For-Profit and Purpose – How a new corporate vehicle could save Australian Media

TL;DR

  • The Turnbull Government’s recent media reform package has promised to “even the playing field” and give traditional media companies a fighting chance in the age of the internet. 
  • Facebook and Google dominate the advertising revenue market, while traditional media companies continue to lose the battle to monetise content. 
  • Directors of traditional media companies are duty-bound to protect the bottom line and shareholder interests. This has led to cost-cutting and short-term revenue seeking, at the expense of public interest journalism.
  • The 2016 US election demonstrates the importance of a healthy media for the proper operation of democracy. 
  • The only guaranteed outcome of the Turnbull Government’s reforms is a loss of diversity in traditional Australian media.
  • In order to save Australia’s fourth estate, a new “for-profit and purpose” vehicle should be considered that aligns the pursuit of profit alongside the pursuit journalism.  A vehicle similar to the US’ “Benefit Corporation” could serve this purpose.

 

The Turnbull Government has promised its media reform package will “even the playing field” for the Australian media industry.  However, the “reforms” are more accurately described as deregulation, inevitably leading to the concentration of the media market, reducing the players on the traditional field. 

It appears that the Government is overlooking the crux of the problem – media companies with anachronistic business models have failed to adapt to the digital era and now struggle to monetise content.  What has followed is a series of straw-clutching plays by failing for-profit media companies.  At the mercy of their fiduciary duties to shareholders, directors have: cut costs, chased click-based ads and now look for suitable partners to amalgamate and find cost synergies – all at the expense of quality journalism.

As Australian media businesses continue courting each other, the prospect of a concentrated media industry and a reduction in diversity of voices becomes reality.  As the fourth estate, a diverse and healthy media industry is in many ways the keystone to liberal democracy.  To preserve this keystone in the long-term, Australia needs to adopt a different corporate structure whereby media businesses are obliged to pursue both profit and the principles of journalism.

A very, very brief history of advertising in the media industry

It is difficult to overstate the shift the media industry has experienced over the last 10 years.  Traditional media companies became successful with a purpose-built business model, centred around both subscription and advertising revenue.  To attract advertising revenue, media companies played matchmaker – pairing advertisers with their target audience. By paying great journos decent money, media businesses created attractive content, acquired the attention of the public, and enticed advertisers and readers to part with their money. This model worked well for decades – content was available from limited resources and the population were a captive audience.  Ad revenue flowed, media businesses were profitable and journalists had the space to do their jobs.  At their peak, traditional media companies could count on revenue from consumers paying to access content and advertisers paying for a slice of the consumers’ attention.

Then came the internet.  Scarcity turned to abundance, media companies no longer had the captive attention of the population and struggled to monetise the attention they could retain.   With a greater supply of content, advertisers looked elsewhere to access the consumer – most notably to the aggregators of this abundance of content – Facebook and Google.  And so new digital business ate the lunch of the traditional media company, with business models built for the internet age – fixed costs, outsourced content creation and unbounded scalability.

With this change as a backdrop, traditional media juggernauts have become laggards, crippled by their outdated business models and arguably anachronistic media ownership laws – evidenced in 2017 with the struggles of two prominent Australian media firms –  Fairfax Media and Channel TEN.

Enter Senator Mitch Fifield.

Media reform package

Senator Fifield’s media reform package includes:

  • Removal of the two-out-of-three ownership rule and 75% audience-reach rule.
  • Introduction of one-off A$60 million innovation fund for smaller and regional publishers.
  • Creation of 200 cadetships and 60 scholarships for journalism students.
  • Direction to the ACCC to investigate the advertising practices of Google and Facebook and their impact on journalism.
  • Higher minimum local content requirements for regional television following trigger events.

With promises of growth and “a shot in the arm” for the media industry, Senator Fifield championed a reform package that, amongst other things, overhauls media ownership and concentration laws, removing the two-out-of-three ownership rule and the 75% audience-reach rule. Introduced by Paul Keating in the pre-internet days of 1986 with the famous proclamation “You can be Queen of the Screen or the Prince of Print, but not both!”, these laws were designed to ensure diversity in media ownership, and therefore media content.

Stakeholders in traditional media have almost unanimously applauded the reforms, prophesying a better future for Australian journalism.  Supporters point to the rise of a new “screen”, and argue that archaic regulations have shackled Australian media, when in the meantime untethered global tech giants prowl freely to capture the lion’s share of the attention of the Australian population (and the ad revenue market that comes with it).  

The question that follows is, will deregulation solve the woes of Australian media businesses?  The Turnbull Government and Australian media industry have promised it will, however, this solution is short-termist at best.  All that will follow is further concentration of traditional media businesses.

