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Corporate Malfeasance and its Control

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)[1] 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[2] or Shlensky v. Wrigley[3] 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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  1. Phil Pryor

    I can’t, and would imagine others can’t, see an easy way through a minefield of problems in facing up to and beating orthodox legal, ethical, financial, business, accounting, political opinion. We might well be supportive of the intent, but the potential opposition is such that only Hitlerian assassinations and obliterations might allow such radical change. Of course, we must all be accountable if we have had some direct say in policy and have willingly agreed. Shareholders, despite other opinions held and spouted, do not usually know or want to know what is really the end result. BHP seem to be murderers and plunderers, but, “who cares”? I remember looking for slight ups and downs in a little fund years ago, to support any emergency, and only looked for rises…I didn’t know then what the investments were or the wider results. “We” don’t really want to finance wrongdoing, do we?

  2. Richard Gaede

    On the surface, a sound approach. It does however contain the seeds of natural injustice.
    A shareholder may invest in a perfectly good company, with socially aware etc. objectives. That company may then stray into inappropriate activities. It may do so with no consultation with shareholders. Shareholders could then become personally liable for conduct on which they were not consulted, had no say, and may, if they had been consulted, condemn, and vote against.
    An analogous situation might be a person who lends his car to a friend for the friend to visit a relative. If while in the friend’s custody, the car is used for “Hoon racing”, is the owner of the car to be held liable?

  3. Terence Mills

    Richard Gaede

    Putting aside the insurance implications of the car situation, the answer to your hypothetical is ‘No’ unless it was reasonably foreseeable by the owner that the simple act of loaning a vehicle would lead to a potentially illegal act.

    Similarly I fail to see that the shareholder in a company could be ‘personally liable’ for the malfeasance (or indeed nonfeasance) of the corporate entity and its management and directors.

    You would need to develop these hypotheses further to build your argument.

  4. Richard Gaede

    Perhaps there is something I have missed in your proposition. As I read it you intend shareholders to become liable to the extent of their investment in the company if the directors engage in “Serious misconduct”. You did not appear to qualify it by shareholders having to be complicit in the misconduct, other than by reason of simply being a shareholder. My analogy then becomes a match for the shareholders. They lend their wealth to the company, whose directors without consultation, or permission from the shareholders engage in serious misconduct. Surely it is proper that the company and its officers be held personally accountable, however why should shareholders also be held personally accountable for something they neither participated in, nor condoned? Shareholders will suffer in any event as the value of their shares is eroded in the market by the consequences of the misconduct, and reduced dividends as revenue is similarlly impaired..

  5. New England Cocky

    @ Richard Gaede: A sensible proposal with interesting consequences.

    Consider this hypothetical situation. Registered corporation Pollution Plus (”PP”) has a paid up capital of 100,000 shares at $10 each, that are trading very nicely at $25.00 when one of their projects is caught out causing major pollution to Sydney Harbour (OK, I remember the Homebush Bay matter) that earns a Court order to clean up the spill at such enormous expense that the Directors appeal the decision all the way to a loss in the High Court of Australia.

    Meanwhile, the market value of PP share has fallen to $0.01 cents costing citizen shareholders considerably. Now the Directors elect to wind up the corporation to avoid both the generated legal costs and the remediation costs. Where does this leave the shareholders?

    Well, with a huge legal liability under this innovative proposal. Naturally the Directors would have been quietly selling down their holding of shares in PP, while Mr/Ms citizen shareholder was misled by the propaganda from the corporation that everything was going to plan.

    Now the shareholders at the time of the initial prosecution are liable for a further cost equal to the face value of their shareholding on top of the market losses. However, the Directors have got away scot free thanks to inside knowledge.

    So once again, Mug Taxpayer is left to cover the clean up costs while the PP Directors are able to set up & serve as Directors without any financial penalty for their likely maladministration.

    Perhaps it is time to both limit the Directors remuneration and apply criminal sanctions for Director’s shown to have acted inappropriately to the best interests of the shareholders and the country.

  6. RosemaryJ36

    Sounds like the Corporations Act is due for review!

  7. Richard Gaede

    Your comments highlight the fact that investing in companies is a potentially risky business i.e. if in your scenario the business is liquidated for the reasons stated, shareholders will lose all of their investment. That is the risk they undertook when they bought the shares. That’s just capitalism.
    Agreed, the company officers would attempt to mitigate their personal losses by cynical insider trading sales. Such trades area breach of directors duties and responsibilities, and the Corporations Law.
    If memory serves correctly, Corporations Law permits unwinding of such transactions where the law has been breached. Certainly the directors cannot just walk away from the losses they have caused. If they have been guilty of breaches of the Corporations Law, their entire personal wealth is available to creditors, and shareholders, whether or not they are still an officer of the company. A situation far from perfect, but having some degree of fairness, and accountability.
    What has been lacking over most of the last 25 years has been the lack of will on the part of the regulator ASIC to properly enforce the law. This has been partly as the result of it being badly underfunded, and resourced (a deliberate policy of govt.), and ministers who have strongly hinted that holding directors accountable to the full extent permitted by law might not produce positive career results for ASIC officials. Some change in Corporations Law is overdue, especially iro phoenix companies.

  8. wam

    I’m a gambler and strayed into the shares gamble but once and with a group bought thousands at .5c. We were overseas when the shares bounced, with Poseidon, to 5c and the organiser sold his. When we got back, we had forgotten our investment and I have them somewhere. It seems to me that there are opportunities for preferential treatment that make it less of a gamble for some. ps wonder where my bookie pencilling salary sacrifice went in the GFC?

  9. Richard Gaede

    wam, “Free marketeers” aka Law of the Jungle fans will tout the stock market as an example of as close to a pure, free market as you can get. Bovine faeces!
    Their free market fails to satisfy any of the fundamentals of a free market.1 All buyers and sellers have equal power. Really? Do I get a broker’s attention with my $10K investment as a super fund with $1Bn? 2 All buyers and sellers have equal knowledge. Have I had the same briefing by company officers as the brokers’ analysts? That ignores “Black” off market crossings between the likes of major investment houses and super funds, which are never announced, unless by a whistle blower.
    Stock markets are a digression from the main thrust of the proposition i.e. that shareholders should suffer some additional penalty for wrongful acts of companies and officers. I contend that much of the infrastructure to hold companies, and their officers to account. It needs the will to enforce it properly. There are, however, some gaping holes which need to be addressed. The new unique director ID scheme will be a great help in preventing Phoenix entities.

  10. A Commentator

    Firstly you obviously mean “astrology” not “astronomy”
    Secondly, I suppose the superannuation funds , their directors and their members are also to be held liable.
    What exactly would be considered a safe destination for retirement savings,?
    Thirdly, it’s ill considered

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