This article is by Darryl Adams, a government worker and internet tragic. A former IT worker, he still pines for the days of IBM keyboards that go CRUNCH and the glow of green screens. He can be found on on Twitter or on Facebook. Check out his site oz-e-books.com for more articles about e-book readers, retailers, formats and news (or will have when Darryl can be drawn away from reading Delimiter). The views expressed here do not reflect the views of his employer, the ATO.
opinion Browsing through the Delimiter comments recently, I saw one of my greatest bugbears rear its ugly head: “[Company X’s] first duty is to its shareholders.”
In other words, this commenter is saying, it is ok to screw suppliers, contractors, customers and users as long as the shareholders get their dividends? Sorry, me no likey.
Shareholders have an element of risk associated with their role. They put up their money as capital for a company. This can be done privately (that is, outside the auspices of the stock market) or publicly. If the company makes money, the shareholder may (this is not mandatory, companies can retain profits, and some like Microsoft are notorious for it) get some of the profits back as a dividend. If the company goes badly, shareholders are generally on the bottom of the list of people who can recover the money from the liquidation process. Even ex-employees stand higher in the carve-up process of a failed company.
When a person is saying that the first duty is to shareholders, they are actually saying that the first duty is to the short-term profits of the company. Many directors and senior management are well-rewarded via bonuses and share issues, and this is actually directing money away from the people who gave the company the capital in the first place. In fact, bonuses and stock options (the issuing of the option at a further date) can be awarded when a company does badly, and generally the whole remuneration system is out of kilter with the normal salary and wage system within the company and the community at large.
But I digress. To bring this back to Australia’s technology sector and our biggest company — Telstra. Telstra is a services company that provides telecommunications infrastructure for Australia and other countries. It has two groups of shareholders: The shareholders who bought their shares in the public floats or on the stock market, and the Future Fund (formally, the Federal Government).
However, shareholders only form part of the story for Telstra. There are also stakeholders: People and companies that have a stake in a well-functioning telecommunication system. People like individual customers, who depend on modern communications for health, wellbeing, keeping in contact with friends and families over remote distances, internet connectivity et al.
Companies also require a stable and uniform communications system that allows them to compete locally, nationally and worldwide. Companies also require telecommunications to deliver information and engage in the marketplace, as well as dealing with suppliers, customers and creditors.
Governments are becoming dependent on telecommunications for delivering/receiving information and providing services and benefits to their citizens and residents.
Now does Telstra have the right to ignore the rest of its stakeholders, to benefit the stakeholders who own shares in it? Legally, yes. However, one of the main things apparent with the whole NBN debate is that as a company focused on delivering short-term benefits to its shareholders, the long-term benefits for them and the rest of the stakeholders have been neglected.
And we can show this via the Next G network, which shows how spending shareholder capital in building up infrastructure has been a boon for all the stakeholders and to the benefit to the shareholders’ return of capital as well. The fact that the POTS (plain old telephone system) has been milked dry by Telstra, and that Telstra Wholesale has the ACCC’s number on speed dial so that the competition watchdog does not wear its fingers down to their elbows dialling Telstra itself shows some of the dangers of the “first duty of the shareholders” approach.
To put things in perspective, Australia’s first telephony network was built by a government entity, the Post-Master General. It was then largely upgraded by private enterprise, but for universal coverage the government had to intervene to ensure that non-profitable areas (everywhere but the major cities) received respectable coverage.
Shareholders like to get a reward for a risk. It is easy to return company profits to shareholders, as it makes it easy for the management bonus and options to get shareholder approval. By not managing the short-term reward for shareholders alongside the long term needs of the stakeholders, companies risk being left behind in the fast-changing technology economy. Or the worst-case scenario, risk an explosion that leaves the stakeholders holding the bill.
And the situation is not just with Telstra, it is also with most of the companies in general, and the technology industry in particular.
For me, the classic example is the NBN project. It takes a lot of capital in order to build the modern network. The fact the government had to step in because private enterprise was so risk-averse that no one could come up with a way to fund the new network shows some of the structural weakness inherent in a “first duty to the shareholders” mentality instead of realising that looking after the interests of most stakeholders will also benefit shareholders in the long term as well — regardless of short-term pain.
So, shareholders are important in the thinking of companies, because without them there would be no company. But they are not the only ones who should be important. Other parties exist and their stake in a company’s future plans should also be considered.
Image credit: Telstra