Directors’ obligations are to shareholders.


The Royal Commission into Misconduct in the banking, superannuation and financial services industry in Australia exposed some notable, and in the circumstances of his position surprising, views of the Chairman of the National Australia Bank. The NAB is one of the country’s biggest publicly listed companies. Its directors, and especially its Chairman, ought to be amongst the very best directors available. Shareholders would have reasonable grounds to believe that they had the best possible governance talent acting in their, the shareholders’, interests.

Yet it is not clear after the evidence of Dr Ken Henry, the Chairman, if the board believes without doubt that the directors’ duty, as agents of the owners of the business, is solely to those owners. The principal and agent problem was broadcast loudly and clearly through the musings of the Chairman in the witness box. Dr Henry said that the board has had many discussions on this point and that there are different views. He mentioned possibly wider duties and obligations to people other than the shareholders.

This is, or should be, a worrying development for all Australians, not just the shareholders of NAB. It has been increasingly obvious that some of those in the powerful position of senior executives of publicly listed companies have allowed their personal political views to affect their business decisions. Some have even used shareholder money on political campaigning, for example in the case of same-sex marriage. But to see one of the key Chairmen musing over possibilities of duties to society is perturbing. He went on to question when the model of capitalism remains appropriate. Had he said business requires a social license to operate, it would have been entirely in keeping with his overall message. An entirely wrong.

There is no place in corporate governance, on the boards of publicly listed companies, for any executive or director to not understand and act accordingly, that their duties are to the shareholders of the business. Milton Friedman wrote a brief explanation of this point decades ago which was published in the New York Times magazine. I wonder if Dr Henry ever read it?

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