There is a lot going on in the media industry at present. It is not a surprise that newspapers (the paper kind) are struggling to survive in the age of the internet. It is more of a surprise, therefore, that the richest woman in Australia has decided to invest heavily in one of our largest newspaper companies. Perhaps she thinks the current low share price is a bargain and the company will recover.
However, as David McKnight commented last week, it is most likely that her investment is not aimed primarily at financial return, but at supporting the right-wing politics that will ease the path for her other investments. She has been asked by the Fairfax journalists to deny such suggestions but is yet to respond.
The real question, therefore, is whether an 18.7% shareholding and possibly a board seat or three would be enough to provide Mrs Rinehart with a mouthpiece for her political views?
It is true that the media industry is different from most others, dominated by strong personalities and their power battles. It is also true, as Tony Boyd pointed out in the AFR last week, that Kerry Stokes successfully used similar tactics in 1995 to gain control of the Seven network. However, 17 years later, we have much higher expectations of boards; corporate governance is a term fully understood by most in the business world.
This is partly due to the ASX Corporate Governance Principles, first published in 2003, and also to the many corporate collapses where the board of directors has been seen to be at fault. The boardroom battles of the ‘90s are no longer seen as acceptable. Nor, as Greg Medcraft of ASIC said last week, are attempts to gain control of a company without following the spirit of our takeover laws, which kick in once a shareholder owns 20% of a listed company.
For a start, there is a corporate governance process for selecting and appointing new board members, which investors can expect to be followed. This process involves the board’s nomination committee considering the overall skill set of the board, its likely needs going forward and the directors coming up for retirement. Some nomination committees even have a rolling list of potential candidates and a permanent brief with headhunters. Having the right board composition - both in terms of experience, skills and independence - is seen as vital to good board performance.
Next, the rules of corporate governance make it very clear that there should be a clear separation between the role of the board and the role of management. Mrs Rinehart’s alleged request that she be able to hire and fire editors is something that would normally be reserved for management. Admittedly, this line between board and management has to be flexible and, in times of crisis, the board may be expected to be more hands-on in its decision-making. When Kerry Stokes took over the West Australian in 2007 it led to the board, as a whole, sacking one of the editors - a decision that had widespread support.
Mrs Rinehart, however, appears to be requesting that accepted practice be ignored and her and two associates be leapfrogged onto the board with individual power to influence editorial content. However, unless the Fairfax constitution has some strange quirks, any new board members still have to go through a formal process of election by an ordinary resolution (over 50%) of all shareholders at the AGM. It is possible (although unlikely) that enough shareholders will be opposed to the move that they will vote against.
Let us assume that Mrs Rinehart and two others do gain seats on the board. It is not clear whether Mrs Rinehart, in requesting three board seats, is suggesting the board should be increased in size from 8 to 11 or whether she hopes to replace the directors who will be up for re-election at the next AGM. Either way, three seats would not make up a majority of the board. Apparently Seven’s board in 1995 simply crumbled when Kerry Stokes made his appearance, but it is doubtful that this will be the case with the current Fairfax board, at least not immediately. Roger Corbett, the chairman, has already stood up to Mrs Rinehart when he refused to give her a seat in May, when she had a 12.6% shareholding and there was a genuine gap to be filled. If the other directors are equally strong, Rinehart’s influence in the boardroom is not going to be enough to force any decision her way.
In addition, Mrs Rinehart will be bound by the law of directors’ duties: to act in the interests of the company as a whole. This means that even if financial returns are not her personal priority, she cannot jeopardise other shareholders’ financial interests. As Minister Conroy has commented, Mrs Rinehart must be careful not to “trash the brand” and reputation of the company. She also ought to be careful not to overly destabilise the board and adversely impact its performance. Research shows that boards that are divided according to factional interests do not tend to function well as a team. Board members do not make good decisions in an adversarial atmosphere where members are not treated equally and with respect. It will not be in the interests of the company for the boardroom to become a battlefield.
Moreover, a wider interpretation of the “interests of the company” has become commonplace more recently - that directors ought to take into account not just the financial interests of shareholders but a broader group of stakeholders including employees, customers and the wider public. Unfortunately, however, this modern interpretation of the law (given authority by the Parliamentary Joint Committee and CAMAC inquiries in 2006) does not go so far as to give rights to these wider stakeholders. They cannot force directors to take their interests into account; it is a matter of discretion for the directors.
Nevertheless, it does give the other directors a good reason to vote against any proposals to turn the paper into a personal mouthpiece; this would alienate readers, harm the company’s reputation and would certainly not make it more profitable. It would not be good for any stakeholder - other than one who might own a large number of mines.