Edward J. Waitzer

The Good Corporate Citizen

This paper considers the use of various legal instruments to advance a more expansive, but focused, view of directors’ duties and discretion – one which focuses on the longer term interests of the corporation. To do so, we begin with an attempt to clarify the nature of directors’ statutory duties under Canadian corporate law. We then consider the recent decisions of the Supreme Court of Canada in Peoples Department Stores Inc. (Trustee of) v. Wise and in BCE v. 1976 Debenture-holders, in which the Court took a broad view of corporate purpose but failed to provide clear logic or operational guidance as to consequential directorial responsibilities. As a result, the Court may have afforded directors increased deference (assuming they comply with prescribed procedural steps) without a clearly stated legal rationale. We then outline various legal theories that courts might consider and elaborate on in order to help advance and clarify some of the concepts averted to by the Supreme Court of Canada in the peoples and BCE decisions, as well as opportunities for complementary legislative or shareholder-initiated reform.

Rethinking the Purpose of the Corporation

For about forty years, corporate governance and corporate law focused on minimizing “agency costs” by aligning the interests of shareholders and managers through a series of techniques, including regulatory standards, independent directors, take‐overs and activist shareholders. These means, combined with implicit acceptance of the “Efficient Market Hypothesis” (EMH) reinforced belief that share prices reflected objective corporate performance and that maximizing shareholder wealth was the purpose of the corporation. This author, however, argues that proper corporate governance requires more than just faith in efficient equity markets and strong managerial incentives. Despite the desire for simplicity, there is no one “right” governance model. Governance is highly contextual and, ironically, the existing corporate law and regulation have tended to frustrate dynamic adaption and have led to governance systems that underperform. The author offers Systems Theory as a better way to think about corporate purpose and governance. Systems are more than the sum of their parts, they are comprised of subsystems which in turn are comprised of other subsystems on so on, and the overall health of the system depends on the continued health of each of its essential subsystems, as well as of the larger system. Systems theory counsels against focusing on any single metric (and in favor of the need for new ones — the relevance of metrics inevitably run down over time). Metrics such as profits, employee turnover, and customer satisfaction are not ends in themselves. Rather, they are a source of information about whether the corporation is relevant, resilient and sustainable. The systems challenge is to bring about a paradigm shift that restores connectivity between investors, employees, management, other corporate stakeholders and governments. This will require thinking differently about how the constituent elements interact and produce results.

Uncertain times, plural rationalities and the pension fiduciary

Modern portfolio theory is no longer quite the safe harbor for fiduciaries making investment decisions that it once was (Hawley et al. 2011). One reason for this is the prolonged uncertainty in the financial markets that was mentioned by chairman Bernanke in 2010 and which still seems to be with us two years (at the time of writing) down the line. In such an environment, the pension fiduciary faces both the external pressures stemming from a prolonged uncertain investment outlook, and the internal pressures stemming from employers and participants reacting to economic uncertainty and voicing their concerns related to the investment of pension assets. Fiduciaries have a duty to balance the interests of their different participant groups, and understanding the perspectives of those beneficiaries is critical to successful implementation of fiduciary obligations (Hawley et al. 2011; Berry and Scanlan 2014). From a practical perspective, unrecognized stakeholder expectations can pose risks to follow-through on implementation of investment strategies. How should the pension fiduciary act when the expected correlations among asset classes fail to materialize? How should the pension fiduciary interpret the apparently mixed signals from plan sponsors whose reactions to the sudden exposure to significant unfunded liabilities range all the way from derisking (by shifting more plan assets into fixed income investments) to seeking higher expected returns (by increasing the plans exposure to hedge funds and private equities)? What is the framework for making asset allocation decisions in such an environment?