JOHANNESBURG - I asked corporate governance guru and educator Mervyn King what he would say to shareholders if he had to address an earnings call.
He said he would say: “Do you understand that you have no duty nor responsibility to the company. Do you understand you are not entitled to take a pencil out the company? Do you understand if you remove a pencil you have committed a theft Mr Shareholder. You are not entitled to any part of income of the company unless the board declared a dividend and there is liquidity to pay you the dividend.”
Shareholders were not owners of a company and companies were sovereign with its own assets and liabilities, he said.
King said the error of corporate leaders during the twentieth century was to focus on the short-term wealth of the shareholders, which led to a century of unsustainable development.
Shareholders don’t seem to understand that they don’t own companies, he said.
20th century thinking
The background to this way of thinking was as follows:
In the late 19th century and early 20th century there was a court case between The Ford Motor Company and the Dodge Brothers, who were minority shareholders of Ford. Ford wanted to modernise their plant and hike pay to its employees so that the company could meet its Model T Ford demand.
But the Dodge Brothers won the court case. Ford then had to declare excess profit as a special dividend to shareholders before raising the wages of employers.
King said this resulted in the concept of the primacy of the shareholder and that directors should steer a company to ensure the maximisation of shareholder wealth.
This concept was reinforced by the Nobel Laureate economist Milton Friedman, who is the 1970s wrote: “The sole purpose of the corporation is to make profit without deception or fraud.”
But shareholders don’t have primacy over other shareholders, King said. Employees, debt holders and suppliers among others had more invested in the sustainability of the company.
“Shareholder ownership’s average holding on the JSE is six to seven months. Shareholders can bail out,” he said.
Companies' balance sheets and reputations could be damaged overnight by not keeping oversight over the long-term wellbeing of a company in their pursuit of instant profit.
Volkswagen has been facing a backlash after a diesel cheating scandal, which has seen Audi chief executive Rupert Stadler jailed.
21st century thinking
However, King said you can’t make profit at any cost. This was wrong.
The error of corporate leaders had been to focus on the maximisation of shareholder wealth, even if it was at a cost to society or the environment. This was not in the best interest of the shareholder and was destructive, he said. The corporate team needed to look at value creation, sustainability and good governance.
King said a conscious leader today should be aware that in order to create value in a sustainable manner, the leader had to ensure that the company created a business model, which had a positive impact on three critical dimensions for sustainable development: the economy, society and the environment.
“The company is an incapacitated, artificial person that has no heart, mind or soul of its own. Its directors become its heart, mind and soul.”
He said boards of directors around the world were moving away from focusing on the maximisation of shareholder wealth to focusing on the long-term health of the company.
This thinking has resulted in a change to the role of an internal auditor.
Integrated reporting, championed by King, is being adopted by major stock exchanges around the world, including the JSE.
King has recently written a book, titled, In Chief Value Officer: Accountants Can Save the Planet.
Value is being assessed on the basis of the sources of value creation used by an organisation and not through a financial lens alone.
Last month King spoke at the Conscious Companies awards and brought up the issue of the environment as related to corporate governance.
In the speech, King spoke about Rachael Carson, a biologist and naturalist, who in the 1950s questioned the long-term outcomes of using pesticides.
Carson’s sparked an environmental revolution and her research led to the nationwide ban on DDT and other pesticides.
Today he said risk accounting was normal.
Companies needed to use integrated thinking, which looks at the input into your business and the outcomes.
“What are the inputs into your business model and activities?”, he asked. “For example, 87percent of Unilever’s waste is now used to create energy and not going to landfills.”
He said Coca-Cola 12 years ago started a programme to recycle water.
“By 2020 they are not going to waste one litre of water. They are 87percent there.”
King said the critical issue in King IV was how did the company make that money.
“It’s all very well looking at headline earnings per share, but the bottom line is if you made that money by being subsidised by society or the environment that is not a true value.”