Canadian Lawyer

November/December 2019

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BANKING ON CORPORATE OPINION 12 www.canadianlawyermag.com The meaning of corporate life The debate about whom corporations should serve has been brought back to the fore by a Business Roundtable statement LATE THIS past summer, The Economist's cover posed the question "What are companies for?" For many, this marked the latest flurry of discussion in the long-standing debate about the purposes that corporations properly serve. For members of my family, it was an occasion to feign annoyance about my constructive and insightful protest of the grave crime of ending a sentence with a preposition. Putting aside familial disagreements about grammar for the moment, the impetus for the recent heightened focus on corporate objectives was the release by the Business Roundtable, an organization of the United States' most powerful chief executives, of its "Statement on the Purpose of a Corporation." In that statement, the Roundtable abandoned the view that companies must prioritize the interests of shareholders, often called the "shareholder primacy principle." It argued that companies should balance the needs of their various stakeholders, including customers, employees, suppliers and local communities, as well as shareholders. While the academic debate about shareholder primacy predates it, the granddaddy of the dogma that directors' primary fiduciary obligations are to protect shareholders' interests in a takeover bid context is the Revlon decision of the Delaware Supreme Court in 1986. In that case, the court concluded that "while concern for various constituencies is proper . . . that principle is limited by the requirement that there be some rationally related benefits accruing to all shareholders." Corporations may take steps to advance the interests of non-shareholder constituencies or to undertake initiatives based on social concerns (such as safety or environmental matters), but only if they are directed to enhancing shareholder value. The recently increased focus on the subject did not arise from nowhere. The debate has been rumbling in Canada since our Supreme Court's decision in BCE Inc. v. 1976 Debentureholders, a leading judgment on the duties of corporate directors to act in the best interests of the corporation. South of the border, the societal role of corporations is newsworthy. The Democratic Party leadership race, for example, has prominently featured candidates' proposals for refocusing corporate attention on non- shareholder constituencies (such as Senator Bernie Sanders' proposed prohibition on share buy-backs unless increases are made to employee compensation and Senator Elizabeth Warren's proposed requirement for employee representation on corporate boards). Even the U.S. president has embraced this to some extent, advocating penalties for corporations that locate productive activities internationally and thereby undermine employment in corporate America. The reaction of shareholder groups has been swift and predictable. The Council of Institutional Investors, for one, respectfully disagreed, noting that the Roundtable's statement "undercuts the notion of managerial accountability to shareholders" and repeating the common criticism that accountability to everyone means accountability to no one. Put differently, corporations serving multiple constituencies cannot be effectively held accountable to any. They might have (though they didn't) even put it to music: "Corps, huh, good god y'all, what are they good for, absolutely everything, say it again!" There is a response to this, naturally. The concerns expressed about corporations having multiple, and often competing, objectives is fundamentally based on questions about the role of corporations in society. The CII itself argued that responsibility for defining societal objectives rests properly with governments and not with corporations. The Business Roundtable, however, was focused on each individual corporation identifying and seeking to fulfil its very own purpose. Whatever a given corporation's goal, the corporation's actions should be measured in terms of their furtherance of that goal, the achievement of which should benefit all of the corporation's stakeholders. Each corporation has its own purpose. This aligns with the statutory expression of fiduciary duties in Canada, namely a duty to act not in the best interests of one or more specified stakeholder groups but, instead, in the best interests of the corporation itself. "The Roundtable . . . argued that companies should balance the needs of their various stakeholders, including customers, employees, suppliers and local communities, as well as shareholders." Neill May is a partner at Goodmans LLP in Toronto focusing on securities law. He can be reached at nmay@goodmans.ca. The opinions expressed in this article are his alone.

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