The evidence of this concentration has manifested quickly. After the announcement of the reforms,  Fairfax Media CEO and Managing Director, Greg Hywood, was asked by a journalist (one of a dying breed) about the potential for M&A. Mr Hywood returned with “Fairfax will act in the best interests of shareholders to take advantage of any opportunities created by the changes”.  An answer Adolf A. Berle, father of the shareholder primacy model of corporate governance, would be proud of.

Who would blame Fairfax for pursuing a suitable partner?  In fact, as a director, Mr Hywood is obliged to consider any M&A opportunities that these reforms provide, seeking out any gains for shareholders that are available.  With ownership laws relaxed, the shrewd business move is for traditional media companies to amalgamate, build scale, cut costs and defend revenue.  For example, should Fairfax and Channel [insert commercial free-to-air station here] now tie the knot (of which rumours are rife), two become one – the same then follows for each firms’ legacy political commentators, foreign correspondents and investigative reporters.  The end result at a micro-level is an amalgamated company that may be stronger - perhaps even more profitable - in the near term, however, any benefits will be short lived.  A merger may cut costs, but is not a long term competitor to the superior business models of global tech giants.  Even more worryingly, the end result at a macro-level in the medium-to-long term is a loss of diversity and strength in journalism. 

The role of media in society

As an industry, the media has been declared as the fourth estate of liberal democracy.  Just like the other three estates (prompt – the Parliament, Executive and Judiciary), it wields its own power and influence.  Traditional media businesses argue that this influence has diminished in recent years, yet there is no doubt that they still have great power in shaping society’s debates.  Although the internet ushered in an abundance of content – in many ways, the population still turns to content created by traditional media companies for their news (albeit accessed via new, digital avenues that present monetisation difficulties). Nielsen’s July 2017 online ratings of the top 10 websites for current events and global news showed that 7 of them were run by traditional media companies (think: news.com.au, smh.com.au, ABC, nine.com.au etc.) – clearly evidencing the influence traditional media companies still have.

Additionally (or because of this influence), the media is the oil that greases the cogs of democracy.  It is a peerless source of transparency (Four Corners exposes a new injustice nearly every Monday at 8.30pm) and in doing so, importantly keeps the other estates accountable. 

As if on cue, the US 2016 election exemplified the importance of this grease.  The legitimacy of the traditional media was called into question and the flaws in modern social media networks were allegedly exploited for political gain.  There are many lessons to be found in the 2016 election, and many for which we are still searching. Undoubtedly one of these is that the fourth estate still has great power, and when not operating properly, distrust ensues and democracy is imperilled. 

It is for this reason that a strong, diverse media industry is integral to the health of society.  With the Australian media industry facing disruption and financial challenges, some have argued that the game has changed so dramatically that diverse, public interest journalism is no longer economically feasible.  In response, aside from deregulation and Senator Fifield’s other token measures, several avenues have been proposed to prop up the industry, including:

Side note: We should tread carefully when it comes to public funding and the media.  Government intervention in journalism is fraught with issues, with the constant criticism and scrutiny of the ABC and SBS evidence of how partisan and political this task can become.  Having one of the other estates legislating the funding and guidelines in the fourth estate can compromise independence and pose more problems than solutions.  Relying too heavily on state-funded media exposes the fourth estate to an array of political risks.

Each of the above options would most likely give a short-term helping hand to the industry, however, none address the primary issue that requires rethinking – the broken business model that traditional media companies have been built on. 

As set out above, an anachronistic business model has seen traditional media companies lose the battle for the advertising and subscription dollar in the internet age, whilst still feeling the pain of cost structures developed in the analogue era.

The reaction to this problem by traditional media companies has been driven by our legal and regulatory corporate governance framework.  Directors, bound by their fiduciary duties, have focused on the bottom line with a view to act in the best interests of their shareholders.  And so profit has been prioritised to the detriment of journalism. 

Corporate governance obligations did not pose such a problem when traditional media companies had a stranglehold on the population’s attention, as robust journalism and profits could co-exist.  However, confronted with fierce competition from all corners of the internet, the choice between profits and journalism is now largely mutually exclusive.

Today, profit is driven by clicks and clicks are generated by baiting “news entertainment” (think of buzzfeed’s “top [insert number]” lists). The economic story supporting public interest pieces has fallen away and so investment and resources in these pieces have fallen away too.  Senator Fifield’s media reform package reinforces the primacy of profit, inspiring amalgamation for short-term cost synergies. 

