mean IOFs are the best remedy.Ciaran Driver, Professor of Economics, SOAS, University of LondonLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1258072019-11-11T04:21:02Z2019-11-11T04:21:02ZShareholder activism sounds good, but it can’t change much<p>In the wake of <a href="https://theconversation.com/haynes-failure-to-tackle-bank-structure-means-that-in-a-decade-or-so-another-treasurer-will-have-to-call-another-royal-commission-110437">systemic corporate misconduct scandals</a> such as those brought to light in the banking royal commission, and issues such as <a href="https://www.unpri.org/download?ac=5599">income inequality</a> and <a href="https://www.abc.net.au/news/2019-10-28/business-lobby-groups-accused-undermining-climate-change/11646120">climate change</a>, there are growing public demands for increased corporate accountability and less emphasis on <a href="https://opportunity.businessroundtable.org/ourcommitment/">shareholder returns</a>. </p>
<p><a href="https://hbr.org/2019/10/a-guide-to-the-big-ideas-and-debates-in-corporate-governance">Corporate governance reform</a> has become a <a href="https://www.vox.com/2018/8/15/17683022/elizabeth-warren-accountable-capitalism-corporations">hot button political issue</a> and <a href="https://www.businessroundtable.org/business-roundtable-redefines-the-purpose-of-a-corporation-to-promote-an-economy-that-serves-all-americans">big business</a> is feeling nervous.</p>
<p><a href="https://aicd.companydirectors.com.au/%7E/media/cd2/resources/advocacy/research/pdf/06457-1-coms-kpmg-ags-trust-survey-report-a4-28pp-v8.ashx">“Social licence to operate” and “trust”</a> are now popular buzzwords in board land. </p>
<p>While company annual general meetings (AGMs) have long been the forum for individual vocal and activist shareholders to embarrass boards, large shareholders are increasingly being criticised for not pressuring company boards enough to be more socially environmentally responsible.</p>
<p>But relying on shareholders to make corporations more accountable and socially responsible is misguided. There are far more direct and systemically effective measures available to do that.</p>
<h2>What are institutional investors?</h2>
<p>Large shareholders can be wealthy individuals and other corporations, but so-called institutional investors are now by far the most dominant shareholders in terms of total funds under management, and in most cases, voting power at corporate AGMs.</p>
<p>Institutional investors are a mix of commercial, state and not-for-profit entities such as investment banks, unit trusts, insurance companies, pension funds, hedge funds, sovereign wealth funds, and charitable organisations that invest on behalf of, or for the benefit of others. </p>
<p>Because they’re intermediaries it’s argued institutional investors are morally responsible where they invest and how they vote at corporate AGMs. Because they invest widely, a whole advisory industry has grown to guide institutional investors. Stock exchange corporate governance codes encourage boards and senior executives to “engage” and have a <a href="https://www.asx.com.au/documents/asx-compliance/cgc-principles-and-recommendations-fourth-edn.pdf">“meaningful dialogue”</a> with institutional investors because of their perceived expertise and knowledge.</p>
<p>In this context institutional investors are seen as pivotal actors to influence corporate boards. <a href="https://onlinelibrary.wiley.com/doi/full/10.1111/corg.12143" title="Ownership, Activism and Engagement: Institutional Investors as Active Owners">Shareholder activism</a> by institutional investors is seen as the way to improve corporate accountability.</p>
<p>That’s why institutional investors are being pressured by high profile shareholder activists, others in the wider community and politicians to be more active and exercise their voice to pressure boards on an increasingly diverse range of issues. This includes things like <a href="https://www.theguardian.com/australia-news/2019/sep/17/australian-ceo-bonuses-at-near-record-highs-despite-royal-commission">executive pay</a>, <a href="https://www.smh.com.au/business/the-economy/from-barricades-to-boardrooms-the-climate-activists-targeting-corporate-australia-20191011-p52zpz.html">carbon intensive investments</a> and <a href="https://www.sacbee.com/news/politics-government/the-state-worker/article236485828.html" title="CalPERS pulls millions of dollars out of immigrant detention companies">social issues</a>.</p>
<p>Some institutional investors, such as the <a href="https://www.rockefellerfoundation.org/about-us/news-media/rockefeller-foundation-launches-new-climate-resilience-initiative-commits-initial-8-million-continue-supporting-global-network-cities-chief-resilience-officers/">Rockefeller Foundation</a>, do have a growing record of advocacy on important issues such as climate change. This activism, while laudable, is not a systemically effective solution.</p>
<h2>Shareholder activism won’t work</h2>
<p>Aside from the fact most shareholder resolutions are non-binding, the interests of institutional investors are not always the same. As well-intentioned US and Canadian pension funds <a href="https://www.pionline.com/article/20140509/ONLINE/140509825/canada-pension-plan-to-oppose-brin-tax-proposal-at-google">discovered in their campaign to stop Google using tax havens</a>, fellow institutional investors sided with Google’s founders to vote down their shareholder proposal.</p>
<p>Institutional investors are large, sometimes foreign entities, often with their own shareholders. It’s not always clear whose interests an institutional investor is representing when it meets with CEOs and boards.</p>
<p>Most shareholders, including institutional investors, remain largely uninterested unless they are being hurt financially. This is exemplified in the pattern of voting at Australian bank AGMs.</p>
<p>In the decade preceding the Banking Royal Commission, few institutional investors questioned why Australian banks were consistently among the most profitable in the world. Shareholders have only cared about runaway CEO salaries when things aren’t going their way.</p>
<p>And unfortunately, giving shareholders more voice will create perverse problems.</p>
<p>First, the mechanisms allowing well-intentioned institutional investors more influence over boards will also allow other large investors greater say. For example Gina Rinehart’s controversial foray into newspaper publishing may well have succeeded in a more shareholder activist-friendly environment.</p>
<p>Second, allowing greater shareholder voice will undermine the responsibilities and duties public companies and their directors already have. For example, the public interest duties of directors include ensuring corporations do not trade while insolvent. </p>
<h2>What has to happen instead</h2>
<p>Institutional shareholder activism is not likely to systemically improve governance and accountability because they’re primarily concerned with returns. And there’s no evidence they will consistently work together in ways that promote the <a href="https://www.sciencedirect.com/science/article/pii/S0304405X00000581">wider community interest</a>.</p>
<p>Instead what we really need is <a href="https://theconversation.com/word-games-and-virtue-signalling-as-the-stock-exchange-reworks-its-corporate-governance-code-112768">real corporate governance reform</a>, better leadership from government, and regulatory oversight.</p>
<p>We already know from <a href="https://www.emerald.com/insight/content/doi/10.1108/S0885-333920150000016011/full/pdf?title=organizational-structure-and-performance-in-european-banks-a-reassessment">GFC research</a> that well designed corporate governance including two-tiered boards and <a href="https://theconversation.com/giving-workers-a-voice-in-the-boardroom-is-a-compelling-corporate-governance-reform-115463">worker/union representation</a> on boards improves accountability. <a href="https://theconversation.com/australias-political-lobbying-regime-is-broken-and-needs-urgent-reform-123003">Stricter lobbying prohibitions</a> can prevent corporations undermining attempts to tackle issues like climate change.</p>
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<em>
<strong>
Read more:
<a href="https://theconversation.com/solving-deep-problems-with-corporate-governance-requires-more-than-rearranging-deck-chairs-99297">Solving deep problems with corporate governance requires more than rearranging deck chairs</a>
</strong>
</em>
</p>
<hr>
<p>The Australian Prudential Regulation Authority is already re-emphaising directors’ duties in <a href="https://www.apra.gov.au/sites/default/files/climate_change_awareness_to_action_march_2019.pdf">mitigating climate change risk</a>. These duties should be strengthened rather than being undermined by unaccountable and un-elected institutional investors trying to exert greater influence which may or may not coincide with the public interest.</p>
<p>Greater oversight by key public agencies <a href="https://theconversation.com/treasury-admits-corporate-governance-is-broken-but-baulks-at-systemic-fixes-100882">to improve corporate accountability</a> is also important.</p>
<p>Finally, better regulation designed to directly address issues such as climate change, wage theft and inequality and more intense enforcement of those regulations will be much more effective than the theatre created by encouraging shareholder activism.</p><img src="https://counter.theconversation.com/content/125807/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Warren Staples has received funding from Australia China Council, Department of Foreign Affairs and Trade (DFAT), and the Victorian Managed Insurance Authority (VMIA). Warren is currently a member of the Institute of Public Administration Australia (IPAA) Victoria’s Sustainability Community of Practice (CoP) Advisory Committee.</span></em></p><p class="fine-print"><em><span>Andrew Linden received funding from RMITs EU Centre to conduct his doctoral research. The Centre is funded by the European Union</span></em></p>Don’t expect institutional investors to become activists for change to make corporations more responsible. More direct approaches are urgently needed.Warren Staples, Lecturer in Social Procurement, The University of MelbourneAndrew Linden, Sessional Lecturer, PhD (Management) Candidate, School of Management, RMIT UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1223652019-10-23T12:31:34Z2019-10-23T12:31:34ZOil companies are thinking about a low-carbon future, but aren’t making big investments in it yet<figure><img src="https://images.theconversation.com/files/297594/original/file-20191017-98644-1otlmcu.jpg?ixlib=rb-1.1.0&rect=0%2C0%2C3438%2C2346&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Oil pump jacks in Williston, N.D.</span> <span class="attribution"><a class="source" href="http://www.apimages.com/metadata/Index/Oil-Tax-Revamp/1dabefd9a77d4be3a3ba4368099a6d33/165/0">AP Photo/Eric Gay</a></span></figcaption></figure><p>The global oil industry stands at a crossroads. Corporate leaders are weighing how closely to stay wedded to their legacy business – finding, extracting and refining fossil energy – versus preparing for an uncertain low-carbon future.</p>
<p>There are signs of an impending pivot. Most of the largest multinational oil companies have formally <a href="https://www.npr.org/2017/05/18/528998592/energy-companies-urge-trump-to-remain-in-paris-climate-agreement">supported the Paris climate agreement</a>. Total has <a href="https://www.fool.com/investing/2018/06/03/i-still-cant-believe-oil-giant-total-sa-spent-16-b.aspx">purchased electric power company DirectEnergie</a> and <a href="https://www.reuters.com/article/us-total-deals/frances-total-completes-direct-energie-deal-and-buys-electric-vehicles-charging-firm-idUSKCN1M016W">charging solutions provider G2Mobility</a>. Shell has acquired <a href="https://newmotion.com/en">e-mobility company NewMotion</a>; its CEO, Ben van Beurden, has expressed support for a <a href="https://www.businessgreen.com/bg/feature/3079348/your-oil-major-needs-you">zero-carbon world target</a>. </p>
<p>The companies least willing to shift focus today tend to be national companies and nationally owned firms, such as those in Kuwait and Venezuela. Such companies control nearly 90% of all the oil in the world. However, some, such as <a href="https://www.saudiaramco.com/">Saudi Aramco</a>, are looking at a range of green projects including solar, carbon capture and hydrogen. </p>
