Keynote Address to the the CPA's Congress 2000,
Sheraton Hotel, Perth, 3 May 2000
INTRODUCTION
Over the last decade and half there has been a veritable revolution in the level and breadth of accountability in corporate Australia.
Corporations -- in both the private and public sector -- have become much more responsive to achieving value for shareholder's and more focused on core activities.
Naturally, shareholders have been amongst the major beneficiaries of this process -- a groups which now represents well over 50 per cent of the Australian population.
Society as a whole has also benefited greatly. The enhanced focus on maximising returns for the shareholder lies behind the large improvement in productivity growth achieved over the last decade by the corporate sector and the economy as a whole. It also lies behind corporate Australia's increased level of international competitiveness and profitability. And it has produced a marked improvement in the level and quality of investment -- which augers well for the future.
Importantly, the increased focus on shareholder value has contributed to a fairer, more open society. It has reduced the potential for both management and influential interest groups to capture corporations for their own advantage and at the expense of shareholders.
It has -- in conjunction with reductions in tariffs and through the introduction of competition policy -- broken down the positions of privilege and special advantage.
It has allowed -- indeed encouraged -- a large number of additional people to become part of the shareholder class.
The focussing of corporate activity on maximising shareholder value has not been achieved at the cost of the social or environmental considerations or at the expense of regional development.
The general government sector -- the sector with prime responsible for collective decisions -- has undergone a parallel process of reform aimed at obtaining greater value for money, greater focus on outcomes and reducing the scope for program capture.
Importantly, it has not shirked its social or environmental responsibilities. The amount of funds allocated to these responsibilities has increased substantially over the last two decade in all areas of government. Moreover the pursuit of value for money has allowed these dollars to go further than they would have in the past. In addition, the increased targeting and monitoring of budgetary expenditure has ensured that the dollars went for the intended purposes.
The enhanced focus on the bottomline by government business enterprises (GBE's) has greatly reduced taxpayer subsidies and freed-up funds for social purposes.
Governments have also put in place a panoply of regulations designed to enforce sound environmental, social and ethical practices by corporations. In other words, the rights and responsibilities of corporations and their shareholders with regard to the environment and society have been more thoroughly codified in the laws of the land. As a result, they have been incorporated in the accountability processes.
Corporate Australia has also contributed to the environmental and social well being of the country in the most effective and appropriate way, which is by creating wealth, jobs and opportunities.
It has also, by and large, embraced the community's desire for greater conservation and protection of environmental resources -- for proof one need only peruse the environmental statements of our major mining firms and visit their sites.
Of course there is long way to go in many areas, particularly in the public sector. Nonetheless, much has been achieved. Shareholder and society at large are the better for it.
THE CHALLENGE
Not everyone is pleased with this process. Many managers and workers have lost power and have been adversely effected by the pursuit of greater shareholder value.
Governments have seen their ability to use GBEs as cash cows greatly diminished and many public servants have lost power over the public purse.
Most of these -- private sector managers, workers, politicians, public servants -- though lamenting the change, accepted it as either irreversible, inevitable or in the public interest.
There is, however, a challenge afoot led by some academics, management consultants -- including the accounting fraternity -- and non-government organisations.
The challenge comes under various headings including:
- stakeholder capitalism;
- business ethics; and,
- triple bottom line.
These approaches differ to some degree.
The aim of stakeholder capitalism is to provide so-called stakeholders -- most typically unions, local political leaders, environmental activists, charities and social activitists -- with rights over the resources and operation of companies on a par with those of the shareholders.
The aim of the business ethics movement is to impose ethical standards -- which have more to do with the promotion of wider social ideals rather than business practice -- on corporations.
The triple bottom line approach is to have corporations report on environmental and social outcomes in concert and on a par with financial outcomes.
The movements, however, have a common set of general aims.
First, they do not seek to overtly overthrow capitalism, but rather to control and direct it for the so-called greater good.
Second, they aim to use the corporate accountability mechanisms to impose social objectives or collective ideals on corporations.
Third, they seek to give rights to thirds parties on a par with those of shareholders and as such, they seek to reduce the priority given to shareholder value.
These movements are seductive. They are craftily packaged and offer an almost endless supply of work for consultants, accountants, NGOs, and management.
