Do current Corporate Governance Practices Help Protect Investors’ interest in Canada
Over the years, many laws have been framed worldwide for protecting the shareholders from manipulations by management. In the year 1720, the British parliament passed the Bubble Act. The act was passed to improve corporate governance and provide investor the protection from the companies making extravagant rumors to inflate stock prices. The year 2002 witnessed the passing of Sarbanes Oxley Act in the United States of America as a result of very big corporate scandals such as Enron, Global crossing and Tyco. These scandals costed heavily on the investors and eroded the confidence of investors in the securities market both in the United States and other parts of the world. The act is considered as the epitome of governance standards in the corporate world. However, the Canadian corporate governance model is significantly different from that of the United States, so the same kind of strict legislation could not be enforced to improve the corporate governance standards in Canada. Rafael la Porta (2000), in his study on corporate governance, concluded that legal environment of a country, determines the corporate governance practices which have bearing on size of the markets in different countries. Further, Swain (2002), Morck (2006) and Gray (2010), reconsider La Porta sources and further suggested that Canadian corporate governance model is more similar to German corporate governance model rather than resembling the models of other common law countries such as the United States of America and the United Kingdom due to the fact that Canada has multiple jurisdictions and allows pyramidal ownership structures. This article examines the role of corporate governance in protecting the investors’ interests in Canada. Firstly, it looks upon the importance of corporate governance measures in securing the interests of investors. Secondly, it discusses the unique nature of Canadian multi- jurisdictional corporate governance model. Thirdly, it highlights the particular characteristics of the corporate ownership in Canada. Finally, certain measures are suggested to improve corporate governance which can help in strengthening Canadian securities market by bolstering investor base both nationally and internationally.
Corporate governance plays a significant role in protecting the interests of the investors. If the laws and regulations relating to corporate governance are regulated and enforced by courts, regulators and market participants in an effective manner, then only the investors are willing to invest in capital markets. Effective corporate governance helps in shielding the investors against misappropriation of their investment.
According to Gray (2010), corporate geography of Canada has been determined more so by corporate concerns over access to resources and markets and less so by the supply side competition in corporate laws and associated regulatory frameworks. Regulatory arbitrage means shopping for jurisdictions, so that rules suit the specific companies’ circumstances. Canada has a distinct model of corporate governance characterized by lack of regulatory arbitrage unlike the arbitrage possibilities in other major economies such as that of United States of America, which promotes positive corporate attraction competition in jurisdictions. This leads to Canadian provincial regulatory lock in and associated managerial entrenchment. The lack of competition in Crown corporations can hamper performance of these entities. Gray (2010) further adds that ‘there is no homogeneous Canadian model of corporate governance but rather a mosaic of 13 provincially distinct models.’ This has important implications on quality of corporate governance because provincial governments may be more inclined towards the management in comparison to shareholders, as they are inextricably entwined with corporations operating within their jurisdiction.
Canadian corporate ownership differs from the widely accepted U.S model of diffused ownership. In the context of this article, controlling shareholders refers to shareholders which have ownership in the form of control blocks. These blocks are held, usually by a wealthy family/families. Canadian corporate ownership is characterized by presence of significant controlling shares, business groups which are pyramidal in structure and prevalence of dual class shares which offer differential voting rights. Dual class shares and pyramiding permits the block holders to have access to rights; which vastly exceed their actual ownership. The controlling shareholders usually dominate the board and so are entrusted with governance of those firms. According to Morck and Yeung (2006), “Pyramiding lets a wealthy individual or family magnify control over one large firm into control over a huge constellation of firms.” This governance problems of Canadian corporate sector more closely resemble those in Italy and Latin America rather than those in other common law countries such as U.S and U.K. In deriving private benefits, controlling shareholders lead to an adverse effect on corporate governance, since the way they run their corporations need not align with the interests of public shareholders. This degrades the confidence of the investors in the capital market leading to less active Canadian stock markets and depressed valuations of Canadian companies.
By empowering and emboldening public shareholders in form of greater legal rights and better investor protection; Canada can improve its capital markets and also promote the efficient allocation of the nations’ collective savings. As per Rafael la Porta (2000), for most countries, the improvement of investor protection requires radical changes in the legal system. Securities, company, and bankruptcy laws generally need to be amended. In order to improve the efficiency of board of directors, a certain number of independent directors must be made mandatory on the board. The institutional investors should disclose their voting policies and records; dual class shares should require periodic renewal by majority of inferior voting shares. Toronto Stock Exchange should drop pyramid member firms with dual class shares from major indexes. There need to be greater emphasis on the enforcement of fiduciary duties of directors towards the shareholders and stakeholders of the company; enforceability of International Financial Reporting Standards to improve transparency and accurate financial disclosures to shareholders and stakeholders. Efforts can also be made to dilute duplicative provincial regimes through a single national regulator. Moreover, the auditors of the company should perform their duties in an independent manner and objectively report the financial irregularities; thereby appreciating the code of professional ethics. Apart from legal rules and regulations, the directors of the company should realize the importance of protection of interests of investors for long term survival of the company. They should follow self-regulation and abide by the principals of good corporate governance reflecting ethical leadership.
Finally, it can be concluded that quality of Canadian corporate governance practices clearly need improvement in order to build the investor’s interests in the Canadian capital market; improve capital market size; expand the size of capital market and improve the allocation of the savings of the investors. The corporate governance practices can be significantly improved by policy reforms in security market regulations .The investors should be aware of their rights as shareholders and they should make investments in companies which follow ethical corporate governance practices.
· Gray , Taylor R. “A Corporate Geography of Canada: Insights into a Multi-Jurisdictional Model of Corporate Governance.” Growth and Change 41.4 (December 2010): 467-494.
· La Porta, Rafael, et al. “Investor Protection and Corporate Governance.” Journal of Financial Economics 58 (2000): 3-27.
· Leung, Philomena, et al. “The Importance of Corporate Governance For Business.” Panel Discussion. Macquarie University, Australia. 21 Sept. 2011.
· Morck, Rendall, and B. Yeung. “Some Obstacles to Good Corporate Governance In Canada and How to Overcome Them.” (2006).
· Swain, Harry et al. “Corporate Governance and Accountability in Canada.” Sussex Circle Inc (2002).