<p>As <a href="https://scholar.google.com/citations?user=roV8b2sAAAAJ&hl=en">transportation/energy</a> <a href="https://itspubs.ucdavis.edu/index.php/about/single/?person=fulton-lewis-m&type=staff-member">scholars</a>, we are most interested in decisions by major private oil companies that are subject to greater public pressure. What should shareholders expect from these companies? And what can policymakers do to encourage further investment in more sustainable options? Oil companies clearly are thinking about a low-carbon future, but many are still exploring ways to get there.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/297593/original/file-20191017-98657-1pl42tz.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/297593/original/file-20191017-98657-1pl42tz.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/297593/original/file-20191017-98657-1pl42tz.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=450&fit=crop&dpr=1 600w, https://images.theconversation.com/files/297593/original/file-20191017-98657-1pl42tz.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=450&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/297593/original/file-20191017-98657-1pl42tz.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=450&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/297593/original/file-20191017-98657-1pl42tz.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=566&fit=crop&dpr=1 754w, https://images.theconversation.com/files/297593/original/file-20191017-98657-1pl42tz.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=566&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/297593/original/file-20191017-98657-1pl42tz.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=566&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Global Climate Strike participants in New York City, Sept. 20, 2019.</span>
<span class="attribution"><a class="source" href="http://www.apimages.com/metadata/Index/Global-Climate-Strike-And-Rally/b316ee9d61d74751b686f63691e5fec3/58/0">Rainmaker Photo/MediaPunch/IPX</a></span>
</figcaption>
</figure>
<h2>Opportunities in transportation and renewables</h2>
<p>Discussions about Big Oil’s interest in sustainability center on continued global demand for petroleum. Industry and independent scenarios anticipate <a href="https://www.eia.gov/analysis/projection-data.php#intlproj">rising oil use until at least 2040</a>, though at a slowing pace. </p>
<p>These predictions <a href="https://www.ipcc.ch/sr15/chapter/spm/">contrast starkly</a> with calls to limit climate change to a <a href="https://www.ipcc.ch/sr15/">1.5 degrees Celsius (2.7 degrees Farenheit) increase above pre-industrial levels</a>. As the Intergovernmental Panel on Climate Change and other expert analyses have shown, to reach that goal, oil use will likely have to peak around 2030, then decline to much lower levels by 2050.</p>
<p>However, large oil companies also have a leg up on the competition when it comes to creating infrastructure for some low-carbon fuels. Since they are essentially massive engineering companies, they have an advantage in the areas of hydrogen fuels and carbon capture and sequestration, which offer new uses for existing fossil fuel infrastructure. For example, hydrogen can be made from natural gas and transported along traditional pipelines and shipping routes. </p>
<p>In contrast, solar generation, batteries, onshore wind and nuclear power do not offer oil companies the same structural or expertise advantages. Thus shifting into these new areas may be seen as problematic. </p>
<figure>
<iframe width="440" height="260" src="https://www.youtube.com/embed/AJ38SiVOD78?wmode=transparent&start=0" frameborder="0" allowfullscreen=""></iframe>
<figcaption><span class="caption">As concerns about climate change mount, fossil fuel companies will have to make strategic decisions.</span></figcaption>
</figure>
<h2>Any pivot will take time</h2>
<p>Oil companies cannot change course overnight, even if policymakers want them to. They must be responsive to shareholders in making such moves. </p>
<p>An analysis by the <a href="https://www.cdp.net/en">Carbon Disclosure Project</a> shows that investor-owned oil companies currently are <a href="https://6fefcbb86e61af1b2fc4-c70d8ead6ced550b4d987d7c03fcdd1d.ssl.cf3.rackcdn.com/cms/reports/documents/000/003/858/original/CDP_Oil_and_Gas_Executive_Summary_2018.pdf?1541783367">spending 1% to 4% of their capital investment</a> on low-carbon energy sources, while national oil companies average a mere 1%. These numbers must increase significantly for the industry to claim any real pivot is occurring.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/297590/original/file-20191017-98632-197w9sp.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/297590/original/file-20191017-98632-197w9sp.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/297590/original/file-20191017-98632-197w9sp.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=294&fit=crop&dpr=1 600w, https://images.theconversation.com/files/297590/original/file-20191017-98632-197w9sp.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=294&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/297590/original/file-20191017-98632-197w9sp.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=294&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/297590/original/file-20191017-98632-197w9sp.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=370&fit=crop&dpr=1 754w, https://images.theconversation.com/files/297590/original/file-20191017-98632-197w9sp.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=370&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/297590/original/file-20191017-98632-197w9sp.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=370&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Proportion of oil company capital expenditures invested in low-carbon energy from 2010 to the first quarter of 2018.</span>
<span class="attribution"><a class="source" href="https://www.cdp.net/en/investor/sector-research/oil-and-gas-report">Fletcher et al., Beyond the cycle (London: CDP, 2018).</a>, <a class="license" href="http://creativecommons.org/licenses/by-nd/4.0/">CC BY-ND</a></span>
</figcaption>
</figure>
<h2>Shareholders speak up</h2>
<p>Numerous reports have described <a href="https://www.economist.com/business/2019/05/30/oil-majors-face-shareholder-resolutions-on-climate-change">climate-related shareholder resolutions</a> at oil and gas companies. But many such resolutions initiated in the last five years have <a href="https://www.ceres.org/resources/tools/climate-and-sustainability-shareholder-resolutions-database">failed a vote</a>, and the number of actions declined from 2016 to 2018. </p>
<p>Still, these efforts led to increased discussion of climate-related concerns between shareholders and management. The recent uptick in corporate climate strategy and investments undoubtedly reflects investor interest, societal pressure, the public policy environment and the growing competitiveness of other technologies. The question is how much change can emerge without much stronger signals from one or more of these sources.</p>
<h2>Action and inaction both have risks</h2>
<p>Big Oil must consider not only the economic advantages of investing in clean energy, but also the financial risk of pursuing a fossil energy source strategy rather than diversifying. </p>
<p>Several scientific studies have shown that nearly 85% of remaining fossil fuel reserves must remain in the ground to keep global temperatures from rising more than 2 degrees C (3.6 degrees F) above pre-industrial levels. When the <a href="https://doi.org/10.1038/nature08017">first peer-reviewed article</a> making this case was published in a major journal in 2009, oil company stock values <a href="https://doi.org/10.1016/j.eneco.2015.08.028">fell by more than 2%</a> over the next two weeks. This amounted to a shareholder loss of US$16.5 billion.</p>
<p>Fossil fuel companies have underperformed the broader S&P index in recent years. This trend is led by U.S. coal companies, which have <a href="https://us.spindices.com/indices/equity/dow-jones-us-coal-index-usd">lost 80% of their value since 2007</a>. </p>
<p><div data-react-class="Tweet" data-react-props="{"tweetId":"1184259408961904641"}"></div></p>
<p>Each oil company will address climate change pressures in its own way. Some with resources to develop in-house renewable energy expertise will do so. More likely, however, we expect that large companies like Total and Shell will continue to purchase smaller companies that have the strategic know-how to help them make the switch. </p>
<p>On a positive note, oil companies are increasing their low-carbon investments each year. While they are starting from a low baseline, rapid growth rates suggest that with sustained commitment, they could be quite large within a decade. For example, Total and BP each are prepared to spend <a href="https://doi.org/10.1016/j.esr.2019.100370">$500 million per year on renewables</a> over the next several decades. Total expects to grow its low-carbon business to 20% of its asset base over the next 20 years. </p>
<p>Ultimately, however, investment strategy will always be driven by expected returns. If available oil and gas investments have an expected return of 15% and low-carbon investments are only expected to make 7%, money will likely continue to flow towards fossil fuels. Changing this reality will require major market and pricing shifts, which may have to be driven by government policies such as <a href="https://theconversation.com/with-the-right-guiding-principles-carbon-taxes-can-work-109328">carbon taxes</a>. </p>
<h2>A pale-green forecast</h2>
<p>Our discussions suggest that companies are interested and feel compelled to explore their options, but there is no clear road map for transforming them into low-carbon energy providers.</p>
<p>Some observers might conclude that oil and gas companies’ limited investments to date in low-carbon technology and business ventures are hindering this transition. Others may view any such investments as a plus, so long as these investments grow and companies don’t simultaneously advocate against policies to reduce emissions. </p>
<p>We believe it is vital for the energy industry and climate stakeholders to continue this conversation, and to identify policy changes that can make it economically advantageous for oil companies to pursue low-carbon futures.</p>
<p>[ <em>You’re smart and curious about the world. So are The Conversation’s authors and editors.</em> <a href="https://theconversation.com/us/newsletters?utm_source=TCUS&utm_medium=inline-link&utm_campaign=newsletter-text&utm_content=youresmart">You can read us daily by subscribing to our newsletter</a>. ]</p><img src="https://counter.theconversation.com/content/122365/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Lewis Fulton directs a research group that receives consortium funding from transportation and energy companies, government agencies that fund or regulate transportation agencies and companies, and private foundations engaged with mobility issues. </span></em></p><p class="fine-print"><em><span>Daniel Sperling receives funding from government agencies that fund or regulate transportation agencies and companies, and private foundations engaged with mobility issues. I am a board member with the California Air Resources Board. </span></em></p>How are oil companies positioning themselves for a post-carbon world? So far, cautiously.Lewis Fulton, Co-director, STEPS (Sustainable Transportation Energy Pathways), University of California, DavisDaniel Sperling, Professor of Civil and Environmental Engineering and Founding Director, Institute of Transportation Studies, University of California, DavisLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1246182019-10-10T10:02:50Z2019-10-10T10:02:50ZThe rise, fall and rise again of businesses serving more than just their shareholders<figure><img src="https://images.theconversation.com/files/296070/original/file-20191008-128665-1oa5q2c.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">quietbits / Shutterstock.com</span></span></figcaption></figure><p>What’s the purpose of a business? For a long time, the textbook answer to that question has been purely “to make as much money as possible for its shareholders”. But business leaders – who often themselves get huge payouts from this model – are beginning to challenge this orthodoxy.</p>
