By Andrew Klein
Making Shareholder Liable to the value of their Share Holding – an easy guide to encourage ethical investment.
Much has been written and said about the damage done to this Planet by Corporations that act solely to create profit for shareholders. The ugly reality is that those in charge of Corporations have a duty to ensure that shareholder profits are maximised at whatever they can get away with and shareholders are limited in their liability. Many a keen legal mind has made a personal fortune to ensure that this status quo remains as if these ideas were cast in stone or possibly represented the latest directions of the Almighty.
This all perversely goes back to the hay day of production and manufacturing in the United States, where the Ford Company sought to give some benefits to its employees.
The result is briefly and well summed up in Wikipedia;-
“Dodge v. Ford Motor Company, 170 NW 668 (Mich 1919) is a case in which the Michigan Supreme Court held that Henry Ford had to operate the Ford Motor Company in the interests of its shareholders, rather than in a charitable manner for the benefit of his employees or customers. It is often cited as affirming the principle of “shareholder primacy” in corporate America. At the same time, the case affirmed the business judgment rule, leaving Ford an extremely wide latitude about how to run the company.
More recent cases such as AP Smith Manufacturing Co v. Barlow or Shlensky v. Wrigley suggest that the business judgment is very expansive, i.e., that management decisions will not be challenged under almost any circumstances where one can point to any rational link to shareholder benefits.
By 1916, the Ford Motor Company had accumulated a capital surplus of $60 million. The price of the Model T, Ford’s mainstay product, had been successively cut over the years while the cost of the workers had dramatically, and quite publicly, increased. The company’s president and majority stockholder, Henry Ford, sought to end special dividends for shareholders in favour of massive investments in new plants that would enable Ford to dramatically increase production, and the number of people employed at his plants, while continuing to cut the costs and prices of his cars. In public defence of this strategy, Ford declared, “My ambition is to employ still more men, to spread the benefits of this industrial system to the greatest possible number, to help them build up their lives and their homes. To do this we are putting the greatest share of our profits back in the business.”
This vision that Ford had to benefit both his company and its employees makes good business sense and has a touch of the humanitarian about it. Common sense approach that would have probably kept many people happy. The damage done to our world occurred just when Shareholder Benefits are impacted. The Michigan Supreme Court held that Henry Ford could not lower consumer prices and raise employee salaries. “A business corporation is organized and carried on primarily for the profit of the stockholders. The powers of the directors are to be employed for that end. The discretion of directors is to be exercised in the choice of means to attain that end, and does not extend to a change, in the end, itself, to the reduction of profits, or to the non-distribution of profits among stockholders in order to devote them to other purposes…”
Well, it is time to re-organize the very culture that has delivered us into the hands of sociopathic directors reaping huge fortunes and in turn doing little for either their employees or the planet. Corporate greed is no more than a precedent-based behaviour that the west has bought into. Of course, it is possible that the parties involved at the time considered the world an infinite resource and that the impact of mindless conspicuous consumption had not even been considered.
Though the impacts of colonial rule and the control of assets had allowed Empire Builders to flourish and one major result of World War One was simply to shift the control of the competing interests of the Old World into those of the New.
I digress here. It would take a very simple Act of Federal Parliament to change the behaviours of Corporations in Australia. The current immunity that shareholders have from the damages done by directors and or companies should be removed.
I can hear economists whining about this, their theories much akin to astronomy and only seriously viable in hindsight to fill books to annoy students with. Shareholders should be jointly and individually liable to the level of the shareholding when a company they own shares is derelict in its duties, pollutes the planet, or allows other crimes against humanity to occur.
This is not rocket science and given the unstable nature of this world and the damage that has been done, such an ethical approach should be considered as soon as possible. Bad investment decisions would be punished by not only losses in financial distributions but possibly by fines imposed per share. As for the Capital Value of shares, greedy short-term planning will reap its own reward. No doubt our huge ‘Superannuation Industry’ would tremble at the thought that monies could no longer be apportioned to a plethora of companies and Financial Advisers would have to know what they are doing. On the other hand, such Superannuation Funds that have been built up by Australian Workers could in theory be lent to the Government to reduce the need for foreign borrowings for local infrastructure development.
All these transactions would have to be totally transparent and every cent accounted for. The other positive of this approach is that it would require top-class accountants and bean counters to see this done, people currently sitting in Parliament could be offered jobs in areas that suit them better and we might even have Political Leaders with a real vision rather than relying on the Thesaurus for ideas.
I have no doubt that this simple idea will be dismissed as a dream or simply too big to implement. I also have no doubt that there are plenty of fingers in the ever-shrinking pie that would not like to see such an approach taken.
It because it challenges the core values of any particular society but because greed and corruption do exist, short-sighted policymakers profit in their own ways, and many political leaders are beholden to the very system that is morally bankrupt.
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