Corporate Governance in Theory and Practice
| Author | J. Anthony VanDuzer |
| Pages | 575-610 |
575
CHA PTER 12
COR POR ATE
GOVERNANCE IN
THEORY A ND PR ACTICE
A. INTRODUC TION
Corporate governance may be defined a s the framework of rules and
practices through which a corporation is ad ministered and controlled.
A corporation’s governance framework determines the goals of m anage-
ment, as well as how those goals are i mplemented, and their achieve-
ment monitored. We have already addressed various aspects of the
legal regime for corporate governance in other par ts of this book. To
set the stage for the discussion in t his chapter of corporate governance
in theory and practice, it is useful to briefly review the framework of
legal rules for corporate governance.
In Chapter 6, we looked at the bundle of rights that share s represent,
including, in some form, the right to vote, and to receive dividends and
the remaining property of the corporation on dissolution. These rights
define, in part, the shareholders’ role in corporate governance. In Chap-
ter 7, we surveyed the corporate law rules regarding t he basic allocation
of power in the corporation between shareholders, directors, a nd officers
and the procedures through which each of these groups exercises its
power. In Chapter 9, we looked at the most important standards that
govern director and officer behaviour in t he exercise of their powers: the
fiduciary duty and the duty of care, a s well as the other, more specific
standards under corporate law, such as the prohibition on paying divi-
dends when the corporation is insolvent, and the responsibilities on
management imposed by tort law. Chapter 10 dealt with the remedies
THE LAW OF PARTNERSHIPS AND COR PORATIONS576
available to shareholders and, in some circum stances, other stakeholder
groups when directors, officers, and the corporation act in ways t hat are
contrary to corporate law requirements, whether these requirements a re
found in the statute or other corporate law rules, such a s those in the
articles or a unanimous shareholders’ agreement. We spent consider-
able time in Chapter 10 discussing t he oppression remedy, which es-
tablishes what is now the most import ant standard for the behav iour
of the corporation and its directors, as wel l as the process for seeking
relief for breaches of that standard. Finally, in Chapter 11, we canvassed
the securities l aw rules that complement and increasingly overlap w ith
corporate law rules in areas related to corporate governance. In addition
to prescribing dis closure that must be made to shareholders in connec-
tion with corporate actions, like holding annual and special meetings
of shareholders, insider trading, and t akeover bids, securities law now
directly imposes corporate governance standards rega rding audit com-
mittees and identifies a var iety of other best practices, requiring corpora-
tions to disclose how they implement these practices or, if they do not,
to explain why and how the practice s they do follow achieve the kinds of
benefits thought to be realized from the identified best practices.
In this chapter, and the final chapter of the book, we examine two
other aspects of corporate governa nce. First, in this ch apter, we look at
the context in which the legal rules for corporate governance operate.
Initially, we focus on corporate governance issues raised by the separa-
tion of management from shareholders, which occurs in w idely held
public corporations. Shareholders in such corporations face sig nificant
challenges in seeking to ensure that management acts in the best in-
terests of the corporation and does not shirk its responsibilities. The
costs associated w ith the risk of managers acting to benefit themselves
at the expense of the corporation are referred to as “agency costs” be-
cause they are costs t hat result from shareholders having t he directors
and officers manage the corporat ion as “agents” on their behalf, rather
than managing it directly. As we will discuss, the legal instruments
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 rel ation to agency costs. Corporate law scholars
have reached different conclusions regarding t he effect of markets on
corporate governance, including, 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 designed to achieve this objective. Some argue
that markets do such a good job of disciplin ing management to act in
shareholder interests that corporate law rules have a limited role to
Corporate Gover nance in Theory and Pract ice 577
play in this regard. They also argue that, in general, mand atory corpor-
ate rules are seldom necessary because most corporate stakeholders,
like creditors, can bargain for contractual provisions to protect their
interests against m anagement misbehaviour. The nature of the corpor-
ation is best understood as a nexus of these contractual relationships.
Others are sceptical of the effectiveness of markets and contract
bargaining. Some sceptics argue that relations between stakeholders in
public corporations should not be viewed as similar to private contrac-
tual arrangements because corporate activity implicates important pub-
lic policy concerns. Consequently, they argue, corporate governance
rules must ensure that corporations are responsive to the interests of all
corporate stakeholders, including employees, the community, and the
public at large — not just shareholders.
Following a survey of some of the main arg uments about the role of
markets and these d ifferent conceptions of the corporation, we discuss
recent changes in corporate governance rules by securities reg ulators
and the courts in Canada and how these changes are based on assump-
tions, often implicit, regarding the nature of the corporation and the
role played by markets in corporate governance.
In Chapter 13 on corporate social responsibility, we return to the
fundamental corporate governance issue that we first addressed in
Chapter 9 and that is touched on in thi s chapter: to whom should direc-
tors and officers be legally accountable? As you will recal l, the Supreme
Court of Canada has stated clearly that the fiduciar y duty is owed to
the corporation and, in determining what this mean s in practice, no
stakeholder interest is to be given priorit y.1 We will discuss some of
the possible implications of thi s approach and alternative approaches
to thinking about who should be the beneficiary of the fiduciary duty
in the context of the debate about corporate social responsibility.
B. OVERVIEW OF THE PROBLEM OF
AGENC Y COS TS
In order to understand how the allocation of power and responsibility
under the CBCA and provincial corporate statutes works, it is neces-
sary to consider the di ffering real-world contexts to which corporate
law applies. These vary from the corporation with a single shareholder,
who is also the sole director and officer, to the large public corpora-
tion, with thousand s of shareholders, spread out around the world, and
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