<p>Or so it seems. The influential Business Roundtable association of top US business leaders, which includes CEOs of Apple, Boeing, Walmart and JP Morgan, made a landmark statement in August. They <a href="https://www.businessroundtable.org/business-roundtable-redefines-the-purpose-of-a-corporation-to-promote-an-economy-that-serves-all-americans">committed</a> “to lead their companies for the benefit of all stakeholders – customers, employees, suppliers, communities and shareholders”. Maximising profits, they said, would no longer be their primary goal.</p>
<p>For many, it was seen as an <a href="https://www.prweek.com/article/1594781/why-business-roundtables-historic-declaration-wasnt-fit-every-company">historic</a> <a href="https://fortune.com/longform/business-roundtable-ceos-corporations-purpose/">moment</a> for business. Markets, however, greeted the news with a yawn. Both the <a href="https://sg.finance.yahoo.com/quote/%5Edji/">Dow Jones</a> and the <a href="https://sg.finance.yahoo.com/quote/%5EGSPC?p=%5EGSPC&.tsrc=fin-srch">S&P500</a> in the US increased marginally on the day of the announcement. </p>
<p>Perhaps they recognised that there is unlikely to be a tectonic shift in the way that businesses behave. Certainly, it’s not the first time that businesses have changed their minds on this issue. The history of what – and who – businesses serve reveals that this is an age-old debate, which has raged since the dawn of modern day capitalism. Often, the real focus of the debate has been on how best to serve the bottom line.</p>
<p>Today, CEOs would be foolish to ignore issues like rising inequality, populism and a backlash against elites that would be bad news for their profits. As the Business Roundtable <a href="https://opportunity.businessroundtable.org/ourcommitment/">stated in its press release</a>:</p>
<blockquote>
<p>If companies fail to recognise that the success of our system is dependent on inclusive long-term growth, many will raise legitimate questions about the role of large employers in our society.</p>
</blockquote>
<p>So we should not see this redefinition of company purpose as altruistic. Far from it. Businesses and CEOs are simply reacting to the changes in their environment, as they should. A cynic could also see this simply as a move to stave off regulations that will force them into making these kinds of changes. But, really, businesses would be better served by being more modest and focusing on what they do best – which is serving stakeholders as well as shareholders – instead of grandiose statements. </p>
<h2>First, stakeholders were first</h2>
<p>Back in January 1914, Henry Ford famously more than <a href="https://www.thedailybeast.com/henry-ford-understood-that-raising-wages-would-bring-him-more-profit">doubled the wages</a> of his assembly workers from US$2.25 a day to US$5 a day. In later years this move took on mythic proportions, with claims that Ford wanted to pay his workers a fair wage so that they could afford to buy the very cars being churned out in his assembly line. </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/296073/original/file-20191008-128652-4g3ks2.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/296073/original/file-20191008-128652-4g3ks2.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=401&fit=crop&dpr=1 600w, https://images.theconversation.com/files/296073/original/file-20191008-128652-4g3ks2.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=401&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/296073/original/file-20191008-128652-4g3ks2.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=401&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/296073/original/file-20191008-128652-4g3ks2.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=504&fit=crop&dpr=1 754w, https://images.theconversation.com/files/296073/original/file-20191008-128652-4g3ks2.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=504&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/296073/original/file-20191008-128652-4g3ks2.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=504&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Henry Ford’s famed assembly line.</span>
<span class="attribution"><a class="source" href="https://www.flickr.com/photos/bluespringsfordparts/14492600447">Kyle Harris / flickr</a>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span>
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<p>The real rationale was more prosaic. The Ford motor factory was beset with chronic absenteeism and high worker turnover. A high wage, especially relative to wages available elsewhere, would reduce turnover, elicit greater effort, and help attract and retain better and more reliable workers. Economists refer to this as the <a href="https://www.nber.org/chapters/c4248.pdf">efficiency wage hypothesis</a> – that firms can increase their profits by paying above-market wages. </p>
<p>Henry Ford himself <a href="http://tiny.cc/r0m8bz">claimed</a> that “There was no charity in any way involved … we wanted to pay these wages so that business would be on a lasting foundation … The payment of five dollars a day for an eight-hour day was one of the finest cost-cutting moves we ever made.” </p>
<p>Ford also wanted to cut prices to sell more cars, and reinvest the company’s US$60m capital surplus (the equivalent of US$1.4 billion today), instead of returning this to shareholders in the form of dividends. Shareholders baulked. Two brothers, John Dodge and Horace Dodge, who owned 10% of the company, sued Henry Ford in the Michigan State Supreme Court. The court <a href="https://chicagounbound.uchicago.edu/cgi/viewcontent.cgi?article=1197&context=law_and_economics">ruled</a> that Ford had to operate his company in the interest of shareholders and not of consumers and employees – profits should be the primary concern for the company.</p>
<p>Despite Ford being checked by the courts, the idea gained favour that corporations should be community minded, pay fair wages, take responsibility for the retirement of their workers via generous defined benefit plans, deliver value to customers and engage in charitable giving. The conglomerate Johnson & Johnson published its “<a href="https://www.jnj.com/our-heritage/8-fun-facts-about-the-johnson-johnson-credo">Credo</a>” in 1943, describing its responsibilities to multiple stakeholders. Shareholders were last in line and deserving only of a “fair” return. </p>
<p>When benefits accrued to a broad set of stakeholders, this also advanced the interests of the business and therefore the interests of shareholders. It was a popular strand of thinking up until the 1980s and was referred to as <a href="https://ideas.repec.org/a/isv/jouijm/v5y2015i1p81-97.html">managerialism</a>. Today, this kind of approach has a number of different monikers: <a href="https://www.london.edu/lbsr/doing-well-by-doing-good">“doing well by doing good”</a>, adhering to a <a href="https://www.inc.com/jeff-haden/why-your-business-needs-a-double-bottom-line-profits-purpose.html">“double bottom line”</a>, <a href="https://www.weforum.org/agenda/2019/01/why-businesses-must-be-driven-by-purpose-as-well-as-profits/">“profit with purpose”</a> and creating <a href="https://hbr.org/2011/01/the-big-idea-creating-shared-value">“shared value”</a>.</p>
<h2>When greed became good</h2>
<p>Most accounts in the <a href="https://www.forbes.com/sites/neilmalhotra/2019/04/16/should-corporations-simply-maximize-shareholder-value/#68798a8227b7">popular press</a> of the switch to the shareholder focus feature the arrival of economist Milton Friedman and the Chicago school of economics. An influential <a href="https://timesmachine.nytimes.com/timesmachine/1970/09/13/223535702.html?pageNumber=379">article</a> by Milton Friedman for The New York Times magazine contended that “the social responsibility of business is to increase its profits”. It was this, apparently, that swayed academic, business, political and eventually public opinion to see the folly of managerialism.</p>
<p>The key ingredient of Friedman’s critique was that corporate executives are employees and must act in the interest of the ultimate owners, the shareholders, while conforming to existing laws and ethical norms. To the extent such executives identify with a social cause they should do so on their own time, using their own resources. Doing otherwise was equivalent to taxing the company, a task better left to civil servants and politicians who are selected by and accountable to the public at large. </p>
<p>Similarly, Friedman argued that socially conscious shareholders whose objectives divert from narrow profit maximising, should pursue these objectives in the private realm. They are free to devote their shareholder dividends to charitable causes as they see fit.</p>
<p>A confluence of events made this the intellectual foundation for the shareholder revolution in the 1980s. By the 1970s, US companies had become fat, bloated, overly diversified and unprofitable. Managers and CEOs lacked accountability. Some had developed a messianic complex using their companies for empire building. </p>
<p>US companies that had been hitherto unchallenged since World War II faced rising competition from European and Japanese rivals, who had started to peck away at their monopolistic and oligopolistic positions, eroding their profit potential. <a href="https://energyeducation.ca/encyclopedia/Oil_crisis_of_the_1970s">Oil price shocks</a> triggered a period of stagflation, recession and pessimism. </p>
<p>By the 1980s, these US companies came increasingly under threat from <a href="https://www.amazon.com/dp/B00PSSCTV2/ref=dp-kindle-redirect?_encoding=UTF8&btkr=1">corporate raiders</a> and buyout funds, who identified inefficiencies, acquired controlling stakes, ruthlessly cut costs, stripped assets and aligned payment of executives to stock market performance.</p>
<p>Friedman’s thesis also found a ready political audience in US president Ronald Reagan and UK prime minister Margaret Thatcher. “<a href="https://www.youtube.com/watch?v=VVxYOQS6ggk">Greed is good</a>” became the new mantra. Then the collapse of the Soviet Union and a dawning realisation of the weakness of state-led development models led to the belief that “<a href="https://www.amazon.com/dp/B001FA0M8O/ref=dp-kindle-redirect?_encoding=UTF8&btkr=1">there is no alternative</a>”. This was Thatcher’s slogan – that the path for societies to advance themselves was by embracing free markets, free trade and free movement of capital.</p>
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<img alt="" src="https://images.theconversation.com/files/296074/original/file-20191008-128661-1y6hlpg.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/296074/original/file-20191008-128661-1y6hlpg.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=394&fit=crop&dpr=1 600w, https://images.theconversation.com/files/296074/original/file-20191008-128661-1y6hlpg.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=394&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/296074/original/file-20191008-128661-1y6hlpg.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=394&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/296074/original/file-20191008-128661-1y6hlpg.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=495&fit=crop&dpr=1 754w, https://images.theconversation.com/files/296074/original/file-20191008-128661-1y6hlpg.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=495&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/296074/original/file-20191008-128661-1y6hlpg.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=495&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">Ronald Reagan and Milton Friedman said ‘greed is good’.</span>
<span class="attribution"><a class="source" href="https://commons.wikimedia.org/wiki/File:Ronald_reagan_congratulating_Milton_Friedman_receiving_the_Presidential_Medal_of_Freedom_C49899-15.jpg">Wikimedia</a></span>
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<p>This doctrine of unfettered capitalism (promoted under the banner of Friedmanism, Reaganomics, Thatcherism, take your pick), eventually morphed into a conviction in the benevolence of markets and deregulation, a deep distrust of government, and a near religious faith in the profit motive. Work by Friedman’s <a href="https://www.sciencedirect.com/science/article/pii/0304405X7690026X">acolytes</a> reshaped the theory and practice of corporate governance, reimagining companies as maximising the return on investment of shareholders. </p>
<p>These beliefs were then transmitted via business schools, economics departments, public policy institutes and think tanks to the next generation of business leaders. Via international financial institutions, including the World Bank, the International Monetary Fund and the World Trade Organisation, these ideas were also conveyed globally. In 1997, the Business Roundtable (yes, the very same) changed their mission statement and <a href="https://www.fastcompany.com/90391743/top-ceo-group-business-roundtable-drops-shareholder-primacy">said</a>: “The paramount duty of management and of boards of directors is to the corporations’ stockholders.”</p>
