Monday, April 30, 2007

More on Qantas

Kenneth Davidson has written a great piece on the sale of Qantas and has managed to make sense of what I have known but not had the words to get across. Basically it is to do with shareholder responsibilities and ripping the financial guts out of a company. Here is his Article from The Age newspaper.


Kenneth Davidson
April 30, 2007

Whichever way you look at it, the shareholders are passengers on a one-way trip to nowhere.

"THE company at law is a different person altogether from its subscribers." (Lord Macnaughton, House of Lords, 1897)

"Shareholders are not in the eyes of the law part owners of the undertaking. The undertaking is something different from the totality of the shareholdings." (Lord Justice Evershed, House of Lords, 1948)

So who owns Qantas? The question is not as silly as it seems. When I say I own my house, everybody understands that I can use it for my own enjoyment and dispose of it as I wish, subject to the relevant planning laws. But when somebody buys shares in Qantas, the shareholder has none of these rights, apart from the right to sell the shares.

Qantas shareholders (apart from its directors and senior executives who also have shareholdings) have nothing to do with the running of the business. So rather than asserting the shareholders own Qantas, it is more accurate to say that the Qantas shareholders own their shares in Qantas.

So who owns the company? This question is less important than, who is responsible for the management of the company and in whose interests? Only the directors are responsible for the company as an ongoing entity in itself as distinct from its employees, its shareholders, its creditors and its customers, who have interests in aspects of the business.

The idea that the directors of a public company are responsible only to its shareholders is a recent idea, largely promoted by neo-liberals such as Milton Friedman, and it has gained popularity with the rise in the threat of hostile takeovers. The interests of shareholders may be synonymous with the interests of the company, but not always.

Even if APA succeeded in making Qantas a private company, APA's structure ensures the liability of the owners will be limited to the money put into the business by APA. And based on the information available thus far, that will only be about 25 per cent of the liabilities that will be created as part of the takeover package.

But if directors operated according to the idea that their responsibility is to shareholders rather than the company itself, how do they resolve conflicting shareholder interests? These include those who would prefer for tax reasons a share buyback against those who prefer dividends, or foreign shareholders who are not subject to capital gains tax against local shareholders who are, or those who want immediate capital gains because they want to exit the company against those who are interested in a long-term stream of earnings.

Apart from limited liability, the main advantage of listing on the stock exchange is the listing provides liquidity and a vehicle for speculation against an asset or collection of assets that are fundamentally illiquid. Even so, some businesses in energy, telecommunications and transport (including Qantas) that have been privatised in the past decade are still seen as providing a public service.

There are two models of corporate responsibility, according to British economists John Kay and Aubrey Silberston, who wrote a seminal study of corporate governance in the mid 1990s. These are the Anglo-Saxon agency model adopted by Britain, North America and Australia, where the company interest is served as a by-product of maximising shareholder value, and the trusteeship model common to Western Europe and Japan, where directors are expected to weigh the balance of the conflicting interests of current shareholders with the interests of present and future shareholders, employees, customers and the public.

The trusteeship model, which is still embedded in the law and practised increasingly in the breach, fits best with the prime responsibility of management to enhance the long-term development of the capabilities of the business.

The agency model, which the initial bid by the APA partners pretended to address, stands in direct conflict with the role of the sharemarket, which is to divorce the time horizon of investors from the time horizons of the companies in which they invest.

What would be the response of shareholders if Qantas unions proposed a deal in which they got $400-500 million from the company in fees and an up-front payment of $4 billion financed by debt in return for a cut in wages offset by a profit-sharing deal? Union claims are weighed in the balance against the interests of the public and company interest. Why not shareholder claims?

The point is, faced with a Treasurer who is incapable of acting in the public interest, unless directors weigh the interests of shareholders against the interests of the company, who is there to do the job?

The public and shareholders who look at their Qantas shares as an annuity rather than a vehicle for speculation have been badly let down by chairman Margaret Jackson and chief executive Geoff Dixon, by whichever criteria of directors responsibility is used.

Either the two of them were remiss in not returning $4 billion in funds to shareholders before APA made its bid or they failed in their fiduciary duty by not recommending against the takeover proposal when they knew that it involved APA ripping $4 billion out of the company. Let's be blunt. Either the directors have been guilty of running a lazy balance sheet or they have not. If not, they are recommending a bid that endangers the long-term viability of the company. Worse, they expect to profit personally if the APA bid succeeds.

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