They are invariably packaged as a new, middle-of-the-road approache to solving the age-old problem of getting a better mix of social and individual goals, that is, a new approach to the "new economy".
The truth is that they are a return to the past.
What is proposed is a model of corporate governace which was the norm in Australia in the past: that is, corporations which put the interest of stakeholders such as government, unions, suppliers, and management on a par with shareholders; corporations in which stakeholders -- particular workers and government -- have an direct input into management decisions; and corporations which give equal weight to non-financial social considerations.
Although the movements are centred in the UK and the US, their ideas are based on a corporate ethos common to Europe and Asia.
Their fundamental aim is to transform the Anglo-American model of capitalism -- with its focus on maximising shareholder value and rights -- to a more social democratic, stakeholder model common in Germany and Japan.
The irony is that these movements are gaining strength at the time when European and Asian companies are rapidly adopting the Anglo-American model.
These new movements do differ in some areas from the approach in the past.
First, the old socialist ideal that government must occupy the commanding heights of industry has been jettisoned. Overt socialism is dead. Instead, the aim of these movements is not to nationalise the corporation but simply to control it.
Their aim is not to throw-out the accountability mechanisms but to use them to obtain and enforce control.
Although the movements' aim is to promote the interests of many of the old players -- concerns such as unions and factory closures -- they have introduced a new set of players and issues.
The chief new stakeholders and prime proponents of the movements are the NGOs -- the shelf proclaimed representatives of civil society.
Indeed, the ultruistic, general-interest mien of the NGOs is one of the most seductive aspect of these movements. The view put forward is that in the past, companies may have been captured by groups seeking selfish, personal gain, but the new movements are different, as they focus on doing good for the greater good.
This is, however, at best simplistic. First, the movements include many of the same old players and issues.
Second, many of the NGOs and other advocates are far from benign or acting for the general good. Many advocates are what is aptly known as "watermelons" -- green on the outside but red on the inside. That is, they are old left-wing opponents of the capitalist system dressed up in new green clothes. Moreover, many of these groups are both unrepresentative of, and unaccountable to, the broader community they claim to represent.
Third, although many proponents of these movements do not seek remuneration, they do seek influence and control -- and who needs money when you share control over a multi-billion dollar corporation?
Another appealing aspect of these movements is their focus on wider social and environmental issues. In the past, the focus of interest groups was on day-to-day issues such as wages, jobs security and local development. These new movements retain an interest in these issues but focus more on broader objectives such as protecting tropical rainforests, overcoming poverty in the third world, and protecting human rights.
But, as they say, "the road to heaven is paved with good intentions". The ideal may be noble but what counts is achieving it. If attempts to achieve noble end only undermines a valuable institution -- such as a corporation -- or otherwise fails to achieve its aims, then the exercise is hardly a noble one.
One thing is certain, these movements will create a great deal of work for many people. The question however, is, will this work be productive or destructive.
I fear the latter.
These movement are threats in a number of ways.
First, they seek to undermine the rights of individuals shareholders. They seeks to impose social or collective rights on corporations and to elevate these objectives to the same status as those of shareholders.
The pursuit of such objectives must come at a cost to shareholders. Collective goods are not free; they cost money and resources to produce. By definition, the shareholders are not the main or even primary beneficiary of these goods. Yet the aim is to have shareholders pay the money, produce the goods, and all free of charge.
Second, the movements will severely undermine the efficiency of the corporate sector and the economy as a whole. These movements seeks to give third parties rights over the operation of corporations and to elevate these rights on a par with those of shareholders. Under the existing system, shareholders rights are paramount and it is the primacy of shareholders rights and the pursuit of these rights by management that drives the capitalist system.
They will dull or distort the search for profit, so growth will slow, jobs disappear, unequal distribution of income will increase and the capacity and interest in protecting the environment will wane.
Under the stakeholder system, choices will need to be made between the rights of shareholders and the rights of so-called stakeholders. This choice will necessarily dull the incentive to maximise profit as stakeholders do not share in the profit and therefore will not be interested in achieving it.
Risk taking will be lower under a stakeholder system, simply because some stakeholders get little benefit from the higher profit it may yield.
Under the stakeholder system, resources will not be shifted to the highest valued use, because some stakeholder will not allow it. For example, the existing workforce will use their "stakeholder rights" to stop firm closures or downsizing even if these changes are necessary for profit. Local communities will also use their "stakeholder" rights to resist relocation of a firm even if there are important gains to the larger community. The "local society for the preservation of the spotted owl" will claim a stakeholder right to block a dam or a pipeline.
