Should billionaires drive company policy? Even if they’re doing good?
The case of AGL and Mike Cannon-Brookes demonstrates why a billionaire cannot dictate company policy or influence individual directors, writes UNSW Business School's Mark Humphery-Jenner
AGL has lurched from controversy to controversy throughout 2022. Whether it’s the failed demerger, board turnover, or the energy transition, one name has been front and centre: Mike Cannon-Brookes.
Mr Cannon-Brookes owns 11.28 per cent of AGL’s shares. He is the largest individual shareholder. He is not a majority shareholder. This has nevertheless given him a significant voice in corporate affairs.
But this really begs the question: Should billionaires have so much power over a company? While it should be noted that AGL’s director-candidates have declared independence from Mr Cannon-Brookes, and the company makes its own decisions, this has not quelled fears of a small group of investors wielding outsized influence.
What are directors' and officers’ obligations?
Directors are legally obligated to do what is in the “best interests of the corporation”. This is not an option; it is a legal obligation. Courts have found that this involves maximising the company’s value. This is because different shareholders might have disparate goals. Some shareholders might be willing to reduce corporate value to be environmentally friendly. Some shareholders might not be. Therefore, ASIC states that the director’s “primary duty is to the company’s shareholders”.
The directors must therefore act for the shareholder body as a whole – not just one shareholder (even if that shareholder is the loudest or largest) and not just environmentally-focused super funds or investors that advocate what is perceived as the ‘moral’ position.
The directors are further prohibited from using their position to “gain an advantage for themselves or someone else”. This need not be pecuniary. It could be achieving a perceived moral or ethical outcome that supports their value system. Directors must therefore not pursue sustainability-related goals at the expense or, with disregard to, shareholders. When pursuing such goals, it must be with the corporation front and centre.
This is even if Mr Cannon-Brookes' – or anyone else’s – goals are laudable or moral. It is also even if they owned a majority of the shares outstanding. This applies whether we are talking about Mr Cannon-Brookes, Elon Musk, Warren Buffett, or any other billionaire with a sizeable chunk of a company. This is because of directors’ duties.
What then is a board to do?
This creates issues for AGL going forward. But, the clear – and only – option is to follow directors’ duties. And, to be clear, this is not an allegation that they have not satisfied their directors’ duties: that would be a matter for regulatory authorities with full information, and not a matter for commentators.
Let’s start with board turnover. First, a subset of shareholders cannot merely install a director on the board. They also cannot veto directorial appointments. They may vote against directors like any other investor. Second, even if a sub-group of shareholders back those directors, their duty is still to shareholders as a whole. Their duty is not to do what their initial advocates or supporters want. Their duty is to maximise shareholder wealth. Their duty is not to advocate for the environmental initiatives their initial backers might have liked or that they personally like.
Fossil fuels and energy transition
What about the energy transition? The writing is clearly on the wall for fossil fuels. But, these assets have financial value. Thermal coal has surged in price in 2022. Oil prices are solid. Natural gas has remained elevated. Thus, directors must analyse fossil fuels dispassionately to determine whether there is a financial case for keeping them in AGL and for how long. Fossil fuels are an investment and should be evaluated like any other investment based on their financial merits (or, potentially, lack thereof).
There could well be a business case for accelerating the energy transition. It has reportedly become more costly to finance fossil fuel-related power. Cash flows could also be impacted by input costs, and power plants seemingly requiring significant maintenance. Loy Yang is metaphorically (and possibly physically) crumbling. But, the board’s responsibility is to analyse whether keeping fossil fuels in the mix improves shareholder wealth, relative to phasing them out.
AGL’s directors are therefore in a tricky position. A billionaire ultimately cannot dictate company policy, nor should they influence individual directors. Directors should take steps to avoid the appearance of such. This will help assuage investors’ concerns. Passing proposal through non-ideological financial modeling would be a good start to any decision. Conversely, investors should also watch to ensure directors are acting in their interests and be on the lookout for governance failures.
Mark Humphery-Jenner is an Associate Professor in the School of Banking & Finance at UNSW Business School. He has been published in leading management journals and his research interests include corporate finance, venture capital and law. For more information please contact A/Prof. Humphery-Jenner directly.