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Shareholder primacy lacks corporate logic

Shareholder primacy fails on a number of fronts; board directors need to consider all of a company’s stakeholders, a head of responsible investment has argued.

user iconGrace Ormsby 11 December 2018 Corporate Counsel
Shareholder primacy lacks corporate logic
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Pablo Berrutti, Colonial First Global Asset Management’s head of responsible investment was on a panel of experts discussing shareholder primacy at the Governance Institute of Australia’s national conference 2018 when he remarked that shareholder primacy “doesn’t satisfy its own inherent, internal logic.”

Mr Berrutti said that the concept fails from an outcomes perspective, no matter whether the outcomes are for broader society or the environment, “but it also fails the very people that it seeks to serve, which is the shareholders, because they perceive no better outcomes as a result of this philosophy.”

This philosophy “has really taken hold since the 70s or so,” he noted, which provides “a fairly good period of time to be able to assess the performance of shareholder primacy as an idea,” he explained.


To challenge shareholder primacy, Mr Berrutti applied a perspective, in which “the underlying assumption has to be, [that] because the corporations law tells us the directors must act in the interests of the company, that acting in interests of shareholders first must be the same thing”.

“For a company to prosper, it requires inputs from a whole range of different stakeholders or different capitals – to use the integrated reporting framework approach,” Mr Berrutti said

In this model, he noted “you do require human capital, you do require neutral capital, you require, as we have seen in the royal commission, trust in your organisation in order for it to prosper.”

Reflecting on his own organisation, Mr Berrutti said that “certainly, in our case, as an asset manager, we require the trust of our clients in order to be able to prosper as an organisation.”

“So from a basic, logical framing, it’s very difficult to put shareholders’ interests first, and still expect that you are able to deal fairly and adequately with the interests of other legitimate stakeholders in the organisation.”

According to Mr Berrutti, when corporation laws were drafted all around the world, there must have been a reason why directors’ duties required them to act “in the interests of the corporations,” when they could have just required directors to “act in the interests of shareholders”.

“The other key difference from a logical standpoint,” for Mr Berrutti, “is that shareholders come and go.”

Noting the average holding periods of shareholders have collapsed over time period this idea has been most prevalent, he queried “which shareholders are companies to act in the interests of?”

“Is it future shareholders, current shareholders, long-term shareholders, day traders, the high-frequency traders?”

As a result of this “alternate framing” of shareholder primacy, and by neglecting to focus on the interests of a company in the long run, Mr Berrutti said “you have all these unintended consequences that follow.”

“The banking royal commission is a clear example of that.”

“There’s been repeated examples where the short-term interests of shareholders were put ahead of the interests of clients that has, in the end, resulted in poorer outcomes for shareholders as well.”

Since the concept of shareholder value maximisation really took hold, Mr Berrutti said “shareholder returns and companies have performed no better,” in fact, “a little bit worse.”

“We seem to have received no additional benefit as a result,” he continued.

“Yet we see the carnage and blow-ups; accounting scandals, frauds, corruption, poorer outcomes that then lead to corporate blow-ups and malfeasance, that have stemmed from what is claimed to be acting in the interests of shareholders.”

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