Of course, under the existing system there are impediments to the free flow of resource -- workers have rights to redundancy. The social impact of projects must be considered and the environmental impact of a project must be ascertained and comply with the laws of the land. However, in the end, it is the rights and responsibilities of shareholders that prevail.
Third, the stakeholder systems will impose a heavy burden on management and undermine its ability to function in an appropriate and accountable manner.
Under the existing system there are always conflicting desires -- between, for example management, workers and owners -- but in the end, the owners' rights usually prevail.
Under the stakeholder system their is no hierarchy of rights and an almost endless list of "rights holders" with conflicting desires. Therefore, a stakeholder system requires a mechanism of choosing amongst the competing rights holders.
For example, in a plant relocation decision, a choice must be made between the rights of present employees who will have their lives disrupted by the move, and potential stakeholders and residents in the new locations whose employment prospects and life chances will be badly damaged if the move does not take place.
The system of adjudication of rights would necessarily be political in nature -- since the stakeholders rights are collective rights -- each having an equal right to be heard and having their views considered. As a result, the decision-making process will necessarily be costly, unpredictable, and focused on equity rather than efficiency, transparency or profitability.
Fourth, a stakeholder system will spur destructive rent seeking behaviour.
Under the stakeholder system, rights to control over a corporation, and the benefits that flow from these rights, are on offer without payment but simply by making a stakeholder claim.
Accordingly, people will expend a great deal of resources lobbying and otherwise trying to acquire these free but highly valuable goods. This not only wastes resources but bogs down management.
The problem of rent seeking is compounded by the unrepresentative and unaccountable nature of many of the proponents. In the past, stakeholder representatives were generally appointed by, and accountable to, stakeholders. They were union leaders, local politicians, or managers of local suppliers. The new movements are driven by NGOs where the link between the executives and the members or ideas they claim to represent is more tenuous and open to fraud.
Indeed, the claims by many NGOs to represent the environment, the world's poor, women and the third world are without substance. Not only is such representation impossible -- given the diversity of views and interest within these groups -- but these NGOs make no effort to put in place the necessary process to be representative. As a result, many of their so-called stakeholder claims are bogus.
Fifth, these movement attempt to force corporations to do things for which they are unsuitable. For example, they demand that managers of businesses determine wages so as to bring about a more equal distribution of income, which in reality is impossible to achieve.
It is also inappropriate to hold corporations responsible for providing charity, addressing third world poverty or addressing human rights abuse in China and other global ideals. These are problems that go far beyond the power of the corporate sector and are best addressed through other means. They can even back-fire. For example, inducing firms not to operate in China because of the latter's poor human rights record could well augment rather than help solve the problems.
WHAT TO DO
It would be a serious mistake to ignore some of the requests and ideas that lie behind these movements. During the last 50 years, many large companies have gone bankrupt or have been taken over because they failed to respond to social, political, economic or technological change. There has been a sharp increase in the value placed on environment by society. Corporations now play a much larger role in society than they did in the past and the world is increasingly global.
However, it would be wrong -- both for companies and society -- to accept their main argument and solutions. They are flawed and would send us back to the past. They would create privilege, undermine people's property rights, undermine wealth and economic growth and eventually undermine our capacity and willingness to redistribute income and protect the environment.
Instead, first, we should continue with the process of improving corporate and public sector accountability, focusing on ensuring greater shareholder value.
Second, corporations should establish quantifiable standards, and report on these to stakeholders, on the range of environmental and social impacts under their direct control, including worker safety, pollution, resource conservation, and community impact. Many companies are, of course, already doing this.
Third, corporate Australia needs to take a more active lead in intellectual debate about the legitimacy of business.
Fourth, the accountability spot light should be firmly placed on the NGO sector.
These organisations play an increasingly pivotal role in society, including the representation of stakeholders. Yet their systems of governance, accounting standards, level of transparency and reporting standards are often rudimentary. Moreover, many claim representative status without even trying to put in place the necessary processes. Even though ethical standards of many of these organisation are above reproach, others have ethical standards which, if adopted in the business of public sector, would result in prison.
In short, it is also time for civil society to become accountable.