<h2>Returning to stakeholders</h2>
<p>Economist Adam Smith, the patron saint of the shareholder model of capitalism, would have protested such a grandiose interpretation. Smith <a href="https://www.adamsmith.org/the-theory-of-moral-sentiments">emphasised</a> not just self-interest but also the values of empathy, trust and high morals in commercial interactions. He lamented excessive risk taking in search of profits, especially in financial markets. </p>
<p>Smith recognised the power of the markets to efficiently allocate resources but also defended the role of the state in addressing market failures. He wondered at the power of markets to create value but was also deeply concerned about poverty, illiteracy and relative deprivation.</p>
<p>The shift towards the shareholder model of business in the 1980s coincided with a tremendous <a href="https://knowledge.insead.edu/blog/insead-blog/understanding-populism-inequality-by-the-numbers-5087">rise in income and wealth inequality</a>, especially in Anglo-Saxon countries. <a href="https://www.pewresearch.org/fact-tank/2018/08/07/for-most-us-workers-real-wages-have-barely-budged-for-decades/">Middle class wages stagnated</a>, while most of the growth in income accrued to the richest 10% (see below). <a href="https://www.credit-suisse.com/media/assets/corporate/docs/publications/research-institute/global-wealth-report-2018-en.pdf">Wealth disparities</a> rose dramatically, while inter-generational mobility in both relative and absolute terms declined sharply. Accompanying this was a rise in depression, suicides and opioid addiction, and <a href="https://www.brookings.edu/wp-content/uploads/2017/08/casetextsp17bpea.pdf">a spike in mortality rates</a>.</p>
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<a href="https://images.theconversation.com/files/295276/original/file-20191002-49346-15xwmv8.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/295276/original/file-20191002-49346-15xwmv8.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/295276/original/file-20191002-49346-15xwmv8.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=407&fit=crop&dpr=1 600w, https://images.theconversation.com/files/295276/original/file-20191002-49346-15xwmv8.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=407&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/295276/original/file-20191002-49346-15xwmv8.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=407&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/295276/original/file-20191002-49346-15xwmv8.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=512&fit=crop&dpr=1 754w, https://images.theconversation.com/files/295276/original/file-20191002-49346-15xwmv8.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=512&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/295276/original/file-20191002-49346-15xwmv8.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=512&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="attribution"><a class="license" href="http://creativecommons.org/licenses/by-nd/4.0/">CC BY-ND</a></span>
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<p>While the 2007-08 global financial crisis temporarily halted this increase in inequality, bailouts for banks and aggressive monetary policies resulting in a boom in asset prices, again <a href="https://theconversation.com/if-politicians-are-serious-about-tackling-inequality-they-need-to-properly-overhaul-the-tax-system-heres-how-124240">exacerbated inequality</a>. In the meantime, unemployment rates <a href="https://www.imf.org/en/News/Articles/2015/09/14/01/49/pr10324">spiked</a> across advanced countries, while mistaken notions of austerity in both the US and Europe meant that the <a href="https://theconversation.com/fact-check-has-austerity-held-back-economic-growth-40578">recovery was painfully slow</a> for the bottom 90% of the population. </p>
<p>The notion that the system was broken sunk deep into the consciousness of voters, who punished centrist parties <a href="https://theconversation.com/new-index-of-economic-marginalisation-helps-explain-trump-brexit-and-alt-right-71172">as guardians of the status quo</a>. Political entrepreneurs and populist parties took advantage of this deep cynicism by channelling voter disenchantment towards globalisation, immigration, elites and supranational institutions as a path to power. </p>
<p>With this shift in political winds, a siege mentality took hold among business leaders and “<a href="https://www.ft.com/content/f2f59112-20bd-11e9-b126-46fc3ad87c65">Davos decision makers</a>”. Nine out of ten confessed to a rising anxiety about “populist and nativist agendas” and “public anger against elites”. The recent Business Roundtable pledge should be seen as a response to this fear and angst that the status quo seems increasingly untenable. </p>
<p>On the one hand, we could slip into a world of protectionism and nationalism held together by identity politics. On the other, we could see a surge in support for intrusive regulations, higher tax rates on corporations, estates and wealth, a crackdown on tax havens, the breakup of large corporations and even a return to state-owned capitalism. Ironically, the pledge if it mitigates such risks, will end up benefiting who else but the shareholders.</p>
<h2>A modest approach</h2>
<p>This brief history has us lurching back and forth between the ideas of shareholder versus stakeholder primacy that have waxed and waned over the decades. Are we doomed to pontificate on this endlessly? </p>
<p>As a way forward, I would advocate for a modest approach to end this interminable debate. A Hippocratic oath for corporations, based on seven principles:</p>
<p><strong>1. Do no evil.</strong> Examples of evil include having your workers take <a href="https://www.theguardian.com/books/2018/mar/11/hired-six-months-undercover-in-low-wage-britain-zero-hours-review-james-bloodworth">bathroom breaks in bottles</a>, selling <a href="https://www.ftc.gov/news-events/press-releases/2019/09/google-youtube-will-pay-record-170-million-alleged-violations">browsing data of children</a>, peddling <a href="https://www.nytimes.com/2019/01/15/health/sacklers-purdue-oxycontin-opioids.html">opioids to patients</a>, facilitating <a href="https://www.bbc.com/news/world-us-canada-48972327">interference in national elections</a>, creating <a href="https://en.wikipedia.org/wiki/Wells_Fargo_account_fraud_scandal">fake bank accounts</a>, cheating on <a href="https://www.bbc.com/news/world-us-canada-48972327">emission tests</a>, enabling <a href="https://www.theguardian.com/business/2019/apr/17/deutsche-bank-faces-action-over-20bn-russian-money-laundering-scheme">money laundering</a> for criminals, paying <a href="https://www.reuters.com/article/us-walmart-fcpa/walmarts-brazilian-unit-agrees-to-pay-138-million-to-settle-fcpa-charges-idUSKCN1TL27J">bribes</a>, forming <a href="https://www.ft.com/content/73163fa0-77c5-11e9-bbad-7c18c0ea0201">cartels</a> and tolerating <a href="https://www.bbc.com/news/technology-40352868">unsafe workplaces</a>.</p>
<p><strong>2. Pay taxes and adhere to laws and regulations.</strong> If laws are murky, implementation is discretionary and compliance is optional. See principle 1, above.</p>
<p><strong>3. Avoid interfering in politics.</strong> Stop lobbying for preferential treatment and, if impossible, disclose all political donations. </p>
<p><strong>4. Do not deny science.</strong> And do not run <a href="https://insideclimatenews.org/news/22122017/big-oil-heartland-climate-science-misinformation-campaign-koch-api-trump-infographic">misinformation campaigns</a> that undermine science in order to benefit your bottom line.</p>
<p><strong>5. Focus on core competencies and embrace <a href="https://www.economist.com/briefing/2016/03/26/too-much-of-a-good-thing">competition</a>.</strong> Making billions of dollars does not necessarily mean you can fix <a href="https://www.fastcompany.com/90269809/after-rapid-growth-zuckerberg-backed-school-program-faces-scrutiny-over-effectiveness-and-data-privacy">education</a> or be an effective <a href="https://www.nbcnews.com/politics/2020-election/former-starbucks-ceo-howard-schultz-decides-against-running-president-n1050596">president</a>. Lobbying to reduce competition and boost profits is not a sign of confidence in the business’s core competency.</p>
<p><strong>6. If invested in the stakeholder model, ensure that stakeholders are represented in your governance structures.</strong> Germany’s post-war model of <a href="https://www.dw.com/en/representing-workers-the-german-way/a-41751752">Mitbestimmung</a> or “co-determination” offers one example of how best to do this. This refers to the unique way that German companies give workers the right to participate in the way they are managed by electing their own representatives to company boards.</p>
<p><strong>7. If concerned about inequality, start at home.</strong> Disclose wages, bonuses and <a href="https://www.ft.com/content/db9d0b4c-6b25-11e8-8cf3-0c230fa67aec">pay ratios</a>, by skill level and by gender in your organisation.</p>
<p>This approach can help restore faith in corporations, protect their brands and reputation, and avoid accusations of hypocrisy, while focusing their attention on what they truly do best – producing goods or services. To paraphrase the writer <a href="http://www.anand.ly/">Anand Giridharadas</a>: “Avoid virtue signalling and virtuous side projects; do your day jobs more honourably.” </p>
<p>And to quote <a href="https://www.amazon.com/gp/product/0226264211/ref=as_li_qf_sp_asin_il_tl?ie=UTF8&tag=thewaspos09-20&camp=1789&creative=9325&linkCode=as2&creativeASIN=0226264211&linkId=63fedf2e2168409d9bd8cae8b264fbb4">Milton Friedman</a>, business “should engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud”.</p><img src="https://counter.theconversation.com/content/124618/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Pushan Dutt does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>What and who businesses exist to serve is an age-old debate – but it’s nearly always been driven by the bottom line.Pushan Dutt, Professor of Economics, INSEADLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1222052019-08-28T13:20:24Z2019-08-28T13:20:24ZWhy South African law on directors’ delinquency is open to abuse<figure><img src="https://images.theconversation.com/files/289827/original/file-20190828-184211-1ff9p1u.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The delinquency clause seeks to raise standards of good behaviour expected of directors.</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>For the first time in South African company law, courts have the power to declare directors delinquent. This remedy was introduced as part of the overhaul of South Africa’s corporate law regime in 2011. It is an innovative remedy available to shareholders and other stakeholders to hold company directors accountable. The newly-adopted delinquency order sets out to raise standards of good behaviour expected of directors. It also protects the public from incompetent and dishonest directors. </p>
<p>To be declared delinquent, a director must be guilty of serious misconduct. There must be a gross abuse of the director’s position, gross negligence, wilful misconduct or a breach of trust. Gross abuse is not a trivial misdemeanour. A <a href="http://www.saflii.org/za/cases/ZANCHC/2015/17.html">gross abuse</a> would be if a director exploits company information or takes a business opportunity that should have been given to his company.</p>
<p>Other examples of conduct which have resulted in delinquency orders are failing to <a href="http://saflii.org/za/cases/ZAGPJHC/2012/60.html">refund money to the South African Revenue Service</a>; taking financial benefits and <a href="http://www.saflii.org/za/cases/ZASCA/2016/35.html">unlawfully excluding a shareholder</a> from the benefits to which he is entitled; allowing a company to trade knowing that it is <a href="http://www.saflii.org/za/cases/ZAWCHC/2017/38.html">insolvent</a>; failing to prepare annual financial statements or <a href="http://saflii.org/za/cases/ZAGPJHC/2012/240.html">not holding annual general meetings for several years</a>; and <a href="https://www.moneyweb.co.za/news/south-africa/more-public-shame-for-pic-officials-linked-to-vbs/">taking bribes</a> of millions of Rands in exchange for turning a blind eye to the looting of municipal, stokvel and pension funds at VBS Mutual Bank.</p>
