Canadian Business and Society:
Ethics & Responsibilities
Chapter
Twelve
Corporate Governance
Prepared by Mark Schwartz, York University
Copyright © 2008 McGraw-Hill Ryerson Ltd.
1
Chapter Outline








Rights of Shareholders
Responsibilities of Board, Membership, and
Structure
Disclosure and Transparency
Evaluating Board and Director Performance
Corporate Governance and Performance
Criticism of Corporate Governance Reform
Rebalancing Power in the Corporation
Corporate Governance and Stakeholders
Chapter 12
Copyright © 2008 McGraw-Hill Ryerson Ltd.
2
Corporate Governance: Definition

The processes, structures, and relationships
through which the shareholders, as
represented by a board of directors, oversee
the activities of the business enterprise.
Chapter 12
Copyright © 2008 McGraw-Hill Ryerson Ltd.
3
Rights of Shareholders





Secure ownership
registration
Capability to transfer
ownership
Access to relevant
corporate information
Participation and voting at
shareholder meetings
Election and removal of
board members




Share in profits of the
corporation
Knowledge of extraordinary
transactions or decisions
Disclosure of dual-class
shares
Capability to exercise
ownership rights
Source: OECD, 2004
Chapter 12
Copyright © 2008 McGraw-Hill Ryerson Ltd.
4
Responsibilities of Board


Board of Directors: group of individuals
elected by shareholders to govern or oversee
the corporation’s affairs.
Fiduciary duties: obligations of directors to
shareholders that are prescribed by laws or
regulations.
Chapter 12
Copyright © 2008 McGraw-Hill Ryerson Ltd.
5
Responsibilities of Board


Board’s written mandate must include board’s
satisfaction with integrity of CEO and other
executives and that they are creating a
culture of integrity (Canadian Stock
Exchanges)
Board must apply high ethical standards and
take into account the interests of
stakeholders (OECD, 2004)
Chapter 12
Copyright © 2008 McGraw-Hill Ryerson Ltd.
6
Board Membership

Independent director: A director who is free
from any interest and any business or other
relationship which could, or could reasonably
be perceived to, materially interfere with the
director’s ability to act in the best interests of
the corporation.
Chapter 12
Copyright © 2008 McGraw-Hill Ryerson Ltd.
7
Board Structure

Board committee examples:



audit; finance; human resources; pension;
compensation; nominating; governance; and
strategic planning.
Audit committee is required to have
independent members.
Most experts recommend separation
between the role of the board chair and the
CEO.
Chapter 12
Copyright © 2008 McGraw-Hill Ryerson Ltd.
8
Disclosure and Transparency

Disclosure requirements for Canadian public
companies (National Instrument 58-201):




Disclose whether board has adopted written code
Describe steps board takes to encourage and promote a
culture of ethical business conduct
Disclosure of executives’ compensation
Board’s audit committee oversees internal and
external accounting auditing function to ensure
accurate financial statements
Chapter 12
Copyright © 2008 McGraw-Hill Ryerson Ltd.
9
U.S. Sarbanes-Oxley Act (2002)






Public Company Accounting Oversight Board
Auditor independence
Corporate responsibility
Enhanced financial disclosures
Corporate and criminal fraud accountability
White-collar crime penalty enhancements
Chapter 12
Copyright © 2008 McGraw-Hill Ryerson Ltd.
10
Evaluating Board and
Director Performance

Criteria for evaluating board performance:






Legal
Strategic and social
Financial
Business
Human resources
Governance
Source: Belcourt and Kluge, 1999
Chapter 12
Copyright © 2008 McGraw-Hill Ryerson Ltd.
11
Corporate Governance
and Performance


Some research suggests that good corporate
governance affects firm performance
Annual rankings of governance practices:


Criteria: board composition, compensation,
shareholder rights, disclosure, returns (Report on
Business, The Globe and Mail)
Criteria: returns, independence, accountability,
disclosure (Canadian Business Magazine)
Chapter 12
Copyright © 2008 McGraw-Hill Ryerson Ltd.
12
Criticism of Corporate
Governance Reform





Audit fees have increased
Management attention diverted away from operation
of business
Additional costs have made North American
business less competitive in global market
Changes may not make a difference to firm
performance or in protection of shareholders
Approach should be principles-based, not rulebased
Chapter 12
Copyright © 2008 McGraw-Hill Ryerson Ltd.
13
Rebalancing Power
in the Corporation






