CORPORATE GOVERNANCE
Boards of directors elected by the shareholders are legally
responsible for the management of the corporation. In practice the
management is typically delegated to executive directors, senior
executives and managers. Such managers coordinate the work of
sometimes thousands of employees. Legally directors are in
charge, but functionally the corporate employees are in charge.
Glasbeek(p. 71) sees no legal problem in the initial investors
handing over control of what was originally their property. The
law operates this way to facilitate efficient investment.
Glasbeek’s concern is with political legitimacy not legal
legitimacy. His concern is that those who justify the corporate
form do on the basis that it is a nice fit with the idealized market’s
working principles. As Adam Smith pronounced in 1776, freemarket principles are based on individuals’ acting on their own
self-interest. However, shareholders have no direct legally
enforceable right to manage the assets to which they have
contributed.
The issue is the longstanding concern over the separation of
ownership from control. Smith himself expressed the view that
governments should be loath to allow the incorporation of
businesses, except in special undertakings, where management’s
exercise of discretion is so restricted that it cannot help but
coincide with investors’ interests. The “routine” businesses that
Smith suggested could be successfully incorporated were banks,
insurance companies, canal digging and bringing water into
large cities.
The importance of Smith’s point is that, while corporate managers
base their legitimacy on the free-market system advocated by
Smith, they ignore his central point about the dangers of
incorporation for the efficient workings of the market created by
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separation of ownership and control.
In 1932, A.A. Berle and G.C. Means re-identified this as a core
problem of corporate law. Their study of US corporations
underpinned their conclusion that ownership without control and
control without ownership were problems of corporate structures.
The authors saw the system as producing increasingly passive
investors, who would abandon the company rather than
discipline management. This went against Smith’s idealized
market.
Debates since the Berle and Means study have emerged between
“liberal social engineers” and “orthodox capitalist”. The former see
the corporate form as being not a true market institution and one
that should be used and regulated for social purposes other than
pure profiteering. In contrast, the orthodox capitalist call is for
restoration of the legitimacy of the corporation with the single goal
of making profits.
The orthodox capitalists of the school of law and economics deny
that corporations are anti-market in structure. They see no loss of
control by owners of capital who invest in publicly traded
corporations. Essentially, they see the legal duties imposed by
corporate law on managers of corporations as embodying the
implicit contractual terms that investors have with the corporate
managers. There appears to be no evidence to support this.
Glasbeek notes further that, just as investors are assumed to be
entirely self-interested individuals, so should managers of the
corporations be assumed to be self-interested. Accordingly,
investors should be fearful of managers not acting in the interest of
the former where it is not consistent with the self-interest of
managers. Such fear is amplified when managers are afforded wide
discretion to act.
The legal instructions to managers are “take reasonable care to act
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in the best interests of the corporation.” This is vague. The
interests of different shareholders can differ. Some want short term
gains, some want long term gains. Should the interests of future
shareholders be considered? The danger is that self-interested
directors or managers will place their own self-interest before that
of the corporation but without detection or remedy by the courts. It
may be argued that this will be remedied by a fall in share values.
Thus the market will detect and resolve the inefficient or selfinterested actions of managers. This may be plausible for some
institutional investor shareholders, such as pension funds, who can
detect inefficiency and use market power to replace management.
Is there evidence of institutional investors using their
disciplinary power? Typically individual small shareholders have
no power to discipline or replace management.
There are some actions shareholders can take if they believe
management is not acting in the best interests of the corporation.
(a)
they can get the corporation to sue abusing or neglectful
managers; at times they have power of principals over
agents;
(b)
they can be bought out at a fair price if they dissent to
directors’ decisions; the directors may argue that they
were acting in the interests of corporations;
(c)
there is also the oppression remedy where shareholders
demonstrate they have been unfairly treated or
discriminated against by directors, managers or the
corporation;
(d)
there is also the fiduciary duty of directors and managers
to put corporation’s and shareholders’ interests first before
their own.
