When Commonwealth Bank boss Ian Narev fronted investors and the media last month to announce a $4.9 billion profit, the relief was palpable.
The result, which came in ahead of analyst expectations, pleased shareholders who received a surprise hike to the dividend. But the profit wasn’t large enough to stir the public outrage which last year led to bank bosses being hauled before a parliamentary inquiry and sparked calls for a royal commission.
“Boring in banking is good,” one senior CBA executive told BOSS after the result.
The idea the bank might not have delivered the largest profit possible may be sacriligious to shareholders but it reflects a new paradigm.
The rising tension between making shareholders happy and keeping angry stakeholders at bay has inspired CBA director Harrison Young to publish a passionate 5500-word essay which has reignited the explosive debate about whether companies exist to do more than just serve shareholders.
“I personally believe that companies have obligations to stakeholders other than shareholders. I believe banks have obligations that go beyond those of ordinary companies,” he wrote.
Who to please
Under fire from politicians, customers, employees, unions, environmental and other special interest groups, companies are being pulled in a multitude of directions. The problem is figuring out who to please.
“[Saying] ‘We serve shareholders’ is akin to [saying], ‘I was just following orders’: a dumbing down of the job and an abdication of responsibility,” wrote Young.
“Banks are servants of the whole community. Honouring the legitimate claims of all stakeholders is common sense. It is what boards do. It is what they ought to do.
“A bank chief executive tries to deliver for shareholders but encounters a stream of distractions. Eventually he comes to understand that coping with distractions is part of his job. He is answerable to everyone. The outcome he must deliver is balance.”
Young’s lofty ideals are easier said than done. The CBA board was slapped down by a remarkable 51 per cent of shareholders at the AGM in 2016, after it introduced a new “people and community” measure into its executive bonus scheme to tackle the issues that led to the financial planning and CommInsure scandals.
Shareholders weren’t convinced.
Shareholders sceptical
Some investors claim the bank simply failed to properly communicate its strategy. Others believe the bank, which like other companies wanted to adopt “soft” non-financial targets for executives, was moving too far from hard financial metrics.
Telstra has introduced bonuses based on the company’s net promoter score and a new service experience index, and AGL Energy is among other companies moving to culture and diversity bonuses; it has introduced team, individual and strategic effectiveness targets.
“Far too often, feel-good solutions seem to be being made just to satisfy the outspoken,” veteran investor and fund manager Peter Morgan warns.
Shareholders are also punishing companies that move too far away from the core mission of delivering shareholder returns in the market. Recent analysis of the latest reporting season by Richard Hitchens, a quantitative analyst at Credit Suisse, found a correlation between rising dividend payments and subsequent investor demand – in other words, companies not prepared to reward investors with higher dividends are being sold off.
Dean Paatsch, director of governance firm Ownership Matters, says companies are fooling themselves if they think they can please everyone without regard to their traditional shareholder powerbase.
“That’s what the job is: balancing competing interests while delivering value to customers. It’s so easy to be distracted by the noise or captured by the constituencies who think that solving their preferred solution comes without an impact on another competing interest,” Paatsch says.
Power struggle
Jon Williams, PwC global leader people, says the difficult balancing act will only become more tricky as employees change the way they work, customers grow in voice and public trust remains at record lows.
“Customers tweet their complaints to the whole world and groups can raise petitions of complaint or mobilise to boycott products or organisations in hours or days, and services and prices can be compared using aggregator websites almost instantly,” he says.
In addition to customers mobilising on social media, there are pressures from employees wanting higher wages and more flexible working, major super funds pushing for gender diversity and environmental groups. The Future Business Council and Centre for Policy Development recently commissioned legal advice from barrister Noel Hutley SC who argues climate risk is foreseeable and directors who fail to properly consider it could be found liable.
“Some climate risks are distinctly financial in nature,” Australian Prudential Regulation Authority executive board member Geoff Summerhayes also warned last month.
“Many of these risks are foreseeable, material and actionable now.”
At the same time, ethical and activist investors are gaining prominence and demanding higher quality company supply chains and a positive social agenda. There is already $77 billion under management for impact investing.
Dividend litmus test
Simon Longstaff, executive director at the Ethics Centre, argues people are starting to realise that here, there is no duty to increase shareholder wealth. While UK law adopts a shareholder primacy model, which makes it clear directors owe a duty to promote the success of the company for the benefit of shareholders, Australian law permits sufficient freedom to consider other interests.
“The true nature of the relationship becomes exceedingly clear to directors when deciding whether or not to pay a dividend,” Longstaff says.
“To the extent that there is an obligation to shareholders, it is to shareholders in perpetuity. Shareholders might be screaming from the roof that they want the dividend to be maintained or increased. However, directors know their duty is to the company and if that duty is best discharged by retaining profits for reinvestment in the company, then that is what directors must do.”
Nestle chairman and AICD president Elizabeth Proust juggles the competing interests this way: “Listed and private companies are conscious of their responsibility to shareholders. However, they are also cognisant of the need to consider employees, customers, communities and the broader social licence,” Proust says.
At Nestle this includes a newly established Creating Shared Value board, which acknowledges the company’s remit includes shareholders, people and the supply chain. It also takes into account the environmental footprint of factories and suppliers: water and energy use, and occupational health and safety.
Herculean task
PwC’s Williams says to succeed in such a complex environment companies must clearly and publicly communicate their purpose as an organisation, their reason for existing.
“Then their board, their CEO and all their leaders must make decisions that consistently align to that stated purpose,” he says.
“For many organisations, particularly those that have been around for a while, articulating purpose and then living it in every decision and employee and customer interaction can appear a Herculean task.
“In this impossibility lies the temptation to revert back to just doing the right thing by the stakeholder group with the simplest measure of success: shareholders.”
If investors feel frustrated or a little unloved by these new competing priorities, newly appointed CEO of the Australian Shareholders Association Judith Fox says fear not. If a company’s rationale is sound and properly explained, long-term shareholders will back it.
“It is not binary debate and it is certainly not adversarial,” she says.
“If your stakeholders are happy, you will have happy shareholders because it means improved customer service, good decisions for the long-term and improved financial performance.”
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