Canadian Corporate Governance: Ten Reasons to Doubt Its Efficacy

• Author: Rene R. Sorell and Alasdair Federico
• Pages: 529-551

Rene

R.

Sorell

and

Alasdair

Federico

A.

INTRODUCTION

Corporate governance

failures

are

front

page

news

in

2004.

Deficiencies

in

corporate governance

are

blamed

for

just

about every corporate scan-

dal

large enough

to be

newsworthy. Corporate governance

lapses

are

said

to

cause

a

diminution

in

investor wealth

and

investor confidence

in

financial

markets.

In

response,

regulators have imposed increased over-

sight

and

disclosure obligations

on

boards

of

directors, stepped

up

enforcement

action, threatened more,

and

watched approvingly

as

issuers have

put

their

own

internal investigative mechanics into motion.

Suspected improprieties

are

taken very seriously

and

addressed rapidly

with

the

assistance

of a

growing coterie

of

enthusiastic outside special-

ists

in

forensic

matters.1

Stricter supervision coupled with transparency,

it

is

argued, will help

to

prevent

the

kinds

of

scandals that have plagued

the

market

and

will improve corporate performance, generating higher

returns

for

investors.

This

paper questions whether "better corporate governance"

is the

panacea

it is

made

out to be. In

particular, this paper questions

the

effi-

Rene

R.

Sorell

is a

partner

and

Alasdair

Federico

is an

associate

of

McCarthy

Tetrault

LLP.

1 See R.

Siklos, "The governance posse"

Report

on

Business

Magazine

(March

26,

2004)

at 25.

529

Ten

Reasons

to

Doubt

Its

Efficacy

Governance:

Canadian

Corporate

530 RENE R. SORELL AND ALASDAIR FEDERICO

cacy

of

corporate governance

as

either

a

vaccine against corporate mis-

feasance

or a

stimulus

to

value maximization.

Ten

reasons

are

proposed

here

for

scepticism about

the

ability

of

corporate governance

to

produce

the

results

the

regulators seek

and

investors

are

said

to

expect.

In

summary,

the

reasons

for

scepticism

are as

follows:

1. Too

much

focus

on the

board

of

directors.

Corporate governance rules

focus

excessively

on the

board

and its

processes,

and

insufficiently

on

the

relationship between

the

board

and

management despite

the

crucial

nature

of

that relationship.

2. A

board's

ability

to

effectively

supervise

management

is

assumed.

The

abil-

ity of a

board

of

directors

to

accomplish

meaningful

day-to-day

oversight

is

simply taken

for

granted

by

corporate governance prin-

ciples

in

place today.

In

fact,

the

power

of a

corporate board

to

effec-

tively

supervise management

is

open

to

substantial doubt.

3.

Confusion

about

purpose

of

risk

minimization

or

value

maximization.

The

goals

of

corporate governance principles

are not

consistent.

Some,

especially securities commissions

in

2004,2

are

using disclosure cer-

tification

strategies

to

promote risk minimization

or

risk control

and

to

regulate

at the

level

of

both

the

directors

and

management. Tradi-

tionally,

though,

corporate governance principles (especially those

propounded

by the

Toronto Stock Exchange

(TSX))

have been aimed

at

myriad long-term enterprise-related issues, ranging

from

increas-

ing

board independence

to

succession

and

strategic planning

for the

enterprise

in aid of

value

maximization.3

4.

Level

of

appropriate

board

intervention

is

unclear.

Corporate governance

principles

do not

convey

a

clear message about

how

active directors

have

to be in

order

to

discharge their supervisory responsibility.

5.

Director

"independence"

is

given

disproportionate

value

by

corporate

gov-

ernance.

Is

independence

as

important

as it is

made

out to be?

Some

independence

is

necessary,

but how

much

is

sufficient

to

accomplish

the

goals

of

corporate governance?

6.

Corporate

governance

stresses

process

and

transparency

of

process

over

sub-

stance.

Corporate governance

is

about board process

and the

trans-

2

See K.

Hewlett

& J.

McFarland,

"OSC

says enforcement

a

priority"

Globe

and

Mail

(March

30,

2004)

B4.

3 See

also

the

Canadian Coalition

for

Good

Governance,

"Corporate Gover-

nance Guidelines

for

Building

High

Performance Boards," online: Canadian

Coalition

for

Good Governance

/

ccggguidelines>

(accessed March

24,

2004)

[CCGG

Guidelines].