Forget “shareholders”, what about Telstra’s stakeholders?


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 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


  1. I both agree and disagree.

    I agree in the sense that as a privatised government entity, purely through legacy responsibilities, Telstra has deep responsibility to maintain minimum service levels to the “strakeholders”…the people requiring those services that in the VAST majority of situations, only Telstra can provide – such as a fixed copper line, or an equivalent service where a copper line cannot be provided – (ie: the Universal Service Obligation)…

    I disagree in terms that as a public company, Telstra now has to do the best for its shareholders – as you point out, that’s the law – so they go where the profits are – and that is not regional areas. They do the bare minimum to meet the USO, and that is it.

    The bottom line is, the provisions of the USO and Telstra’s shareholder responsibilities are completely incompatible with each other. Telstra should have been broken into retail and wholesale arms – and the wholesale side probably – (but not definitely) – kept in government hands.

    In the end – the structural separation that should have happened then is even more important now. The NBN might not be the only possible answer, but it is the best answer anyone has come up with so far.

    I just hope it doesn’t get sold off at the end.

    • I agree Michael. If we are to have the NBN then it should not be sold off. The Howard Government really stuffed things up when they sold Telstra as a vertically integrated telco.
      They should have either sold off only the retail arm or made sure that a separate entity bought the wholesale arm and had legislation in place that disallowed the wholesale provider from going anywhere near retail.

  2. As a telecom services equity research analyst with 25 years of experience in the sector, I am perplexed that all the focus there is on the wireline network when globally, the innovation, network architecture transformation and business model transformation globally is focused on the wireless network.

    Unknown to many Australians, Telstra is considered by almost all global carriers to have built the best wireless network in the world – at a substantial cost. With the HSPA++ network evolution and introduction of MIMO technology, throughput speeds are likely to migrate toward 100Mbps before too long. This suggests that the government enforced NBN is a tremendous waste of taxpayer money. Telstra already sees well over 50% of its entire wireless data traffic coming from rural markets which implies higher than expected wireless substitution so the broadband adoption curve in rural areas is already well underway. Unlike other countries that overlay 2G with 3G technology – Telstra has deployed 3G to 99% of PoPs so customers receive a ubiquitous service.

    Telstra shareholders may be a priority but have not benefited from its monopoly position over the years. The truth is that shareholders have been fleeing Telstra and the telecommunication services sector for years as these companies have been unable to generate a required return on invested capital due to high levels of capital expenditure, intensive competition and an unstable regulatory environment. Just focusing on profit and ROA is misleading – as profit covers debt capital costs. Until recently the correlation between Verizon in the US (as a proxy for the group) and Telstra has been high – both have lost 30% in shareholder value since 2001. Since mid 2010, when the NBN discussions took a turn for the worse, significant divergence has occured and shareholders will continue to flee Telstra in my view until some “light touch” regulatory sense in Australia resurfaces. Australians don’t appear to have a sense of how good things are relative to third world wireless networks elsewhere.

  3. I look at the US infrastructure as the poster child of free market infrastructure.

    We have 4 major carriers using two different standards (CDMA and GSM), 2 competing 4G wireless standards (LTE and WiMax), competing cable companies who have monopolies at the local council level atempting tripple play (phone, cable tv, internet) yada yada yada.

    In a nutshell, it is a mess.

    Look at all the people complaining about 3g and AT&T in San Fransico and New York (admitidly they are the epicentre of tech reporting, so it could be a distortion). The iPhone lock in with AT&T would not have been so bad in Australia for any one carrier baring pre merger 3 (who had sub-par coverage) but there are places with NO AT&T coverage and unable to use an iphone legally (well up to the DMCA excemtion this year)

    Dont have a point, except that the “heavy” regulations in Australia has given us a far superior network than the US.

  4. Daryl

    Thanks for your comment. I look at the US infrastructure as the poster child of free market infrastructure as well. In a nutshell, it works. We have 4 major carriers taht are converging on LTE technology, albeit at different rates due to relative spectrum positions and an ability to leverage the gas in the tank left in 3G technologies – which is significant. The RFP at Sprint and Clearwire incorporates software defined radio that allow the companies to seamlessly migrate to LTE over time. The world has moved to wireless and the investment has followed. We are likely to see the emergence of three robust wireless companies, along with further consolidation that may include the cable sector who have ownership economics in the increasingly important area of wireless backhaul.

    I agree about your point on network challenges. Did AT&T envisage the data traffic surge that has California generating a multiple of the traffic seen in Canada? No. Are they working with ERIC and ALU to evolve the platform. Yes. Key areas of focus are policy control and signalling. As well as a much needed change in the pricing model. The US leads the world in data traffic loads, primarily driven by the unlimited pricing plans than are now moving back into equilibrium. We still have narrowband backhaul connections to the majority of cell towers compared to broadband Gigabit Ethernet backhaul connections at Telstra. Be careful what you wish for down there………………… might just destroy something quite valuable by bringing the Government back into this sector.

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