Shareholder Governance, “Wall Street” and the View from Canada
The Business Roundtable, a group of executives of major corporations in the United States, recently released a statement on the purpose of a corporation that reflects a shift from shareholder primacy to a commitment to all stakeholders. While the statement seems radical to some, it is consistent with recent Canadian corporate law. Boards of directors in Canada have had to make decisions incorporating the concepts expressed in the Business Roundtable statement for over a decade.
The primary concern expressed by those opposed to a shift from shareholder primacy is that it undercuts managerial accountability, thereby resulting in increased agency costs and undermining the overall effectiveness and efficiency of corporations. The experience in Canada suggests such concerns are largely overblown.
A stakeholder-based governance model rejects the idea that corporations exist principally to serve shareholders. Instead, a stakeholder-based governance model requires the consideration of various stakeholder groups to inform directors as to what is in the best interest of the corporation.
The move to a stakeholder-based governance model is largely the result of general dissatisfaction with the shareholder primacy model, under which:
- Management and boards felt intense pressure to focus on short-term results at the expense of long-term success;
- Communities and workers often felt ignored or abandoned;
- Customers felt unsatisfied with product quality and customer service;
- And suppliers felt threatened and pressured to drive down costs, even if doing so requires reducing quality or moving offshore.
Indeed, the introduction of the statement by the Business Roundtable provides that:
Americans deserve an economy that allows each person to succeed through hard work and creativity and to lead a life of meaning and dignity. We believe the free-market system is the best means of generating good jobs, a strong and sustainable economy, innovation, a healthy environment and economic opportunity for all.
Put differently, a stakeholder model reflects a rejection of the Gordon Gekko ethos from the 1987 movie “Wall Street” that “greed, for lack of a better word, is good.”
The 2008 Supreme Court of Canada decision in BCE Inc. v 1976 Debentureholders rejected Revlon duties to maximize shareholder value in connection with a change of control transaction. In its decision, the court specifically provided that “the fiduciary duty of the directors to the corporation originated in common law. It is a duty to act in the best interests of the corporation. Often the interests of shareholders and stakeholders are co-extensive with the interests of the corporation. But if they conflict, the directors’ duty is clear—it is to the corporation.”
The thinking in the BCE decision has now been reflected in Canada’s federal corporate statute, which provides that that, when acting with a view to the best interests of the corporation, directors may consider, without limitation, the interests of shareholders, employees, retirees and pensioners, creditors, consumers and governments; the environment; and the long-term interests of the corporation.
At its most basic level, the move away from shareholder primacy better reflects the history and animating principles of corporate law, which establish that a corporation is a separate legal person and its shareholders are not owners of its assets per se, but investors with certain contractual and statutory rights (including a right to elect directors and a residual claim on the assets). That distinction―that shareholders are not owners in the classic sense―is of fundamental importance and gets to the heart of corporate governance and the role of boards. Indeed, the seminal work of Berle and Means, which has influenced a generation of corporate governance scholars, is focused exactly on the separation of ownership and control.
When the BCE decision first came out in Canada some expressed concern that a focus on the corporation provides no meaningful guidance for boards of directors. That concern has not manifested itself. The experience of advising boards following BCE has not been one of confusion or uncertainty―that’s not to say decisions are easy, but well-advised boards of directors understand and act in accordance with their fiduciary duties as expressed by BCE.
It is also worth pointing out that a singular focus on shareholders does not provide clear guidance to boards of directors. In a modern public company, shareholders come and go, each with their own investment criteria and objectives.
As a practical matter, in Canada, a stakeholder model allows directors to exercise their business judgment to consider the interests of stakeholders, to the extent those directors have an informed basis for believing that doing so will contribute to the long-term success and value of the corporation. However, in the context of a change of control transaction, much of the focus rightly remains on what consideration shareholders will receive.
As long as directors fulfill their duties of loyalty and due care when considering the interests and reasonable expectations of the corporation’s stakeholders, the business judgment rule protects Canadian directors from liability. Minutes of meetings should reflect, where appropriate, that directors considered such factors as reputation of the corporation, legal and regulatory risk, investments in employees, the environment and any other matter that could affect the success or value of the corporation.
Other factors that help address concerns of those who fear a stakeholder-based governance system is that the market for corporate control remains healthy and, since Canadian securities law does not permit a “just say no” defense, the threat of an unsolicited offer being made directly to shareholders is always present. In addition, product markets and reputational pressures also provide meaningful incentives to promote responsible and disciplined management. And perhaps most important, shareholders retain their most basic and powerful right in the stakeholder model: they elect the board of directors and can change the board if they are dissatisfied with its performance.
So, to our friends in the United States, we encourage you to consider the experience here in Canada before concluding that the ideas put forth by the Business Roundtable will undermine the effectiveness of your public corporations.