| Reviews / Comptes Rendus | Labour/Le Travail, 56

Reviews / Comptes Rendus

Janis Sarra, ed., Corporate Governance in Global Capital Markets (Vancouver: UBC Press 2003)

CORPORATE GOVERNANCE has become a business buzzword in the turbulent years since financial scandals at Enron, Tyco, Nortel Networks, and other leading global corporations wiped hundreds of billions of dollars from the portfolios of investors around the world. Legal experts, securities regulators, and business schools have since rushed in to fill the legal and moral void left by those scandals, with a range of proposals aimed at enhancing the integrity, transparency, and accountability of corporate management. Corporate managers and directors are now held to a higher governance standard thanks to initiatives like the US Sarbanes-Oxley requirements for financial reporting. Whether these measures, and other changes being designed and debated in many countries, make any noticeable difference to the efficiency of capitalism remains to be seen. An equally important, but less-discussed, question is whether these refinements to the managerial processes of the modern corporation will somehow make society a "better place," more broadly defined — or, in fact, a worse one.

Indeed, on a superficial level the notion of "holding corporations accountable" must seem rather appealing to a relatively broad cross-section of society, including many social and community advocates who have jumped on the corporate governance bandwagon. The language of "social responsibility" is often invoked in discussions of governance reform. Those calling for tighter control over corporate managers are often called "activists." But to whom are they asking that corporate managers be held accountable? And on what criteria? These are important questions not always addressed by those, including those on the left, beating the drum for new governance standards.

Within this context, this recent Canadian collection —Corporate Governance in Global Capital Markets, edited by Janis Sarra of the Faculty of Law of the University of British Columbia — makes for an informative and thorough, but sobering, read. The thirteen essays contained in the volume were originally presented at a specialists' conference on corporate governance held at UBC in 2002. They address several different dimensions of the corporate governance debate. An introduction by the editor, and her excellent theoretical survey in Chapter 2, provide a useful legal and economic context for the subsequent discussions, and a convenient introduction for non-specialists to the theoretical literature regarding corporate control and its central "principal agent" problem (namely, how do those who own corporations ensure that their hired managers respect their preferences and priorities). An accessible foreword by Purdy Crawford — the wise man of Canadian corporate governance — summarizes his views on recent reform proposals (including splitting the functions of CEO and Chairperson, and issues related to the composition and size of boards of directors).

Part 3 of the book contains three chapters considering the role of directors in more detail — including a novel look by Barry Slutsky and Philip Bryden at the unique governance challenges facing directors of Crown corporations. Part 4 considers the special governance problems faced by distressed corporations — unfortunately, an all-too-common circumstance in Canada in recent years. Its three chapters will provide useful fodder for a public debate over Canada's bankruptcy protection laws and procedures that will only intensify in the wake of the recent management debacle at troubled steel-maker Stelco.

Most Labour/Le Travail readers will likely be especially interested in the chapters contained in Part 2 of the book, "Shareholder Activism and Control: Accountability for Corporate Harms." These four chapters provide a representative sense of the growing, but to my mind unconvincing, literature linking corporate governance with so-called "corporate social responsibility." The chapters by Gil Yaron (of the Shareholder Association for Research and Education, a leading Canadian shareholder "activist" network) and Ronald Davis (now Associate Professor in the UBC Faculty of Law) consider the social responsibility angle on corporate governance most broadly. Both authors situate their arguments with respect to the notion of the "universal investor," posited by Robert Monks and other writers, who have celebrated the rise of pension funds and other institutional investors as heralding a constructive new era in capitalism. The idea is that since these institutional investors hold the shares of many (or even most) corporations, and they tend to invest for long-term returns, they will possess economic interests that are compatible with (or even identical to) those of the broader society. Hence these investors can use their collective power (assuming a legal and cultural framework which facilitates this shareholder "activism") to promote progressive social and environmental goals through the corporations which they own.

Yaron considers the extent to which Canadian corporate law allows for the sorts of interventions (such as shareholder resolutions) aimed at enforcing the will of these "universal" (and presumably socially concerned) investors over corporate actions. Despite recent legislation which expands the legal space for these types of interventions in Canada, Yaron finds that many barriers remain, ranging from shareholder apathy to ownership concentration to inadequate proxy voting rules. Davis considers whether the activism of universal investors could be capable of restraining the negative actions of far-flung multinational enterprises. He concludes that it cannot sufficiently do this job (for various functional reasons, such as imperfect information and the uncertain framework of international law), and must be supplemented by government regulations to ensure that corporations respect "international standards."