<p>A host of things aren’t enough for a <a href="http://www.saflii.org/za/cases/ZAWCHC/2016/130.html">delinquency order</a>. These include poor decision-making, ordinary commercial misjudgement or a misguided reliance on incorrect professional advice. </p>
<p>A delinquency order will ban a person from being a director for at least seven years, or even for a lifetime in very serious cases. His name is put on a public register of disqualified directors. Even though a delinquency order will not send a director to jail, it carries a stigma and reputational damage. </p>
<p>Conditions may be imposed on a delinquency order, such as ordering the director to go for remedial education or to do community service. After three years he may apply to court for the order to be suspended and suspended with an order of probation. But he may face challenges in convincing a court of his rehabilitation. </p>
<p>In my research I have found that <a href="http://www.scielo.org.za/pdf/pelj/v19n1/51.pdf">courts do not make enough use</a> of these kinds of conditions when declaring directors delinquent. Courts should impose appropriate conditions on the delinquency order to protect the public from a recurrence of the conduct and to enhance the director’s rehabilitation. </p>
<h2>Who can apply for a delinquency order?</h2>
<p>In addition, I found that South Africa’s remedy is open to abuse. This is because the country’s law, unlike the UK or US, has a much wider definition of who can act. </p>
<p>For example, it allows employee representatives or trade unions the right to apply for a delinquency order. The company secretary and a prescribed officer can also apply for a delinquency order. And it gives one director or a single shareholder the power to bring delinquency proceedings. There is nothing to stop a disgruntled director or shareholder from doing so. There is a great deal of potential for any of these people to put directors under pressure by exercising this right, or by threatening to exercise it.</p>
<p>In contrast, in the US a single director or shareholder cannot apply to court for an order to remove a director. Instead, the application must be brought derivatively by the board of directors or a shareholder – that is, in the company’s name, and not in their personal name. A derivative action allows a person to bring an action on behalf of a company to protect the company’s legal interests from parties allegedly causing harm to the company. </p>
<p>South Africa has gone in completely the opposite direction. A court has ruled that delinquency applications cannot be brought derivatively (in the company’s name), but must be brought by a single shareholder, in the <a href="http://www.saflii.org/za/cases/ZAWCHC/2016/130.html">shareholder’s name</a>.</p>
<p>In my research, I have found that <a href="https://journals.co.za/docserver/fulltext/obiter_v38_n3_a15.pdf?expires=1566487191&id=id&accname=58010&checksum=51FFE99B25FAB50562F2B87F927D17B5">abuse could be controlled</a> much more effectively if shareholders or directors could bring delinquency proceedings derivatively. </p>
<p>The advantage of derivative procedures is that they have a good faith requirement. The derivative proceeding does not mean that the application is brought by a group. It means that the application is brought in law by the company, and not by the individual shareholder or individual director.</p>
<p>This safeguard is missing when delinquency applications are brought by a director or shareholder in their own name. So frivolous or vexatious delinquency applications may not be screened out and must be fully litigated in court. This could take years to be finalised. </p>
<p>Even before a delinquency application is argued in court, it could affect the directors’ reputation and also the company’s share price, especially if the company is listed on a stock exchange. </p>
<p>For example, the share price of Old Mutual, the second-largest insurer in South Africa which is listed on various stock exchanges, has <a href="https://www.dailymaverick.co.za/article/2019-08-23-old-mutual-chair-trevor-manuel-breaks-his-silence-about-moyo-battle/">dropped drastically</a> recently. This is partly due to publicity of the unprecedented move by the former CEO, Peter Moyo, to have all 14 non-executive directors on the board declared <a href="https://www.fin24.com/Companies/Financial-Services/moyo-ruling-takes-toll-on-old-mutual-share-price-20190730">delinquent</a> and thus banned from being directors. </p>
<p>The reason for Moyo’s application is that he believes the board did not properly handle his termination of employment as the CEO of Old Mutual, in June 2019. Old Mutual has said that it dismissed Moyo because of a <a href="https://www.moneyweb.co.za/news/companies-and-deals/peter-moyo-puts-new-screws-on-old-mutuals-board/">conflict of business interest</a>. </p>
<p>The Companies Act makes no provision for the collective declaration of delinquency of an entire board, which has never been done. To succeed with this unusual application, Moyo must prove that there are valid grounds to declare every single board member delinquent, and that there is enough evidence to support these grounds.</p>
<p>In <a href="http://www.saflii.org/za/cases/ZAWCHC/2016/130.html">another case</a> a disgruntled shareholder applied to declare delinquent four directors of Lewis Group, a public listed company. Arguments were made to the court that the shareholder was acting in bad faith, and that his application was vexatious and frivolous. The court agreed and found that the application had no merit. But, the bad publicity given to Lewis Group while the matter was pending had a <a href="https://www.fin24.com/Companies/Retail/court-asked-for-independent-probe-of-lewis-execs-practices-20160726">negative effect on its share price</a>.</p>
<h2>Caution against abuse</h2>
<p>These cases show the extent of the power conferred on one director or a single shareholder to bring delinquency proceedings against directors. It is important to guard against the abuse of delinquency applications, especially since the Companies Act has no safeguards to protect against such abuse. This remedy must be used responsibly and sensibly by those with the power to use it.</p><img src="https://counter.theconversation.com/content/122205/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Rehana Cassim does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>For the first time in South African company law, courts can declare directors delinquent. This new remedy must not be abused by those with the power to use it.Rehana Cassim, Senior Lecturer in Company Law, University of South AfricaLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1221652019-08-22T11:43:43Z2019-08-22T11:43:43ZTrain services are very efficient for shareholders – less so for customers<p>Train fares in the UK will increase by 2.8% in January 2020, after rising <a href="https://unitetheunion.org/news-events/news/2019/january/rail-firms-have-paid-over-1-billion-to-shareholders-in-last-6-years-finds-tuc/">3.1% in January 2019</a> following a year of timetable changes and cancellations. Who do the train companies think they’re fooling?</p>
<p>One thing is clear: the fact that they have paid <a href="https://unitetheunion.org/news-events/news/2019/january/rail-firms-have-paid-over-1-billion-to-shareholders-in-last-6-years-finds-tuc/">out £1 billion to shareholders</a> over the past six years demonstrates that the companies are efficiently delivering financial returns to private investors while delivering an inefficient service for the people who really matter – their customers.</p>
<p>Where work is considered to be a public service, it’s interesting to consider the efficiency demands of the government versus the efficiency demands of a private company. After all, the decision to outsource public services relies on the idea that the market can be more efficient than government.</p>
<p>While companies performing government-outsourced services understand that their private interest in achieving market objectives is their key selling point, they must also understand that those same objectives must also align with the public interest. Indeed, train company customers are the public and those customers can see that efficiency costs have paid off well for private investors. Cost efficiencies, such as attempts to <a href="https://metro.co.uk/2019/06/06/basket-case-franchise-southern-ranked-worst-train-operator-public-trust-9832139">cut the number of train guards</a>, raising fares and <a href="https://www.independent.co.uk/travel/news-and-advice/train-delays-compensation-latest-uk-railway-claim-rights-money-back-weather-snow-a8394306.html">making it difficult to make a reimbursement claim</a>, no doubt positively contribute to the generous rewards shareholders enjoy.</p>
<p>Similar efficiency-making measures and allegations of mismangement exist elsewhere in government outsourcing. Consider <a href="https://www.roofingtoday.co.uk/scale-of-carillions-mismanagement-revealed/">the collapse of Carillion</a>. It <a href="https://uk.reuters.com/article/uk-carillion-restructuring-dividends/collapsed-carillions-dividends-totalled-1-billion-idUKKBN1F5266">also reportedly paid £1 billion</a> to shareholders over a 19-year period despite racking up huge amounts of debt. Its collapse also led to the <a href="https://www.gov.uk/government/news/carillion-official-receivers-employment-update--2">loss of over 2,000 jobs</a>.</p>
<p>Another example is the <a href="https://theconversation.com/first-rail-now-probation-why-its-time-to-reassess-when-public-sector-outsourcing-goes-wrong-114475">outsourcing of probation services</a> to Interserve – one of the UK’s biggest government contractors and the largest provider of probation services in England and Wales – which headed into administration in 2019 with assets moved to a new group controlled by the firm’s lenders. The management of probation services <a href="https://www.ft.com/content/c5935758-7730-11e9-bbad-7c18c0ea0201">is now being renationalised</a>. </p>
<p>The GMT union said ministers had learned nothing from Carillion and the outsourcing of public services. “Shambolic mismanagement is putting jobs put on the line and services in jeopardy,” <a href="https://www.bbc.co.uk/news/business-47582406">its national officer said</a>. </p>
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<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/first-rail-now-probation-why-its-time-to-reassess-when-public-sector-outsourcing-goes-wrong-114475">First rail, now probation: why it's time to reassess when public sector outsourcing goes wrong</a>
</strong>
</em>
</p>
<hr>
<p>The question commuters and legislators should be asking, then, is: are our transportation, construction and probation services efficient for the public or efficient for the companies?</p>
<h2>Efficiency for whom?</h2>
<p>Customer perceptions of efficiency should be important for companies. As consumers, we both consciously and unconsciously make efficiency judgements. For example, when our trains are cancelled for the umpteenth time, pictures of crowded platforms on social media begin to appear with captions like, “Why can’t the trains just run on time?” or “How do the trains run on time in Spain and not here?!”</p>
<p><div data-react-class="Tweet" data-react-props="{"tweetId":"573143442047434752"}"></div></p>
<p>What these posts communicate is a simple frustration: that a public service intended to efficiently get people to work on time and deliver them home at a reasonable hour can no longer be taken for granted.</p>
<p>I’m reminded of a story I read about a commuter who reported that she “<a href="https://www.thecomet.net/news/hertfordshire-commuter-talks-mental-health-1-5998634">was stuck in a never-ending cycle of despair</a>”, inducing anxiety, which eventually became a part of her every day commute. The consumer advocacy magazine Which? <a href="https://www.which.co.uk/news/2019/01/rail-firms-ranked-which-train-companies-failed-to-impress-stressed-commuters/">reported similar frustrations</a>, including being disciplined at work and parents unable to get home for bedtimes.</p>
<figure class="align-left ">
