By Rachel Waterhouse, CEO, Australian Shareholders’ Association
A large cohort of healthy, investible companies, and their profits, is the foundation of the Australian economy, with companies of all shapes and sizes contributing a whopping $1.8 trillion to Aussie GDP.
In the same way a house needs walls and rooms on the foundation, businesses needs more than profits to be successful. They need to consider their impacts on all their different stakeholder groups to generate lasting success.
The idea of balancing profits with other priorities is a perennial focus of markets. It’s important to understand how this interplay operates when assessing potential investments.
Shareholder primacy, and therefore profits, is enshrined in law. Section 181 of the Corporations Act 2001 requires directors to act in the best interests of the company. Courts have historically interpreted this duty as prioritising shareholder interests, particularly in terms of maximising profits. The half yearly reporting cycle also encourages companies and shareholders to have a short-term profit focus.
In addition to profits, it pays for companies to take into account a range of stakeholder needs – including customers, employees, communities, suppliers and regulators – to generate sustainable financial performance and investment returns.
This is the subject of the Australian Shareholders’ Association’s new paper, Getting the right balance between profits and stakeholder needs.
Profits have to be a priority. They mean companies can hire staff, pay suppliers on fair terms and pay dividends. They allow businesses to reinvest in their operations to produce future returns, as well as attract investors. But having too much focus on the financial aspects of doing business can adversely impact company performance.
This can be as simple as companies charging the highest possible amount for their goods and services, but not taking into account cost of living pressures on customers, pricing themselves out of the market and losing market share.
With this in mind, responsible boards constantly balance a range of aims in addition to making a profit. This includes things like reputation management, staff engagement and productivity, compliance and risk management.
In fact, long-term evidence suggests investing in a responsible way, which includes taking into account the company’s impact on its stakeholders, generates outperformance. Investment products certified by the Responsible Investment Association of Australasia have returned 13.2 per cent over the past decade, versus a 9.19 per cent return for mainstream Australian share funds.
When you’re assessing a company as a retail investor, it pays to look beyond financial information to form a true picture of a company’s prospects. Here are some questions to consider when you’re looking into a company’s ability to produce a profit and also look after its broader ecosystem.
- How is it governed and managed?
- Does the board and management think about the long-term implications of their business decisions, not just short-term financial benefits?
- How does it deal with stakeholders including shareholders as well as customers, staff, suppliers and its community?
- Are its actions fair and ethical?
- Are its business practices sustainable?
- Does it have a good compliance record?
- What’s the company’s reputation in the community?
We expect the companies we monitor to produce a profit and their stakeholders’ needs. It’s the only way companies can engage fairly in all aspects of their operations and treat their broad range of stakeholders with sensitivity and respect.
I want to acknowledge my colleague, Fiona Balzer, our Head of Policy and Advocacy, for her fantastic work in developing this paper, as well as the members of ASA’s Policy Committee and Company Monitoring Committee for their review and input.
You can download your copy by following this link.