CEOs have been too powerful
New balance of power emerging among
management, board, professional services
(e.g., lawyers, auditors)
Directors now playing bigger role in strategic
decision making and ethical responsibilities
Auditors more cautious
Legal counsel representing everyone
Some shareholders more active in pressuring
boards
Chapter 12
Copyright © 2008 McGraw-Hill Ryerson Ltd.
14
Corporate Governance
and Stakeholders

OECD Principles of Corporate Governance
(2004):




Rights of stakeholders are to be respected
Effective redress for stakeholders when rights
violated
Stakeholders should have access to information
Stakeholders should be allowed to blow whistle on
illegal or unethical practices to board
Chapter 12
Copyright © 2008 McGraw-Hill Ryerson Ltd.
15
The Corporation and Democracy




At the shareholder level, voting rights are based
upon share ownership and abuses occur,
infringing upon the rights of some shareholders.
Most employees have no say in the governance
of the enterprise.
The general public is removed from any access
to the system of corporate governance.
A number of stakeholders therefore not involved.
Chapter 12
Copyright © 2008 McGraw-Hill Ryerson Ltd.
16
Mintzberg’s Democratization of the
Corporation



Mintzberg proposed formal devices to
broaden the governance of the corporation.
Two means: representative democracy and
participative democracy.
Two groups involved: employees (internal)
and interest groups (external).
Chapter 12
Copyright © 2008 McGraw-Hill Ryerson Ltd.
17
Mintzberg’s Democratization of the
Corporation





Four basic forms of corporate democracy:
1. Worker Representation - workers have
representatives on the Board of Directors. I.e.
European ‘Co-Determination’.
2. Pluralistic Representation - ‘public interest’
representatives are elected to the Board of Directors.
3. Worker Participation - workers are given some
control of decision making, I.e. worker councils.
4. Pluralistic participation - external influence
groups are somehow included in internal decision
making.
Chapter 12
Copyright © 2008 McGraw-Hill Ryerson Ltd.
18
Problems - Pluralistic Participation


Seen with non-profit institutions.
How to do you ascertain representation?
Chapter 12
Copyright © 2008 McGraw-Hill Ryerson Ltd.
19
Problems - Co-determination







Leads to politicization of decision making.
Increases bureaucracy
Hampers entrepreneurial drive
Dilutes responsibilities
Delays decision
Endangers the unity and flexibility of management.
Considered incompatible with the free market system
and existing concept of private property rights.
Chapter 12
Copyright © 2008 McGraw-Hill Ryerson Ltd.
20
Problems -Worker-Representation




Minor impact on business.
Does not increase participation by workers.
Concentrate power on the top (only labour is
involved and selection of representatives is
not easy).
Representative may be remote from their
constituents
Chapter 12
Copyright © 2008 McGraw-Hill Ryerson Ltd.
21
Mintzberg’s Democratization of the
Corporation



Representative Democracy (Positives)
Gives air of legitimacy to the governance of
the corporation.
Opens channels of communication, gets
management to look at the human side,
greater access to management information.
Chapter 12
Copyright © 2008 McGraw-Hill Ryerson Ltd.
22
Corporate Governance Reform


Types of Governance Structure
Issue #1 - ‘Inside’ Versus ‘Outside’ Members
of the Board and Board Leadership.
Chapter 12
Copyright © 2008 McGraw-Hill Ryerson Ltd.
23
Corporate Governance Reform



Rechner (1989)
Type 1 - Majority Outsides and
Independent Board Leadership.
Considered this the ideal type of structure for
effective governance. Avoids the lack of
independence associated with insiders and
the vested interest leadership of the
combined CEO/Chairperson.
Chapter 12
Copyright © 2008 McGraw-Hill Ryerson Ltd.
24
Corporate Governance Reform



Type 2 - Majority Outsiders and CEO
Duality.
Common among large industrial corporations.
CEO exercises too much power? I.e. Type
and quality of information presented, board’s
agenda.
Chapter 12
Copyright © 2008 McGraw-Hill Ryerson Ltd.
25
Corporate Governance Reform



Type III - Majority Insiders and CEO
Duality.
Rubber-stamp Board
Total management control.
Chapter 12
Copyright © 2008 McGraw-Hill Ryerson Ltd.
26
Corporate Governance Reform



Type IV - Majority Insiders and
Independent Board Leadership.
Dominance of insiders is offset.
However, least likely to occur.
Chapter 12
Copyright © 2008 McGraw-Hill Ryerson Ltd.
27