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ANDREW CLARKE[*] discusses the Australian orthodoxy of the shareholder model of the company.
The case put forward by Qantas for laying off maintenance workers and closing its 55-year-old Sydney plant fits the classic shareholder model. That model can be described briefly: directors owe their duties of good faith and performance to ‘the company’; the company is a separate legal entity — albeit a strange beast — because without people acting in and through it, it could not function; directors are appointed, employees employed, customers deal, competitors compete and regulators keep a watchful eye. And last, but not at all least, shareholders own the shares issued by the company. All of the above are stakeholders whose efforts and activities make the company function and are vital for its survival. Notwithstanding this, the term ‘the company’ has, in effect, been equated under Australian law with the company’s shareholders. Directors are required to act in the best interests of the company, that is, its shareholders. This is the excuse provided by Qantas in its latest gambit to shed maintenance jobs out of Sydney, shift workers to Queensland and Melbourne and to leave — hovering and unresolved — the issue of wholesale jobs going offshore, probably to China, where labour costs are so much cheaper. The buttressing argument for all this is that in a globally competitive industry competition is fierce and costs need to be viewed through international eyes.
But the problems with this model are numerous. It reduces employees to a simple — but key — component of bottom-line costs: one that can be reduced so as to enhance the corporate balance sheet. Revenue less costs equals profit. In bare terms, reduce the drag factor of costs on this simple equation and the mathematical certainty is that profits are increased and shareholders win through more frequent and bountiful dividend declarations, or increased share prices, or both. Further, this approach conflates low costs with safety issues; of all the major airlines in the world, Qantas has the best safety record. How much change can the maintenance regime withstand — worker numbers reduced, their location shifted, their collective rights ignored — before the culture of safety, backed by committed employees, frays? In addition the approach overlooks that executive directors take a lot of their remuneration in share options that can be exercised by them according to tailor-made sign-on terms. Directors then are wearing two hats: board members and shareholders. A basic conflict of interest? Some would argue so. Of course, it is justified by the underlying narrative that the wealth of all shareholders will be improved as it is the directors who create this cascade of wealth; the interests of director/shareholders and those of other shareholders are therefore neatly aligned.
All this begs the question: has Qantas’ safety record been achieved by happenstance, or by the evolution and maintenance of an elaborate human system, one predicated on a series of vital inputs, including committed employees; excellent overseeing and cross-checking systems; as well as good relations and communication between directors, managers and employees? Perhaps its world’s-best record can be maintained by outsourcing labour to the cheapest international bidder. But does a company — an Australian icon at that — cease to be an Australian company when its employees are based elsewhere in the global grab to reduce costs? This will be an increasingly important issue as the low-cost base for labour and the ability to provide higher level skills becomes ever more far reaching in nations close to home, such as China and India.
Newscorp is a company whose main share base is no longer in Australia, but the United States. Is Newscorp still predominantly an Australian company? On the basis of share registries, no. So can the same issue be viewed via location of employees? If in a few years’ time 90 per cent of Qantas’ maintenance staff is in China and 80 per cent of its cabin crew in London, is it still an Australian company? The shareholder model would argue that it remains Australian if the main share register and, by extension, access to finance remain here. But a more holistic view would argue that the dislocation of its workforce might intolerably stretch the fabric that makes Qantas an Australian company. It is an argument about degrees based on another way of viewing companies. This view is put forward in the model that competes with, and opposes, the shareholder model. Shareholder primacy rules in Australian companies and Australian courts, but there is another way of viewing companies and maybe — just maybe — this other model will become more prominent in the 21st century.
The stakeholder or communitarian model recognises that companies are complex entities operating in complex societies. They are not business forms that can be reduced to simple linear arrangements where their raison d’être is merely to increase shareholder wealth. The communitarian model supports the idea of employees as assets imbued with intellectual abilities, creativity and corporate knowledge: not simply as cost cogs in the (Henry) Ford-ist machine presupposed by shareholder primacy. What’s more, the communitarian model views a happy, motivated workforce as vital to a company’s success, not as an optional extra. High staff retention, effective training and development, transparent promotion and reward systems and great communication up and down the company are all managerial precepts intersecting with this more holistic model. The critics of this approach say that the company gets blurry and sentimental and loses its focus when it stops thinking about shareholders. On the other hand, supporters of the model say it makes a much better attempt to reflect the postmodern complexities of companies operating in tough, changing and increasingly international sectors.
So where to from here for companies, such as Qantas, apparently wedded so strongly to ‘shareholderism’? A look at legal history provides some interesting possibilities. Fascinatingly, Australian courts were not always so enamoured of the shareholder model. Back in 1912, the High Court was a young, idealistic institution and the guardian of a freshly minted constitution. In that year, Griffith CJ stressed the underlying social credentials of companies in Miles v The Sydney Meat-Preserving Company (Limited):
The law does not require … the members of a company … to maintain the character of the company as a soulless and bowelless thing, or to exact the last farthing in its commercial dealings, or forbid them [the members] to carry on its operations in a way they think conducive to the best interests of the community as a whole.[1]
Modern Australian corporate jurisprudence has moved well away from these sentiments and would regard them as faint and fuzzy. In 1997, Justice Alex Chernov opined that there is ‘increasing pressure on boards to ensure that the managers are managing in the interests of shareholders and are steering the companies forward to create wealth in the most effective way.’[2] This latter view is classic ‘shareholderism’. Given the example of Qantas and others, these theoretical sentiments find repeated resonance in practice; for example, Telstra was lauded in 2004 for changing its dividends policy:
Telstra’s army of investors will harvest an extra $4.5 billion from the company over the next three years after the company closed the book on its ill-fated offshore growth strategy.[3]
In 2006, shareholder concerns largely rule Australian companies, and it is to this model that the Qantas board has clearly deferred in reshuffling its maintenance program. However, the Sydney Meat case of 94 years ago shows us how far the pendulum can swing in the course of a century. Who knows? Qantas, circa 2080, may proclaim its social, environmental and Australian cultural values far ahead of simply keeping its shareholders flying at ever-greater altitudes.
[*] ANDREW D CLARKE teaches law at the University
of New England.
© 2006 Andrew D Clarke
[1] [1912] HCA 87; (1912) 16 CLR 50, 66.
[2] Alex Chernov, ‘The Role of Corporate Governance Practices in the Development of Legal Principles Relating to Directors’ in Ian Ramsay (ed), Corporate Governance and the Duties of Company Directors (1997) 34.
[3] Michael Sainsbury, ‘Telstra’s $4.5 billion for the faithful’, The Australian (Sydney), 22 June 2004, 19.
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URL: http://www.austlii.edu.au/au/journals/AltLawJl/2006/25.html