While both authors express caution about trusting shareholder activism with too much responsibility for moderating the excesses of global corporations, their underlying faith that activist shareholders would even have a motive for enforcing more humane and sustainable behaviour on corporations, let alone the power to do so, is open to serious question. Yaron is more honest than most advocates of this strategy, in reporting that pension funds own only about 10 per cent of all publicly traded equities (less informed writers on this subject still often claim, falsely, that pension funds own "most" of the stock market). Yet he never asks how socially aware pension investors might aim to exert influence over the other 90 per cent of capitalism. He summarizes research which superficially addresses the question of whether shareholder activism can "make a difference" on the behaviour and performance of companies. The evidence is quite robust that active pension fund interventions (such as those initiated over the years by CalPERS, the giant California public sector pension fund) will indeed lead to improved financial performance – measured by profitability, share price return, and other conventional indicators. Yet the vast majority of those interventions have been strictly aimed at governance issues and shaking up ineffective corporate management teams, not at promoting more "noble" social or environmental goals. So we should not be surprised that this "activism" leads to improved "performance" by those traditional measures. Whether the targeted corporations demonstrate any notable difference whatsoever in their social and environmental responsibility is an entirely different question, and Yaron's conflation of the two issues is confusing at best. Indeed, many "social investment" advocates will deliberately portray Yaron's evidence as "proving" that socially concerned investment strategies can match or even exceed the financial performance of traditional investment strategies, thus indicating that "ethics" and "profits" are not incompatible. In fact, however, Yaron's evidence shows simply that investors who actively press managers to increase profits can in fact succeed in doing so. That's a rather different conclusion, indeed. Can-ada's largest occupational pension fund, the Ontario Teachers' Pension Plan Board, has taken a similarly "activist" approach — buying an active 25 per cent stake in the non-union airline WestJet, and partnering with Maple Leaf Foods to shut down underperforming (and unionized) meat processing plants. The "activist" OTPPB has an exemplary financial record among its peer institutional investors, yet can hardly be attributed with having had a progressive impact on society through its investment strategy.

The central proposition of the "universal investor" model, that so long as investors are vested in a sufficiently broad range of companies then their interests will converge with those of society (since the negative consequences of actions of those corporations can no longer be "externalized" by those investors), is ludicrous: it implies society is simply a constellation of corporations, and denies the possibility of any conflict of interest (or potential for "externalization") between those who own corporations and those (at home or abroad) who do not. A related implicit claim is that shareholding is now universal across social classes (as well as being "universal" in Monks' sense of portfolio diversification), yet evidence on the precarious (and growing) inequality of financial wealth ownership readily disposes of this claim. In fact, most Canadians have no economically significant stake in the stock market whatsoever (either directly or indirectly), and the vast majority of corporate equities are owned (directly or indirectly) by a surprisingly small elite of society. The mutual fund industry likes to pretend that investing is a socially "universal" pastime every February when they unroll their annual onslaught of RRSP advertising; but social scientists should dig a little more deeply before accepting the claim at face value.

In the end, the project of improving corporate governance is ultimately aimed at tightening the control of shareholders over the actions of corporations, in hopes of enhancing shareholder wealth. As editor Sarra states bluntly in her introduction, "The goal that flows from these notions is shareholder wealth maximization, aimed at an optimal return on investment of equity capital." (xvii) It is not at all clear that corporations that function still more directly and ruthlessly in the interests of maximizing profit (and hence shareholder wealth), whether defined in the short-run or the long-run, will be at all more respectful or accommodating of working people at home or abroad, their communities, or the environment. Indeed, the reverse is quite likely the case. In this context, progressives should indeed be very careful what they ask for in the corporate governance debate, lest they get it — regardless of how often words like "accountability," "responsibility," and "activism" get thrown around. A more hard-headed left analysis of corporate governance initiatives, and how they relate to efforts aimed at holding corporations accountable to a more inclusive constituency (beyond just their shareholders), would be a most useful and timely contribution to this ongoing debate.


Jim Stanford Canadian Auto Workers

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