Article 136A (1) of the Companies Act states the following: “A director of a company shall be bound to act honestly and in good faith in the best interests of the company”. In previous articles under same header, I’ve already explained how and why the interests of a company may, on occasion, differ or clash with the interests of its shareholder(s).
This is not the scope of this article. I would instead like to explore the meaning of this vague though important axiom “in the best interests of the company”, since I find article 136A (1) indistinct and open to (mis)interpretation.
What is “in the best interests of the company”? I believe it depends on the size and type of company. For a company such as Air Malta, for instance, I think the interests of the company are the interests of its key stakeholders. The next question that follows is: What is a stakeholder? I would answer: Individuals or constituents that contribute, either voluntarily or involuntarily, to a company’s wealth-creating capacity.
In the case of Air Malta, this would mean the employees, the government (especially in its capacity as a shareholder), the customers and the local community (the taxpayers), as the bare minimum. I say “bare minimum” since there might be other key stakeholders not in my list.
Why am I pointing this out? Simply because the stakeholder theory might be relevant to the current Air Malta crisis and therefore help the management to navigate out of the company’s present plight, which effectively is a fight for survival.
Michael Porter, economist, management guru and legendary Harvard professor, recently came up with an interesting way of looking at business. He argues that the purpose of a business is to create “shared value”; meaning that a company should pursue strategies or policies that not just enhance the competitiveness of a company but also advances the economic and social conditions of the communities in which it operates.
Porter convincingly argues that if businesses in general continue to be exclusively motivated by “shareholder value” and “profit maximisation” alone, and regardless of social and environmental costs, capitalism as we know it may very well lose popular support and the consequences of which would be dire.
Let me not mince my words: Some local companies are just too big and important to be “declared bankrupt” or wound-up, and it is futile using traditional restructuring tools to solve current financial and operational problems even if this may be imposed on us as a country by the EU. I think Air Malta is one of those companies as well as companies like MIA, BoV and Malta Freeport. These companies are too big and important to be allowed to have “profit maximisation” as a mission.
If Air Malta is declared bankrupt (which apparently it came close to doing so recently), downsized too aggressively or conversely allowed to continue to operate as it was (i.e. at a loss), the impact on its key stakeholders (employees, customers, shareholder, local community), would be hugely significant and negative, including, I suppose, seriously undermining the Maltese economy itself. It, therefore makes sense, to bring on board the critical stakeholders of the company and consult / involve them in key strategic decisions.
Their interests become the company’s interests! So, for instance, if it makes more sense to all the critical stakeholders to treat Air Malta as a sui generis national business of considerable strategic importance to the Maltese economy; meaning that “profit maximisation” and/or aggressive “cost-cutting” are not necessarily relevant, then the management of the company needs to take serious note of this reality and act upon it. It would also mean that the company’s top management should consult and involve beforehand the critical stakeholders, in all the future critical decisions.
The form of “consultation” and “involvement” needs elaboration, granted; but given the constraints of this article I am unable to expand on this point where I would explain in detail the mechanisms and the ideal approach.
But something that is glaringly obvious to anyone looking from the outside is that Air Malta needs to consult and involve its key stakeholders at the highest of levels in all future key decisions.
I would go as far as to say that all critical stakeholders need to agree on the company’s strategy, which presumably is or should be “to make Malta easily accessible to all major routes given Malta’s island status” and then to find ways and means to realise such a strategy at a commercially sustainable way; but the successful formula should not include aggressive cost cutting across the board, the goal of profit maximisation or ridding the company of its talented / experienced employees.
In whose interest is it anyway? Taking Air Malta as a case study: I would say, it should be in the interests of the Maltese people in general (who need Malta to be connected to the outside world), the employees (who dedicate their careers and livelihood to the success of the company), the customers (without whose custom there would be no Air Malta) and the government (which owns and finances the enterprise); ergo the key stakeholders.
Companies of a certain size, bargaining power and potential impact must factor-in the views and interests of their critical stakeholders when taking crucial strategic decisions. After all, let’s not forget, that a business is nothing without the support of its key stakeholders.
Mr Fenech is managing director of Fenci Consulting Ltd.
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