The dichotomy of profit vs public interest should not be taken to demonise directors, whose hands are tied by their duty. Shareholders invest in media companies on the same basis that they would for any other company; with the knowledge that the directors will act in their best interests as the managers of their capital.  A decision that subverts this duty would not only breach the law, but also be unequitable for investors who have informed their investment on this expectation.

The best interests of democracy

The media reform package does not provide a solution to this dilemma. It reinforces and enables the existing behaviour of media companies by facilitating their attempts to merge their way out of their financial distress. Senator Fifield is shuffling deck chairs on the Titanic.  The tectonic shift in the media market structure casts serious doubt on the ability of traditional media companies to succeed and leaves unanswered the question of how media diversity can be protected. One potential remedy is this: the introduction of a “for-profit and purpose company” to play the role of the traditional “corporation” in the media industry – freeing Australian media from the domineering obligations of the shareholder primacy model. 

The U.S. have the “benefit corporation” as their “for-profit and purpose” vehicle (whilst the U.K. have the Community Interest Company).  The benefit corporation, a relatively new corporate vehicle, has been legislated for in over 30 U.S. states and adopted by a variety of companies including Patagonia and Kickstarter.  The precise formulation of what is a benefit corporation differs from State to State, but broadly, the concept is to value the collective good, with directors legally obliged to pursue a public benefit alongside profit (with this public benefit originally envisaged to centre on environmental benefits).  This is achieved by framing the generation of a public benefit as being in the best interests of the benefit corporation – broadening the corporate mission and widening the fiduciary aperture.  In order to act in the best interests of the benefit corporation, amongst other things, directors are compelled to advance the defined public benefit.

To achieve this profit / purpose blend, the legislative regime put in place includes accountability measures (the extension of directors’ duties, penalties for breaches of this extended obligation and standing for shareholders and directors to bring an action for alleged breaches of this extended duty) and transparency measures (publishing an annual “benefit” report).

Some of the key features of Benefit Corporations (from a range of legislative regimes):

  • Incorporated for profit and purpose: A benefit corporation is required to pursue profit and a general or specific public benefit.
  • Duty to act in the best interest of the benefit corporation: Embedded in this duty, directors are compelled to advance the specified public benefit. (Note: some jurisdictions have adopted a “stakeholder”-centric approach to this duty, requiring directors to consider the interests of a variety of stakeholders.  Arguably a more harmonious and considered approach is one that aligns the duty with the defined purpose of the benefit corporation).
  • Standing to bring an action: Standing to bring an action for an alleged breach by a director of the expanded duty is limited to a defined class.  This defined class is typically the shareholders (via a derivative action), the other directors or an established regulatory body.
  • Benefit report: Requirements to prepare and publish a “Benefit Report” providing sufficient information to investors and the public regarding the pursuit of the defined public benefit.
  • Third party standards: Requirements for “Benefit Reports” to be prepared, and often certified, in accordance with third party standards to ensure the defined public benefit is being pursued and reporting is credible and easy to comprehend.

A vehicle like the benefit corporation could be used to solve for the current erosion of quality journalism in the media industry.  A regime could be adopted where a media business defines its public benefit as “public interest journalism” or “objective journalism in region X” (with some further particularity). The result would be a media business incorporated to pursue both profit and public interest journalism, with duties owed to both the shareholder and the citizen. The success of such a regime is dependent on the implementation of strong accountability and transparency measures.  Assuming this is achievable, with the 2016 US election as a backdrop, the argument for putting the interests of society and democracy alongside shareholders is irrefutable.

This alignment of the pursuit of journalism and profit would have several effects:

  1. Allow directors to look past the allure of “news entertainment” and short-term revenues provided by click-based ads, and instead invest in objective news reporting and commentary.  Not only would it give directors the space and freedom to do this, they would be duty-bound to do so.
     
  2. Attract investment from people who aren’t seeking profit at all costs (given the rise of ethical investment – now over $50 billion is invested in Australia in ethical investments – this class of investor may not be as fanciful as you first think). These investors would be on notice that they are giving their capital to a company that is pursuing profits and a purpose; effectively thwarting any action against directors who take decisions which give primacy to purpose.
     
  3. Potentially result in a financially viable operation.  Establishing a media company with a public interest purpose at its core would be an enticing proposition for Australia’s best journalists. With high quality journalists on-board, the attention of a segment of the population yearning for informative content would follow, increasing the opportunity for revenue (either advertising or subscription).

The recent media reforms will not be the panacea the Government is hoping for, and the endangered media will continue to be a topic of political debate. In the next round, the discussion needs to consider the failings of the traditional media business model and the contradictory choice between profit and journalism.  It is time for the fourth estate to look outside the confines of the shareholder primacy model that currently prescribes profit as the key performance indicator at the exclusion of public interest journalism.

 

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