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The problem is the vagueness and flexibility of such rules. Their
existence does indicate a problem in the corporate form of
separating ownership from control. Technical solutions have been
attempted. Glasbeek suggests the entire conception of corporations
requires consideration. A major concern is the de facto lack of
accountability of officer and directors to minority shareholders.
The role of employees
The business form workers cooperative is permitted and regulated
by law in Canada. While workers' cooperatives do not come close
to matching large corporations as accumulators of capital, they do
offer the possibility of greater accountability of managers to other
stakeholders, than that afforded by the corporate form. The form of
a workers' cooperative does not preclude incorporation. For
example the Mondragon (Spain) cooperatives are incorporated.
However, such cooperatives have a structure and procedures that
render managers accountable to the owners (workers) through a
workers' council in which each member has one vote. While the
iron law of oligarchy tends to operate, with decisions made by a
few people, the workers' co-op system does offer some checks by
the owners of the business upon those who exercise control of
decisions.
Some workers in Canada do influence their working conditions by
negotiating collective agreements with management. However,
collective bargaining must focus exclusively on the terms and
conditions of employment. It is not open to a workers' union to
contribute to the decision whether a proposed closing down of the
plant will take place, or whether the CEO should be fired and
provided with a golden parachute. Some corporations remunerate
employees with company shares. While this may encourage
employees to work harder and more efficiently, such arrangements
rarely provide workers with the power to challenge managerial
decision making because minority shareholders have typically no
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significant role to play in the management of corporations.
Furthermore, workers are by tradition and law bound to obey
managerial rules and directives provided they are reasonable,
certain and known.
Why do Canadian workers have no legal right, as workers, to
decide on matters of company policy? One presumes that an
important factor is the traditional cultural view of workers as
unimportant, as suggested by the Master Servant legislation that
regulated work relations in the 19th Century. Workers, too, are
often viewed as commodities merely to be bought and sold in the
labour market. While the National Labor Relations Act (NLRA)
that accompanied Franklin D. Roosevelt's New Deal was intended
to establish partnership between workers and management, such
partnership did not materialize because employers refused to
bargain items that they considered to be "management rights". In
particular managers guarded jealously their "right" to determine
how work is performed. See ***
Workers are viewed as inferior to management with respect to
performance of work, even in professional workplaces such as
schools, universities, hospitals, fire and ambulance services and
other workplaces with high levels of professional knowledge on
the part of workers.
Is there justification for excluding workers from a role in the
management of corporations? Arguments for their exclusion are
that workers do not take the financial risks of investors and
shareholders. While this is true, workers do take risks of workplace
injuries and resulting incapacity. It is not clear that risks of
financial loss experienced by shareholders should be treated as
more important than risks of physical and mental harm that are
experienced by employees.
It is also argued that workers have the right to exit a workplace,
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merely by providing reasonable notice of such exit. While this is
true, its relevance is unclear. Directors, officers, and managers are
all entitled to leave an organization but retain the right to manage
it. It is not immediately obvious why a worker's right to leave the
organization would justify his /her exclusion from the process of
managing the organization, through elected representatives.
Glasbeek argues workers should have more participation and
power in the management of the organizations for whom they
work. He notes the success of worker/management joint
committees in Europe, particularly Germany. The Westray mine
disaster of 1992 illustrates not only illegal management practices
but the lack of government supervision and enforcement of safety
regulations, that could have been checked by a governance role of
workers through their elected representatives.
In Canada, one or two persons own the majority of shares of 80%
of publicly traded corporations. Minority shareholders are the
overwhelming number of persons, yet have no role in the
management of their corporations. Add to this the exclusion of
workers from governance in corporations and the apparent
increasing incidence of illegal or unethical management practices
(Bre X, Enron, Westray, Hollinger are examples) and there may be
a case for bringing changes in the governance of corporations.
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