• Breadcrumb navigation uses Javascript

---

No conflict of duty in Westfield's vote

by Simon Longstaff

The vote by GPT unitholders to approve internalisation of the management of the Trust followed heated debate about a number of aspects of the proposal – including the question of whether or not Westfield should vote its securities.

A broad cross-section of the nation's most respected finance journalists and commentators expressed serious doubts about the ethical character of Westfield's decision to vote and criticised the ASX's refusal to exercise its discretion to prevent that company from doing so. To the critics, it seemed so obviously wrong – and they said so – again and again.

My interest in the debate arose for a variety of reasons. First, the Chairman of GPT, Peter Joseph, is also Chair of the Board of St James Ethics Centre. Second, Westfield has been a generous supporter of the work of the Centre over many years. Third, Peter Joseph and his colleagues at GPT had approached me to act as a kind of 'sounding board’ in relation to some of the ethical issues that they faced.

However, I also have a great respect for the opinions and character of the journalists who criticised Westfield's decision (and that of the regulators). Theirs are views not easily dismissed. So, I was concerned to engage in the argument – to understand the source of the criticism and if I agreed, then say so (as I must).

I entered into an extended conversation with one of these writers in order to 'tease out’ the principles that might be invoked to support (or refute) the contention that Westfield should not vote its securities. We did not turn our mind to questions of law. All seemed to agree that there was no legal impediment. Rather, the question remained one of ethics – and we had still not resolved an answer to that question even at the time of the vote. I remained agnostic, the commentator remained convinced that it was wrong for Westfield to vote.

The core argument of Westfield's critics has been that it is wrong to vote securities in circumstances where you have a conflict of interest. In the case of Westfield, it was argued that one consequence of a vote in support of internalisation would be that Westfield could then consummate a deal to purchase a part share in three of GPT's most valuable retail properties (albeit at a price based on independent valuations).

As such, it was argued that Westfield stood to gain a benefit not available to all other unitholders – and thus, should not vote. Beyond this, some commentators opined that the GPT assets were being sold at a price that would allow Westfield to benefit at the expense of other unitholders – a much more serious conflict.

So, what is to be made of this criticism? The first point to understand is that most debate about the ethics of ‘conflicts’ focuses on what is better described as ‘conflicts of duty’.

For example, we apply strict standards of accountability to company directors, cabinet ministers, lawyers and so on in circumstances where they owe some third party a specific duty that is incompatible either with their personal interests or the duty they owe to some other person. Company directors have a fiduciary duty to act in the best interests of the company as a whole. Cabinet ministers must exercise their public power exclusively in the public interest. Lawyers owe a fiduciary duty to their clients. It is when such duties conflict with interests (or other duties) that we properly invoke protocols and laws designed to manage and regulate the situation. That is, we do not invoke the ‘conflict of interests’ principle merely when interests conflict!

It is therefore of considerable significance to the debate about Westfield that the company owed no duty to GPT unitholders or any other party.

Indeed, there are a number of circumstances in which we allow people to vote – despite there being patent conflicts of interest. For example, political parties contending for elected office will often make promises of a kind that will confer benefits on one section of the population – but not on all. It might be the promise of financial assistance to a particular industry, or the funding of new infrastructure in a particular electorate etc. etc..

Yet, it is (at present) inconceivable that citizens in, say, a marginal electorate should be prevented from voting because they have a conflict of interest. It is equally inconceivable that anyone would seek to imply a grave ethical fault in those insisting on their right to vote.

Then there is the rather common phenomenon of 'tactical’ voting by shareholders at general meetings – often supporting or rejecting proposals for reasons that are entirely self-interested (and quite possibly detrimental to the interests of others). For example, a shareholder might vote against a certain proposal with the intention of destabilising a company in advance of mounting an as yet undeclared takeover bid – structured to secure its interests (but not necessarily those of all others). I am not aware of tactical voting of this kind attracting adverse comment – or calls for shareholders not to vote in these circumstances.

These clear exceptions to the principle invoked by the critical commentators (that people should not vote in circumstances where they have a conflict of interest) tell us something important about that principle – that it is not an absolute and may, on occasions, be subordinate to others. Westfield's critics start from an ethically informed place – and are sincere in the expression of their criticism.

However, I think that they may have fallen into the trap of believing that this issue is simply a matter of ‘right’ versus ‘wrong’ – rather than a more complex case of ‘right’ versus ‘right’.

I think that our intuitions in the political arena are correct – the right to vote is so fundamental in a democracy that it should remain intact – even if the benefits of voting one way or another are uneven in their allocation. Voting securities may not carry the same ethical weight as casting a vote in a civic election. However, it must rate fairly close.

After all, the right to vote is fundamental to certain classes of securities that people purchase or exchange on an agreed basis. This is not just a legal right – there is also ethical content based on concepts of property, consent, promise keeping etc. Given the absence of any other duty binding on Westfield – it is difficult to know what ethical ground their critics stood upon.

There should be a presumption against voting on matters in which one's interests are actually (or potentially) inconsistent with specific duties owed to others. This presumption should inform an appropriate framework of governance for markets and corporations. However, this principle should not be extended to cases where no overriding duty exists. The right to vote securities remains a central, ethical plank of the system as a whole.

Of course, the law may limit this right – as it sometimes does in relation to other basic rights such as freedom of speech, movement, and so on. However, the ability to qualify such rights is (and should be) the legislatures’ alone – exercised only to the extent strictly necessary to protect or promote the public interest.

On some views, Westfield voting its securities may not have been in the interests of all GPT's unitholders. However, there was never any risk to the public interest. This being so, I can see no ethical reason why Westfield should not have voted nor why the ASX should have intervened.

discuss this article

---