Who is being served?

By Marcel Côté

The fiduciary responsibility of a board of directors requires its members to act in the best interests of the company. This was reaffirmed in last year’s well-known Supreme Court of Canada decision in the BCE and Bell Canada case. The highest court in the land ruled that when board members must decide between the interests of various stakeholders (for example, shareholders and bondholders, as in the BCE case), they should be guided by the interests of the company and all its stakeholders.

Governance is very often associated with the defence of shareholders, especially minority shareholders. Al-though professional organizations dedicated to promoting good governance — and there are many in Canada — profess their respect for the rights of all corporate stakeholders, in practice they focus their attention on shareholder concerns.

This is mainly due to the activism of the Canadian Coalition for Good Governance (CCGG) and to Board Games, an annual ranking of Canadian companies based on governance practices published by The Globe and Mail. The CCGG comments on major public governance issues. It is supported by large institutional investors, and its initiatives in good governance are limited to defending the interests of minority shareholders, as if institutional investors and companies always have common interests.

Yet, good governance means much more than defending minority shareholders’ rights. In Canada, the vast majority of public companies have a controlling shareholder, very often an entrepreneur who intends to pass the business on to his or her children. Good governance must acknowledge this contingency and address it. This means ensuring that the business transfer is well organized, that the next generation will be able to assume control of the enterprise and that the family has put in place adequate management structures such as a family council. This process forms the basis of good governance in companies with a controlling shareholder. However, you won’t find the slightest information about succession-planning issues in the abundant documentation on governance produced by the CCGG or by professional firms of lawyers, accountants or human resource specialists.

The same criticism applies where corporate social responsibility is concerned. Like succession planning in family businesses, organizations that disclose best practices in corporate social responsibility are also overlooked and rarely mentioned in documentation on good governance. Such stakeholders as customers, communities, employees and society in general are given short shrift by the CCGG and other advocates of good governance.

Each year, the Globe uses 35 well-defined criteria to evaluate the performance of several hundred boards of Canadian public companies. However, the vast majority of these criteria relate to minority shareholders’ rights and thus provide a tunnel view of what constitutes good governance. The truth is that the priorities of minority shareholders may differ from those of other stakeholders. In the Globe ranking, the priorities of minority shareholders far outweigh those of other stakeholders.

The result is ironic, to say the least. According to this ranking, good governance is not tied to good economic performance. There is a slight negative correlation between the governance ranking and the five-year return for investors, which is certainly not what we’re taught in the many training programs on corporate governance.

Governance that is concerned only with minority share-holders is poor governance, which unfortunately is what the Globe ranking reflects. The reality of every business is complex, and its governance must take this into account. The Globe and the CCGG should follow suit.

Marcel Côté is founding partner at SECOR Consulting in Montreal