Corporate Governance in Theory and Practice

• Author: J. Anthony VanDuzer
• Profession: Faculty of Law University of Ottawa
• Pages: 519-547

519

CHA PTER 12

CORPOR ATE

GOVERNANCE IN

THEORY AND PRACTICE

A. INTRODUCTION

Corporate governance may be def‌ined as the framework of practices

and rules through which a corporation is administered and controlled.

We have already addressed various aspects of the legal regime for cor-

porate governance in other parts of this book. To set the stage for the

discussion in t his chapter of corporate govern ance in theory a nd prac-

tice, it is usef ul to brief‌ly rev iew the framework of legal rule s for cor-

porate governance.

In Ch apter 6, we lo oked at the bundle of r ights th at share s represe nt,

including, in some form, the right to vote, and to receive dividends and

the remaining property of the corporation on di ssolution. These rights

def‌ine, in part, the shareholders’ role in corporate governance. In Chap-

ter 7, we surveyed the corporate law rules regarding the basic alloca-

tion of power in the corporation between shareholders, directors, and

off‌icers and the procedures through which each of these g roups exer-

cises it s power. In Chapter 9, we looked at the most importa nt standards

that govern director and off‌icer behaviour in the exercise of their pow-

ers: the f‌iduciar y duty and the duty of care, as well as t he other, more

specif‌ic st andards under corporate law, such a s the prohibition on pay-

ing dividends when the corporation is insolvent, and the responsibil-

ities imposed by tort law. Chapter 10 dealt w ith t he remedie s avail able

to shareholders a nd, in some circ umstances, to other stakeholder groups

when directors, off‌icers, and the corporation act in ways that are contrary

THE LAW OF PARTNERSHIPS AND COR PORATIONS520

to corporate law requirements, whether these requirements are found

in the statute or other corporate law rules, such as those in the art icles

or a unanimous shareholder’s agreement. We spent considerable time in

Chapter 10 discussing the oppression remedy, which establishes what

is now t he most important standard for the behaviour of the corpora-

tion and its directors, as well as an expeditious process for seeking relief

for breaches of that sta ndard. Finally, in Chapter 11, we canvas sed t he

securities law rules that complement and increasingly overlap with cor-

porate law rules in area s related to corporate governance. In addition to

prescribing disclosure that must be made to shareholders in connection

with corporate law actions, like holding annual and special meetings of

shareholders, and insider trading and takeover bids, securities law now

dire ctly pre scrib es corpo rate gover nance st andar ds regar ding aud it com-

mitt ees and identi f‌ies a var iety of other be st prac tices, r equir ing cor pora-

tions to disclose how they implement these practices or, if they do not,

to explain why they do not and how their practices achieve the kinds of

benef‌its thought to be achieved by the identif‌ied practices.

In this ch apter, and the f‌inal ch apter of the book, we exa mine two

other aspects of corporate governance. First, in this chapter, we look at

the context in which the legal rules for corporate governance operate.

Initially, we focus on corporate governance issue s raised by the separa-

tion of management from shareholders. Shareholders face signif‌icant

challenges in seeking to ensure that management acts in the best inter-

ests of the corporation and does not shirk its responsibilitie s. The costs

associated with the r isk of management misbehav iour are referred to

as “agency costs” because they are costs that result from shareholders

having the directors and off‌icers manage the corporation on their be-

half, rather t han managing it di rectly. As we will discuss, the legal in-

struments that we have looked at in the rest of the book address agency

costs in a highly imperfect way. The second part of this chapter looks

at the role that markets play in relation to agency costs. Commentators

have reached different conclusions regardi ng the effect of markets on

corporate governance, includi ng, in particular, on the extent to which

market forces encourage directors and off‌icers to be accountable to

shareholders and the corresponding need for, and appropriate nature

of, corporate law rules de signed to achieve this objective. In brief, ad-

vocates of the benef‌its of markets argue that markets do such a good job

of disciplining man agement to act in shareholder interests that corpor-

ate law rules have a limited role in this regard. They also argue that, in

general, mandatory corporate rules are seldom necessar y because most

corporate stakeholders, like creditors, who have f‌ixed claims against

the corporation, can bargai n for contractual provisions to protect their