The concept of corporate governance seems a bit screwy to me if directors are to represent shareholders yet a shareholder owning half the shares is criticised for nominating a person it likes as a director.

Yet Prime Minister John Howard finds himself being described as some kind of villain for planning to use the government’s 51.8% shareholding to install Geoffrey Cousins on the board of Telstra against the wishes of existing directors. In the minds of those existing directors, supported according to press reports this morning by the Telstra senior management team, they know best what is in the interests of shareholders.

Knowing best means choosing who is best suited to join them around the directors table with an actual vote of shareholders meant to be nothing more than a rubber stamp. A politician like John Howard has a different view of elections. If as a shareholder you do not like the way a board operates you are entitled to use your numbers to do something about it.

If you are another shareholder and disagree with the Howard view then by all means vote a different way. But, I can hear the Telstra Chairman Donald McGauchie and his hand-picked acolytes cry, that is not a fair process because the man with more than half the votes is bound to win.

Now leaving aside that it was the major shareholder who made the very political appointment of Mr McGauchie to the board in the first place, so what? Telstra was never going to be an orthodox investment. From the beginning it was clear to investors (or it should have been if they had half a brain) that political decisions would play a major part in its future. The Parliament was going to decide if, and when, and by how much ownership would be in private hands. Government was, is now and ever shall be, able to determine the rules under which the major telecommunications player operates.

People worried about such a hybrid animal where profits are so heavily dependent on political decisions should not invest in it. There is nothing really unique about such a situation. If you do not like having Rupert Murdoch and his interests being dominant then do not put your money into News Corp shares. The Murdoch standards of corporate governance are well known.

It is when investors are deceived about what kind of company they hold shares in, and directors are misled about the degree of influence they are allowed, that those investors and directors are entitled to get upset. Even if this argument is not accepted, there is good reason to argue that Telstra directors are not acting in the best interests even of the shareholders other than the government with their policies of confrontation with John Howard.

When the Future Fund has sold its last piece of Telstra paper, decisions by government largely will determine how much money Telstra can make. A sensible director could well argue that being amenable to the wishes of a government, even though they affect profits in the short term, is in the best long term interests of shareholders. At the very least there should be someone on the board who asks that question.

Peter Fray

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