<img alt="" src="https://images.theconversation.com/files/289069/original/file-20190822-170906-1v7l2gr.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/289069/original/file-20190822-170906-1v7l2gr.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=803&fit=crop&dpr=1 600w, https://images.theconversation.com/files/289069/original/file-20190822-170906-1v7l2gr.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=803&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/289069/original/file-20190822-170906-1v7l2gr.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=803&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/289069/original/file-20190822-170906-1v7l2gr.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1009&fit=crop&dpr=1 754w, https://images.theconversation.com/files/289069/original/file-20190822-170906-1v7l2gr.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1009&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/289069/original/file-20190822-170906-1v7l2gr.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1009&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">The daily grind.</span>
<span class="attribution"><span class="source">Jo Adetunji</span></span>
</figcaption>
</figure>
<p>Unsurprisingly, neglecting the needs of commuters led the Office of Rail and Road to state that there is a lack of “<a href="https://www.ft.com/content/5b0dc4a0-89aa-11e8-affd-da9960227309">responsibility and accountability</a>” for train operators. Such experiences contributed to Which? magazine’s review of the train services <a href="https://www.which.co.uk/reviews/trains/article/best-and-worst-uk-train-companies/best-and-worst-uk-train-companies">which ranked</a> Northern, Southern, Thameslink and Southeastern at the bottom of their commuter rating table. All were “rated poorly for punctuality, reliability and value for money in particular”.</p>
<p>Much of the ill will towards train companies has accumulated over time, but one event that is still prominent in the minds of customers is the Govia Thameslink Railways (GTR) timetable change fiasco.</p>
<p>Months of cancellations and delays resulted in <a href="https://www.bbc.co.uk/news/business-47378448">a government commissioned review</a> of the rail industry, a government order that GTR <a href="https://www.go-ahead.com/media/press-releases/gtr-reaches-contractual-agreement-dft-including-gbp15m-customer-benefits-package">invest £15m in improvements for passengers</a>, and a £5m fine. GTR has nevertheless retained its control over the railways it operates with commuters paying more to use its trains. Some have argued that the consequences for rail providers have been marginal, with the shadow transport secretary, Andy McDonald, <a href="https://www.theguardian.com/business/2019/mar/14/govia-thameslink-faces-5m-fine-over-2018-rail-timetable-chaos">describing GTR’s £5m fine as a “slap on the wrist”</a>.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/chaos-on-southern-trains-a-symptom-of-britains-rotten-privatised-railway-industry-62117">Chaos on Southern trains a symptom of Britain's rotten privatised railway industry</a>
</strong>
</em>
</p>
<hr>
<p>Against the backdrop of generous shareholder payouts, such fines can be interpreted as the price of doing business. But such corporate behaviour is not without risks. When train companies enrich their shareholders at the expense of their customers, their legitimacy is at stake. And when basic services necessary for everyday life can no longer be counted on, companies tasked by government to provide these services should worry if they want to succeed in the long term.</p>
<p>It’s no wonder that the Labour Party’s official position is to renationalise train services. What is clear is that the train companies are efficient money makers when they raise fares, but they have yet to provide the right kind of efficiency for the people who really matter.</p><img src="https://counter.theconversation.com/content/122165/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Daniel Fisher does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Late trains, anxiety, stressful commutes, disruption to family life – just some of the woes of train customers.Daniel Fisher, PhD Research Candidate, Cass Business School, City, University of LondonLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1192812019-07-24T11:38:57Z2019-07-24T11:38:57ZInvestors, consumers and workers are changing capitalism for the better by demanding companies behave more responsibly<p>Capitalism’s days may be numbered – at least judging by recent polls. </p>
<p>A <a href="https://www.washingtonpost.com/news/wonk/wp/2016/04/26/a-majority-of-millennials-now-reject-capitalism-poll-shows/">majority of millennials reject</a> the economic system, while 55% of women aged 18 to 54 <a href="https://www.axios.com/axios-hbo-poll-55-percent-women-prefer-socialism-f70bf87e-34fd-4b63-b1f6-2f2b6900f634.html">say they prefer socialism</a>. More Democrats now <a href="https://www.pewresearch.org/fact-tank/2019/06/25/stark-partisan-divisions-in-americans-views-of-socialism-capitalism/">have a positive view of socialism</a> than capitalism.</p>
<p>One problem interpreting numbers like these is that there are many definitions of capitalism and socialism. More to the point, people seem to be thinking of a specific form of capitalism that deems the sole purpose of companies is to increase stock prices and enrich investors. Known as shareholder capitalism, it’s been the <a href="https://prospect.org/article/when-shareholder-capitalism-came-town">guiding light of American business</a> for more than four decades. </p>
<p>As a <a href="https://www.umass.edu/spp/people/faculty/elizabeth-schmidt">scholar of socially responsible companies</a>, however, I cannot help but notice a <a href="https://ssrn.com/abstract=3406867">shift in corporate behavior in recent years</a>. A new kind of capitalism seems to be emerging, one in which companies value communities, the environment and workers just as much as profits.</p>
<p>The latest evidence: The leaders at some of the world’s largest companies said <a href="https://www.bloomberg.com/news/articles/2019-08-19/jpmorgan-s-dimon-among-ceos-rejecting-shareholder-centric-model?srnd=premium">they are ditching</a> shareholder-first capitalism and instead embracing a corporate purpose that seeks to serve all constituents. </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/285412/original/file-20190723-110166-1u9gidg.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/285412/original/file-20190723-110166-1u9gidg.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/285412/original/file-20190723-110166-1u9gidg.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/285412/original/file-20190723-110166-1u9gidg.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/285412/original/file-20190723-110166-1u9gidg.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/285412/original/file-20190723-110166-1u9gidg.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/285412/original/file-20190723-110166-1u9gidg.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Democrats increasingly view socialism in a more positive light.</span>
<span class="attribution"><a class="source" href="http://www.apimages.com/metadata/Index/Election-2020-Student-Debt/d9aebde776694f1b993a364e5383dc0e/2/0">AP Photo/J. Scott Applewhite</a></span>
</figcaption>
</figure>
<h2>The purpose of business</h2>
<p>Nearly 50 years ago, the economist <a href="https://graphics8.nytimes.com/packages/pdf/business/miltonfriedman1970.pdf">Milton Friedman</a> proclaimed that the sole purpose of a business is “to use its resources and engage in activities designed to increase its profits.”</p>
<p>Within a decade, Friedman’s claim <a href="http://rooseveltinstitute.org/wp-content/uploads/2018/06/The-Shareholder-Myth.pdf">became accepted wisdom</a> in corporate boardrooms. The era of “shareholder primacy capitalism” had begun.</p>
<p>One result has been <a href="https://forecast-chart.com/historical-sp-500.html">remarkable growth in the stock market</a>. But critics argue companies and the “shareholder value theory” <a href="https://hbr.org/2017/05/managing-for-the-long-term#the-error-at-the-heart-of-corporate-leadership">are also complicit</a> in exacerbating many <a href="https://www.washingtonpost.com/us-policy/2019/02/25/race-shareholder-profits-has-left-workers-dust-according-new-research/">economic</a>, <a href="https://www.theatlantic.com/business/archive/2012/04/how-investing-turns-nice-people-into-psychopaths/255426/">social</a> and <a href="https://www.theguardian.com/sustainable-business/2017/jul/10/100-fossil-fuel-companies-investors-responsible-71-global-emissions-cdp-study-climate-change">environmental</a> problems, such as <a href="https://www.washingtonpost.com/posteverything/wp/2017/03/02/perspective-on-the-stock-market-rally-80-of-stock-value-held-by-top-10/">income inequality</a> and <a href="https://www.theguardian.com/sustainable-business/2017/jul/10/100-fossil-fuel-companies-investors-responsible-71-global-emissions-cdp-study-climate-change">climate change</a>.</p>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/285409/original/file-20190723-110187-1ag0vc1.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/285409/original/file-20190723-110187-1ag0vc1.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/285409/original/file-20190723-110187-1ag0vc1.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=804&fit=crop&dpr=1 600w, https://images.theconversation.com/files/285409/original/file-20190723-110187-1ag0vc1.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=804&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/285409/original/file-20190723-110187-1ag0vc1.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=804&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/285409/original/file-20190723-110187-1ag0vc1.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1010&fit=crop&dpr=1 754w, https://images.theconversation.com/files/285409/original/file-20190723-110187-1ag0vc1.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1010&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/285409/original/file-20190723-110187-1ag0vc1.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1010&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Milton Friedman won prizes for his research on consumption analysis and monetary history.</span>
<span class="attribution"><a class="source" href="https://en.wikipedia.org/wiki/Milton_Friedman#/media/File:Milton_Friedman_1976.jpg">Wikimedia Commons</a>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span>
</figcaption>
</figure>
<p>They also note that putting profits first actually <a href="https://scholarship.law.upenn.edu/cgi/viewcontent.cgi?referer=http%253A%252F%252Fwww.bing.com%252Fsearch%253Fq%253Dlynn%2520stout%2520toxic&amp=&go=Search&amp=&qs=n&amp=&form=QBRE&amp=&sp=-1&amp=&pq=lynn+stout+toxic&amp=&sc=1-16&amp=&sk=&amp=&cvid=79A92B3E536049C493D0683540E953E5&amp=&httpsredir=1&amp=&article=1031&amp=&context=penn_law_review&amp=&sei-redir=1#search=%22lynn%20stout%20toxic%22">harms shareholders</a> in the long run by encouraging managers to take actions that may eventually reduce earnings.</p>
<h2>The rebellion</h2>
<p>Many consumers, workers and socially conscious investors have also noticed these shortcomings and increased pressure on corporations to change.</p>
<p>For starters, more Americans no longer find it acceptable for companies to exclusively seek profits. A <a href="http://www.conecomm.com/research-blog/2017-csr-study">2017 poll</a> found that 78% of U.S. consumers want businesses to pursue social justice issues, while 76% said they would refuse to buy a product if the business supported an issue contrary to their beliefs. Almost half the respondents said they had already boycotted a product for that reason.</p>
<p>Workers increasingly expect their employers to share their values. A <a href="https://sustainablebrands.com/read/organizational-change/3-4-of-millennials-would-take-a-pay-cut-to-work-for-a-socially-responsible-company">2016 study</a> found that most Americans – particularly millennials – consider a company’s social and environmental commitments when deciding where to work. Most would also be willing to take a pay cut in order to work for a “responsible” company – and are demanding their current employers behave that way.</p>
<p>For example, workers at online furniture company Wayfair <a href="https://www.forbes.com/sites/rakeenmabud/2019/07/12/two-lessons-from-the-wayfair-walkout/#71c1ddc33a88">recently walked out</a> when they learned it had sent beds to detention centers at the U.S.-Mexico border. More than 8,100 Amazon employees signed an open letter supporting a <a href="https://medium.com/@amazonemployeesclimatejustice/public-letter-to-jeff-bezos-and-the-amazon-board-of-directors-82a8405f5e38">shareholder resolution</a> urging the retailer to do more to address climate change. </p>
