Promoting the Long-Term Management of Public Corporations Through a Reform of Canadian Corporate Law

• Author: Camille Paquette
• Position: Currently a corporate lawyer at Dentons Canada LLP?s Montreal office
• Pages: 16-41

APPEAL VOLUME 24

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ARTICLE

PROMOTING THE LONGTERM

MANAGEMENT OF PUBLIC CORPORATIONS

THROUGH A REFORM OF CANADIAN

CORPORATE LAW

Camille Paquette *

CITED: (2019) 24 Appeal 19

ABSTRACT

Short-termism, a tendency to overemphasize strateg ies that generate immediate nancia l

results at the expens e of long-term prots, is a serious issue t hat the business community

faces. Short-term market pressures and the responsive behaviour of cor porate boards

undermine long-term economic prosperity and soc ial welfare. While select i nvestors and

executives may benet na ncially from this short-termism, it largely runs c ounter to the

interests of long-term investors and other sta keholders. Without concrete measures , it is

unlikely th at we will address the problem of short-termism.

is article ma kes recommendations directed at encoura ging long-term oriented thinking

in boardrooms. It proposes t wo regulatory measures that, i f jointly implemented, would

dissuade board s from managing corporations for the short-term and insu late them from

market pressures:  rst, imposing a duciary duty upon di rectors to act in accordance with

the corporation’s long-term interests; and second, requiring exe cutive compensation to be

aligned with t he corporation’s long-term interests.

* Camille Paquette is curren tly a corporate lawyer at Dentons Cana da LLP’s Montreal oce. She

holds a Bachelor of Civil L aw from the University of Montrea l and a Master of Laws from McGill

University. She wrote this pape r as part of her research projec t at McGill University.

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APPEAL VOLUME 24

TABLE OF CONTENTS

ABSTRACT ........................................................19

TABLE OF CONTENTS .............................................20

INTRODUCTION..................................................20

I. THE SHORTTERMISM PHENOMENON ..........................21

A. Short-Termism: Modern Corporate Culture...........................21

i. e Concept of “Short-Termism”................................21

ii. How Short-Termism has permeated Corporate Culture...............23

B. Is Short-Termism a Problem? ......................................26

i. e Short-Termism Debate ....................................26

ii. Examples of Short-Termism’s Ill-Eects . . . . . . . . . . . . . . . . . . . . . . . . . . . 29

C. Factors Contributing to Short-Termism..............................32

i. Short-Term Activist Investors interfering in Decision-Making ..........32

ii. Executive Compensation inducing Short-Termist Behaviour ...........34

II. SOLUTIONS TO DETER SHORTTERMIST BEHAVIOURS &

ENCOURAGE LONGTERM MANAGEMENT .........................35

A. Clarifying Directors’ Fiduciary Duty under Section 122(1)(a) of the CBCA...36

i. State of Law and Shortcomings .................................36

ii. A Fiduciary Duty to Act in the Corporation’s Long-Term Interests ......38

B. Reforming Executive Compensation under Section 125 of the CBCA .......39

i. State of the Law, Current Practices, and Shortcomings................39

ii. A Duty to Align Compensation with the Corporation’s Best

Long-term Interests ..........................................41

CONCLUSION ....................................................43

INTRODUCTION

Short-termism has permeated corporate c ulture across the world, negatively aecting

corporate be haviour.1 In recent years, e xecutives, investors, and other c orporate leaders

have all allowed shor t-term considerations to overwhelm the long-term growth objectives

of the corpor ation.2 Whi le businesses were once mana ged with a view to prosper over

time, they are now managed as if meeting quarterly expect ations is their sole purpose.

Under continuing pressure from na ncial markets to max imize short-term results, boards

have become overly preoccupied with current earnings and sha reholder returns, while

neglect ing long-term investm ents.3

1 Eric Sigurdson, “Overcoming the Forces of ‘Shor t-termism’—corporate governance, prin cipled

leadership, and long-term sustainable value creation”, Sigurdson Post (19 February 2018), online:

02/19/overcoming-the-forces-of-short-termism-corporate-

governance-principled-leadership-and-long-term-sustainable-value-creation/#_ftnref48>

archived at .

2 Overcoming Short-termism: A Call for a More Responsible Approach to Investment an d Business

Management (New York: Aspen Institute Business & S ociety Program, 2009) at 2, online:

aspeninstitute.org/content/uploads/les/content/images/BSPonlineBroch.pdf> archived at

.

3 Dominic Barton & Mark Wiseman, “Focus ing Capital on the Long Term” (2014) January-February

Harvard Business Review, online: <hbr.org/2014/01/focusing-capital-on-the-long-term>

archived at .