The ousting of Solomon Lew from the board of directors of Coles Myer Ltd reveals some serious defects in Australia’s corporations law.
Lew said after his ouster (or failure to get re-elected), “More than 170,000 households filled in a proxy and voted for me and it gives me some kind of mandate.’’
Not only that, about a quarter of the shareholders by value voted for him.
But despite that, he will not get a place on the board. Lew is right. He does have some kind of a mandate.
The basic trouble is that under the Corporations Act 2001 (and all the law before it) shareholders rule the roost. In most cases a simple majority of shareholders is enough to elect all the directors. In an extreme case, a person controlling 51 per cent of the shares gets to elect every director, with no room for any representation for the people controlling the remaining 49 per cent.
It would be like John Howard’s Liberal Party winning the most votes at a federal election and having every single seat in Parliament being filled by a member of the Liberal Party. (Similarly, for Labor).
Australian company law works under a system of replaceable rules. This sets up a basic constitution and set of rules for all companies, including the rule that shareholders elect directors on the basis of a simple majority.
It is open to a company to have its own constitution with different rules or for a company to change the rules after the company has been formed, including the way directors are elected. That is why they are called replaceable rules. But because the default position is that a simple majority (by value) of shares can determine all the directors, that has become the pattern in Australian business.
It is a very unfortunate pattern. The effects of this on the conduct of business are for the worse.
In some cases unrepresented minorities agitate and distract the business because they do not have a seat at the board where they can put their view. Lew, for example, has spoken of his mandate to continue various barrows he has been pushing, especially shareholders’ discounts. He could also use the weapon of calling extraordinary general meeting, which can be quite costly to the business.
Minorities – instead of getting a say at the board table – are often faced with taking action through the courts or through the Australian Securities and Investments Commission – once again a costly and distracting exercise.
Worse than this, when a simple majority takes all the seats on the board, there is no-one to sound warnings, to expose wrong-doing, to ask questions about the business sense of a proposed action, or to question the ethics of an action.
Examples on the business front abound: HIH, FAI, Qintex, Bond Corporation, One-Tel and so on. Maybe, they would have gone bust anyway, but with a more varied board, it is likely the alarm bells would have been sounded earlier and much creditor and employee anguish been averted. On the ethics front, the major banks’ deal with radio personalities for plugs on air is a good example.
Truce, many major companies second on to the board directors from outside by recommending to shareholders that they be elected. Often, though, these come from the same mould.
An attempt by Democrats Senator Andrew Murray to mandate a different process of director election failed in 1997. He said he would prefer a proportional system.
Murray’s system would mean that a majority of shareholders would still get a majority of board positions and their will would prevail, but its advantage would be the voice of minority opinion being heard and less of a capacity by the majority to work in secrecy until it is too late. It is a bit like the value of having an Opposition in Parliament. Without it, tyranny, corruption and incompetence can thrive.