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Ken Henry is wrong, and that has implications for public policy

Dr Ken Henry’s statement to the banking royal commission was misguided ‒ he needs to listen to modern business theory and learn from the mistakes of the past, says Darryl Carlton.

During the banking royal commission hearings last week, an exchange between National Australia Bank chairman, Dr Ken Henry, and senior counsel assisting the commission, Rowena Orr QC, garnered a lot of attention.

It has been reported that Dr Henry stated “the capitalist model is that businesses have no responsibility other than to maximise profits for shareholders. A lot of people who have participated in this debate over the past 12 months have said that’s all that you should hold boards accountable for, is that they are focused on the maximisation of profits for shareholders.”

If my students answered an exam question in this way, they would fail the subject.

Over the years, many academics and researchers have discussed this topic. In that regard, Dr Henry is correct. But he must not have been paying attention because researchers such as Charles Handy have said:

“The purpose of a business is not to make a profit, full stop. Rather, it is to produce profit so the people in the business can do what pleases them, their families, and others close to them and far away.”

Handy argues that companies should be managed as communities, for that is what they are: communities of employees organised to serve communities of customers. When this is done using moral values, the system retains internal and external integrity.

The greatest-ever business academic, Dr Peter Drucker has stated that “the purpose of a business is to create customers. A business must make profit in order to stay in business and to continue servicing its customers and meeting the needs of its employees and owners” 1.

I will give credit to Dr Henry, and allow that yes, there has been research published that encourages the idea that the purpose of a business is to maximise shareholder value. This research was published in 1976 under the title, ‘Theory of the Firm: managerial behaviour, agency cost and ownership structure’2.

View denounced by business leaders, academics

“The dangerous ideas that underpin and reinforce corporatism are encapsulated in Dr Henry’s dismissive testimony and his bleating that his only responsibility is to make a profit for shareholders.”

Very quickly, this view was denounced by business leaders and academics the world over. The famed CEO of GE, Jack Welch, referred to ‘maximising shareholder value’ as the dumbest idea in the world. Forbes magazine, the bible of capitalism followed up with a cover story entitled ‘The Dumbest Idea in the World’ and their research found that ‘‘maximizing shareholder value’ turned out to be the disease of which it purported to be the cure.

In the decade from 1980 to 1990, CEO compensation per dollar of net earnings produced doubled. From 1990 to 2000, it quadrupled. Meanwhile, real performance was declining. From 1933 to 1976, real compound annual return on the S&P 500 was 7.5 perc ent. Since 1976 the total real return on the S&P 500 was 6.5 per cent (compound annual).

As chairman of NAB and former head of the Department of Treasury, Dr Henry is operating to a set of rules and ideas that were debunked and roundly discredited more than 30 years ago.

Dr Henry is confusing corporatism with capitalism.

Capitalism thrives on “creative destruction”. Entrepreneurs create new ideas, new ways of doing business. Out with the old, and in with the new. Capitalism re-invents itself, corporatism on the other hand protects and rewards the powerful entrenched businesses that build barriers to new ideas and stifle innovation.

Corporatism, not socialism, is the enemy of entrepreneurship and renewal. The dangerous ideas that underpin and reinforce corporatism are encapsulated in Dr Henry’s dismissive testimony and his bleating that his only responsibility is to make a profit for shareholders. The evidence is clear, when senior executives and the board claim that they are acting in the interests of the shareholders, mostly they are acting with extreme self-interest.

Enforcement of anti-competitive behaviour supports the growth of new and innovative entrepreneurial ventures. Good companies and great ideas need protection from the predatory practices of corporations acting to maximise profit at the expense of their customers, society and the environment.

The Harvard professor, Dr Clayton Christensen, studied why good companies fail. And what he found was that successful companies focus on meeting the needs of their existing customers and fail to change to meet the needs of their future customers. Corporatism puts this idea on steroids and seeks to entrench this focus with the support of government policy.

“Good companies and great ideas need protection from the predatory practices of corporations acting to maximise profit at the expense of their customers, society and the environment.”

Dr Henry’s statement was misguided, and he needs to listen to modern business theory and learn from the mistakes of the past. The banking royal commission has exposed the lengths that large corporations will go to in order to protect their profits. This behaviour does not serve the interests of shareholders, and it certainly does not serve the interests of customers, the society more generally, or the environment.

The courts in Australia have upheld that the primary responsibility of boards of directors is to make decisions that are in the best interests of a ‘notional shareholder’. A notional shareholder is not the same as the group of individuals that own shares today. The notional shareholder, as contained in legislation, is a current and future shareholder.

In other words, the board must consider the future of the business, not just making a profit today. The board needs to make decisions that protect their future viability and future customers. Lying, cheating and stealing does not protect the future ‘notional shareholder’.

Public policy needs to move beyond the outdated and inadequate idea of corporatism. We need corporations’ law and enforcement agencies that act to promote entrepreneurship, renewal and, as Schumpeter framed it, “creative destruction”.

Top image: NAB chairman, Dr Ken Henry, speaks at the banking royal commission hearing.


1. Drucker “The Practice of Management” (1954)

2. Michael Jensen and Dean William Meckling of the Simon School of Business at the University of Rochester

Author Bio

Darryl Carlton

Darryl Carlton is an Industry Fellow at Swinburne University. Darryl has spent over 40 years in the practice of information technology. He was the founder, CEO and Chief Architect of the world's first SaaS ERP. He was Head of IT Strategy for Telstra, Head of Business Process Engineering for Optus, Chief Executive Officer for BizTone.com, Chief Information Officer for the Environment Protection Agency, IT strategy advisor to several government departments, and Head of Applications Development for one of the world’s largest internet service providers. He is completing a PhD on the subject: 'Understanding Cobb’s Paradox: a multi-grounded theory case study of IT project failure in the public sector'.