<p>Finally, investors are <a href="https://hbr.org/2019/05/the-investor-revolution">becoming more socially aware</a> and putting more of their money behind businesses that behave in sustainable and responsive ways. At the beginning of 2018, portfolio managers <a href="https://www.ussif.org/files/Trends/Trends%202018%20executive%20summary%20FINAL.pdf">held US$11.6 trillion</a> in U.S. assets using environmental, social and governance criteria to guide their investments, up from <a href="https://www.ussif.org/files/Publications/10_Trends_Exec_Summary.pdf">$2.5 trillion in 2010</a>. </p>
<p>Laurence Fink, founder and CEO of BlackRock, the <a href="https://www.bloomberg.com/news/articles/2019-06-13/blackrock-looks-to-five-megatrends-to-expand-etf-business">world’s largest asset manager</a>, <a href="https://www.blackrock.com/corporate/investor-relations/2018-larry-fink-ceo-letter">summed up the growing sentiment</a> when he said, “To prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society.”</p>
<h2>The corporate response</h2>
<p>Presumably realizing how important these constituencies are to their bottom lines, businesses are paying attention. </p>
<p>The Business Roundtable’s <a href="https://www.businessroundtable.org/business-roundtable-redefines-the-purpose-of-a-corporation-to-promote-an-economy-that-serves-all-americans">decision</a> to “redefine the purpose of a corporation” to serve all Americans may be the most recent sign of this, but it’s hardly isolated. </p>
<p>Dick’s Sporting Goods, Kroger, Walmart and L.L. Bean, for example, responded to growing concerns over mass shootings by <a href="https://www.triplepundit.com/story/2019/parkland-year-2-gun-safety-and-business-response-gun-violence/82451/">restricting the sale of guns</a>. Proctor and Gamble, a major sponsor for U.S. Soccer, expressed support for the quest of the <a href="https://www.tmz.com/2019/07/14/procter-and-gamble-donate-us-womens-national-soccer-team-equal-pay/">women’s team</a> for equal pay and donated $500,000 to help narrow the pay gap with men. </p>
<p>Airlines including American, United and Frontier <a href="https://www.nytimes.com/2018/06/20/us/airlines-transport-immigrant-children.html">refused to knowingly fly children</a> separated from their parents at the border following outrage over the Trump administration’s policy. And even though Amazon shareholders rejected the worker-supported shareholder resolution described above, <a href="https://www.ecowatch.com/amazon-climate-change-resolution-2637862790.html?rebelltitem=3#rebelltitem3">Amazon set stronger goals</a> for reducing its carbon footprint after the resolution was introduced.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/285407/original/file-20190723-110170-ddfuyq.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/285407/original/file-20190723-110170-ddfuyq.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=362&fit=crop&dpr=1 600w, https://images.theconversation.com/files/285407/original/file-20190723-110170-ddfuyq.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=362&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/285407/original/file-20190723-110170-ddfuyq.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=362&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/285407/original/file-20190723-110170-ddfuyq.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=455&fit=crop&dpr=1 754w, https://images.theconversation.com/files/285407/original/file-20190723-110170-ddfuyq.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=455&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/285407/original/file-20190723-110170-ddfuyq.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=455&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Unilever found that its ‘sustainable living’ brands such as Ben & Jerry’s are growing faster than its other products.</span>
<span class="attribution"><a class="source" href="http://www.apimages.com/metadata/Index/Milk-With-Dignity/4b5b78c94d6a4ab79cc3ab3068e82742/47/0">AP Photo/Wilson Ring</a></span>
</figcaption>
</figure>
<p>These actions have sometimes hurt the bottom line. The decision to restrict gun sales cost Dick’s Sporting Goods <a href="https://www.bloomberg.com/news/articles/2019-03-29/dick-s-dks-ceo-ed-stack-says-gun-shift-cut-sales-by-150m">$150 million</a>. Delta <a href="https://www.marketwatch.com/story/georgia-lawmakers-kill-jet-fuel-tax-break-after-delta-drops-nra-discount-2018-03-01">lost a $50 million tax break</a> in Georgia after severing ties with the NRA. </p>
<p>But these and <a href="https://www.dailysignal.com/2018/08/30/how-louisiana-stood-up-to-the-anti-gun-corporate-elite/">other companies</a> didn’t back down. The CEO of Dick’s Sporting Goods <a href="https://tennesseestar.com/2019/03/30/dicks-sporting-goods-lost-millions-over-anti-gun-policies/">explained</a> that when something is “to the detriment of the public, you have to stand up.”</p>
<p>Companies are also setting tougher social and environmental goals for themselves and then reporting their successes and failures. Tesla, Unilever, Nike and Whole Foods are among nine companies with annual revenues of at least $1 billion that “<a href="https://www.theguardian.com/sustainable-business/2016/jan/02/billion-dollar-companies-sustainability-green-giants-tesla-chipotle-ikea-nike-toyota-whole-foods">have sustainability or social good at their core</a>.” </p>
<p>In 2018, <a href="https://www.ga-institute.com/press-releases/article/flash-report-86-of-sp-500-indexR-companies-publish-sustainability-responsibility-reports-in-20.html">86% of Standard & Poor’s 500 companies</a> reported on their environmental, social and governance performance and achievements, up from less than 20% in 2011.</p>
<p>And companies have found that putting more emphasis on social justice can pay off. Unilever, for example, said in 2017 that its “<a href="https://www.marketingweek.com/unilever-sustainable-brands-growth/">sustainable living” brands</a>, such as Ben & Jerry’s, Dove and Hellmann’s, are growing much faster than its other brands. Companies with the best scores on their sustainability reports <a href="https://www.forbes.com/sites/terrywaghorn/2017/12/04/sustainable-reporting-lessons-from-the-fortune-500/#7a4d9f756564">generally perform better financially</a> than those with lower scores. </p>
<h2>The end of shareholder capitalism?</h2>
<p>Skeptics can be forgiven for believing these corporate “changes” are not real or are simply public relations stunts designed to appeal to a new generation.</p>
<p>Businesses can, of course, say they will be responsible citizens while doing the opposite. Few sustainability reports in the United States are <a href="https://www.cpajournal.com/2017/07/26/current-state-assurance-sustainability-reports/">externally audited</a>, and the companies are asking us to take them at their word.</p>
<p>Even if they are well-meaning, intentions are not enough to create systemic change. A 2017 study showed that many companies with climate change goals actually <a href="https://hbr.org/2017/11/how-bold-corporate-climate-change-goals-deteriorate-over-time">scaled back their ambitions over time</a> as the reality clashed with their lofty goals.</p>
<p>But businesses can’t afford to ignore their customers’ wishes. Nor can they ignore their workers in a tight labor market. And if they disregard socially responsible investors, they risk both <a href="https://hbr.org/2019/05/the-investor-revolution">losing out on important investments</a> and facing <a href="https://www.porticobenefits.org/Overview/ReponsibleInvesting/InvestingForSocialImpact/ClimateChangeResolutions">shareholder resolutions</a> that force change.</p>
<p>The shareholder value doctrine is not dead, but we are beginning to see major cracks in its armor. And as long as investors, customers and employees continue to push for more responsible behavior, you should expect to see those cracks grow. </p>
<p><em>This is an updated version of an article originally published on July 24, 2019.</em></p>
<p>[ <em>Like what you’ve read? Want more?</em> <a href="https://theconversation.com/us/newsletters?utm_source=TCUS&utm_medium=inline-link&utm_campaign=newsletter-text&utm_content=likethis">Sign up for The Conversation’s daily newsletter</a>. ]</p><img src="https://counter.theconversation.com/content/119281/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Elizabeth Schmidt does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>A new kind of capitalism is emerging in which companies value communities, the environment and workers just as much as profits. Even the Business Roundtable agrees.Elizabeth Schmidt, Professor of Practice, Nonprofit Organizations; Social & Environmental Enterprises, UMass AmherstLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1103242019-01-25T12:45:45Z2019-01-25T12:45:45ZSlack: how the messaging app could change after an IPO<figure><img src="https://images.theconversation.com/files/255147/original/file-20190123-135163-2hxxfg.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Slack is especially popular in the tech world.</span> <span class="attribution"><a class="source" href="https://unsplash.com/photos/p-xSl33Wxyc">Farzad Nazifi via Unsplash</a>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span></figcaption></figure><p>Slack, the collaboration platform favoured by designers, developers and an increasing number of companies, is <a href="https://www.wsj.com/articles/slack-planning-to-pursue-direct-listing-11547202723?mod=hp_lead_pos6">rumoured</a> to be planning an IPO. In similar fashion to <a href="https://theconversation.com/spotify-goes-for-gutsy-direct-listing-on-stock-exchange-here-are-the-winners-and-losers-94209">Spotify</a>, it is reportedly considering going direct to market instead of using one of the household banks as an underwriter.</p>
<p>One suggested reason is that Slack’s investors <a href="https://www.reuters.com/article/us-slack-ipo/slack-seriously-considering-direct-market-listing-source-idUSKCN1P514A">can get out fast</a>. A direct listing is a way for the company to grow and attract funding in the most direct and least expensive way. </p>
<p>Slack fans have reason to be concerned. We are not talking buyout and takeover (yet). But we are talking a move that may bring shareholder pressure and influence, and with it the quest for short-term returns at the expense of longer-term creativity and innovation.</p>
<p>The current figures show how quickly Slack has grown. <a href="https://www.nasdaq.com/article/podcast-8-million-slack-users-and-two-other-numbers-you-need-to-know-cm1076356">One estimate</a> by financial news watchers Barron’s is “US$300m of annual recurring revenue which has more than doubled in the past two years”. In 2018 it was estimated to have reached <a href="https://techcrunch.com/2018/05/08/slack-hits-8-million-daily-active-users-with-3-million-paid-users/">8m daily active users with 3m paid users</a>. </p>
<p>For many individuals, groups, communities and entire large corporations Slack is becoming a core process for team meeting, product and process development, core decision making, information sharing and is even replacing email as a default mode of communication. A lot of people love the platform because of its independent roots, its independent spirit of innovation, its culture of plug-in tools and collaborative values. The company will have to be careful not to lose this appeal as it grows and gains more outside influence.</p>
<h2>Success is not a given</h2>
<p>With growth comes opportunity and the suggestion that Slack will publicly float this year isn’t surprising. The question that arises is, as with full acquisitions, will the landscape of shareholding quickly change and pressure the company to go for quick income, and drive risky and exciting innovation off the radar?</p>
<p>Success is not a given for any growing company. IPOs and buyouts can bring new opportunities, open up markets and enable investment in new product innovation. But the innovative, often boundary-pushing spark of smaller disruptive startups can be snuffed out as they become more established and try to appeal to a mass market. </p>
<p>There are, of course, risks from bigger competitors with established reach into larger corporations such as Microsoft’s Teams program, which was built to directly compete with Slack. Growth that comes from a public listing may be inevitable, but it comes with risks, and there may be a price to pay, depending on who invests and why. Private investment does have the advantage of being able to seek backers that align more with a company’s ethos and values.</p>
<p>Many innovative digital startups have been acquired by larger corporations who gobble up their originality and innovative capability. This is often to the horror of grassroots, early-adopter customers who feel these digital pioneers have sold out to mediocrity and risk-averse dinosaurs. And <a href="https://www.wired.com/story/facebooks-aggressive-moves-on-startups-threaten-innovation/">the evidence</a> is certainly growing that, as shareholder influence from outside becomes more prominent, innovation can get sacrificed in the pursuit of corporate mediocrity and shorter-term gains.</p>
<p>This is a classic story of how digital startups can get eaten up – as <a href="https://www.marketwatch.com/story/slack-plans-to-public-via-rare-direct-listing-in-coming-months--wsj-2019-01-11">happened with the social network Yammer</a>. Another oft-quoted example of how innovative initial products can become scuppered is <a href="https://www.bloomberg.com/news/articles/2018-05-10/don-t-skype-me-how-microsoft-turned-consumers-against-a-beloved-brand">Skype</a>, which was bought by Microsoft in 2011. From independent-spirited, game-changing startup, Skype is now a product set within the rules and desires of a big corporation and has lost users as a result.</p>
<h2>Value extractors vs creators</h2>
<p>There are no definitive studies of how public listings of digital firms either stimulates or stifles innovation over time, though there is certainly anecdotal evidence. The view that “prevailing stock market ideology enriches value extractors, not value creators” is <a href="https://www.huffingtonpost.com/entry/how-shareholder-value-is-killing-innovation_us_5980d9cee4b0b35d274c5e36">increasingly stated</a>. It can indeed suppress and even kill off innovation. </p>
<p>For platforms such as Slack, this relates to being proactive and responsive in relation to its current and potential user base, taking risks, being bold, creative and boundary breaking. Will a public listing attract those looking for more guaranteed rewards? Much will depend on the level and type of new shareholder influence and interference. </p>
<p>What we do know from the research is that when shareholders intervene more, this tends <a href="https://editorialexpress.com/cgi-bin/conference/download.cgi?db_name=AFA2016&paper_id=1426">to block innovation</a> and ultimately impacts the bottom line. For Slack, this could look like underfunding for innovation and limiting risk taking and creativity. Or if higher revenues are sought through selling user data or partnerships with corporate interests, for example, this could hurt the brand’s popularity with users. </p>
<p>This is a risk for those who have committed to Slack in order to <a href="https://www.business.com/articles/how-slack-is-changing-workplace-communication/">change their workplace culture towards something more collaborative</a> and smarter working habits. Slack reaches deeply into that culture and that commitment could prove to be damaging if the product is diluted or changed in ways that stifle that culture change. </p>
<p>There is no evidence that this will happen with Slack, but it is worth posing the question: will Slack lose its grip on its founding values and innovative roots as new shareholder interests start to take hold? Those who have embedded Slack into their company cultures might just need a Plan B.</p><img src="https://counter.theconversation.com/content/110324/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Paul Levy owns shares in CATS3000 Limited</span></em></p>Shareholder pressure and influence brings with it the quest for short-term returns at the expense of longer-term creativity and innovation.Paul Levy, Senior Researcher in Innovation Management, University of BrightonLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1038022018-09-24T16:08:59Z2018-09-24T16:08:59ZLabour and John McDonnell are right to give workers a stake, says company law professor<p>The shadow chancellor’s <a href="https://www.bbc.co.uk/news/uk-politics-45621361">conference speech</a> on September 24 set out the Labour Party’s radical new economic policies to tackle inequality and increase industrial democracy. John McDonnell paid tribute to the “brilliant” work of the Institute for Public Policy Research (IPPR) think tank and its recent report <a href="https://www.ippr.org/files/2018-08/1535639099_prosperity-and-justice-ippr-2018.pdf">Prosperity and Justice</a>, upon which much of Labour’s polices are based. His speech included striking proposals on employee ownership and employee representation on the board.</p>
<p>Under the proposals, all UK listed companies with more than 250 staff would be legally required to transfer 1% of their ownership into an “inclusive ownership fund” of collectively held shares. Employees would have the same voting rights as shareholders but, unlike shareholders, their dividends would be capped at £500 a year. Any surplus – estimated at £2.1 billion – would be transferred back to social services as a “social dividend”. </p>
<p>Companies, McDonnell rightly stated, benefit from the vast investments made by society, so they should contribute to its upkeep. The inclusive ownership fund would be locked into the company, non-transferable and administered by a board of employee trustees. </p>
<p>In respect of corporate governance, all companies with over 250 employees would be required to have one third of its board peopled by employee representatives.</p>
<p>For the many corporate law and governance scholars who have argued for similar changes, there is much to be celebrated in these bold proposals. But, as they stand, they are not without issues that need teasing out. Here are a few.</p>
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<h2>Unclear effects</h2>
<p>It is not clear how employee share ownership will reduce the social, economic and environmental problems caused by the way that companies are currently run for shareholders. This has long been an issue highlighted <a href="https://www.cambridge.org/gb/academic/subjects/politics-international-relations/political-economy/rethinking-society-21st-century-report-international-panel-social-progress?format=WX&isbn=9781108399579">by corporate law scholars</a>.</p>
<p>The IPPR report itself argues that the shareholder value focus of UK companies prioritises short-term returns over long-term investment, in which dividends trump investment in production. It notes that 55% of cash flow is devoted to dividends today, compared with 39% in 1990. And this is regardless of actual profits, which have been much lower since the 2007-08 financial crisis.</p>
<p>Indeed, the short-term goals of shareholders are further amplified today because the majority of FTSE shares are owned by foreign investment funds whose management are rewarded for short-term returns. Giving employees the same shareholder voting rights as shareholders would only act as a counter to these powerful interests if the numbers were comparable – which seems unlikely.</p>
<h2>Failure to protect employees</h2>
<p>Both McDonnell and the IPPR say worker ownership and control will enhance company efficiency, pointing to the success of European economies. McDonnell points out that employee ownership is four to five times higher in Germany and encourages productivity and long-term thinking. Similarly, the IPPR report states: </p>
<blockquote>
<p>Countries which adopt stakeholder models of corporate governance with formal means of employee representation have stronger R&D investment performance, higher productivity and lower inequality than shareholder centric models.</p>
</blockquote>
<p>But these stakeholder systems have consistently failed to protect employees. The legally mandated representation of employees on the supervisory boards of large companies (but not the management board) current in Germany has not protected employees from the huge inroads into their rights as workers in such legislation as the <a href="https://www.theguardian.com/commentisfree/2013/jan/01/germany-hartz-reforms-inequality">Hartz reforms</a>.</p>
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<img alt="" src="https://images.theconversation.com/files/237781/original/file-20180924-85785-fbq42j.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/237781/original/file-20180924-85785-fbq42j.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=437&fit=crop&dpr=1 600w, https://images.theconversation.com/files/237781/original/file-20180924-85785-fbq42j.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=437&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/237781/original/file-20180924-85785-fbq42j.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=437&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/237781/original/file-20180924-85785-fbq42j.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=549&fit=crop&dpr=1 754w, https://images.theconversation.com/files/237781/original/file-20180924-85785-fbq42j.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=549&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/237781/original/file-20180924-85785-fbq42j.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=549&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Board representation might not be enough to protect worker rights.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/business-people-meeting-discussion-corporate-team-335173421">Rawpixel/Shutterstock</a></span>
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</figure>
<p>Supervisory boards are designed to protect the company, and its profitability, rather than its employees. This is one reason for the longstanding rejection of this model by UK trade unions <a href="https://www.jstor.org/stable/1409733?seq=6#metadata_info_tab_contents">in the past</a>. As UK companies are currently structured to have a single board of directors (unitary boards), McDonnell’s proposals would increase the areas in which employee representatives could participate. </p>
<p>But, to be effective, Labour’s proposal would need to be clear about employee roles on boards – is it for the protection of shareholder value (in which employees would participate) or the protection of jobs and investment? And, if it’s the latter, how they would realistically achieve this.</p>
<h2>Problematic details</h2>
<p>It is also worth noting that the EU has dramatically shifted away from the idea of stakeholder governance to shareholder empowerment. So, when espousing the benefits of the EU’s approach to corporate governance (as both McDonnell and the IPPR do), the UK should proceed with caution.</p>
<p>Over the last ten years, the EU has launched and spread “stewardship codes”, which encourage more shareholder involvement in governance. Plus, the EU’s <a href="https://publications.europa.eu/en/publication-detail/-/publication/9b871b38-3d20-11e7-a08e-01aa75ed71a1/language-en">Shareholder Rights Directive 2017</a>, which gives more powers to shareholders to dictate company policy, was adopted in spite of the <a href="http://ec.europa.eu/internal_market/company/docs/modern/com2010_284_en.pdf">EU’s own</a> <a href="http://ec.europa.eu/internal_market/company/docs/modern/com2011-164_en.pdf">reports</a> showing that shareholder primacy drove the destructive short-termism and risk taking that caused the global financial crisis. </p>
<p>Finally, the claim that employee engagement enhances efficiency is highly problematic as it collates what is good for employees with what is good for shareholders. Yet, what has produced good returns for shareholders is a low paid, flexible domestic workforce and offshore workers that are highly exploited, as well as huge corporate debt to fund share buy backs <a href="https://www.bis.org/review/r150811a.pdf">and speculative financial investments</a>. </p>
<p>So, there is a lot of detail to iron out. But what remains heartening in McDonnell’s speech was Labour’s mission to treat workers – and to make companies treat workers – not as costs or welfare burdens, but as the creators of value who are entitled to the “full fruits of their industry”. Or, at least, to some of it.</p><img src="https://counter.theconversation.com/content/103802/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Lorraine Talbot is affiliated with the International Panel for Social Progress.</span></em></p>All companies with over 250 employees would be required to have one third of its board comprised of employee representatives.Lorraine Talbot, Professor of Company Law in Context, University of BirminghamLicensed as Creative Commons – attribution, no derivatives.