"Do Current Corporate Governance Practices Help Protect I investors' Interests in Canada? " In the year 1720, the British parliament passed the Bubble Act. The act was passed to improve corporate governance and provide investor the protection from the companies making extravagant rum ours to inflate stock prices. Over the years, many laws have been framed worldwide for protecting the shareholders from manipulations by management.
The year 2002 witnessed very big corporate scandals such as, Global crossing and TTY co.These scandals cost heavily on the I investors to the tune of billions of dollars which resultantly eroded the confidence of investors' in the security market both in the United States and other parts of the world. This necessitated the need for special legislation relating to corporate governance which led to the passing of Sabine Axle Act in the United States of America. This act became famous worldwide and was considered as an epitome of governance standards in the corporate world.However, the Canadian corporate governance model is significantly different from that of the United States, so the same kind of strict legislation could not be enforced to improve the corporate governance standards in Canada.
This essay examines the role of corporate governance in protecting the I investors' interests in Canada. Firstly, I will discuss how corporate governance measures are necessary to protect the interests of I investors. Secondly, I will discuss the unique nature of Canadian multi- Jurisdictional corporate governance model.Thirdly, I will highlight the particular characteristics of the corporate ownership in Canada. Finally, I will suggest measures to improve corporate governance which can help build up Canadian security market by bolstering investor base both nationally and internationally.
The most popular study s similar to this topic was conducted by Rafael la Portia, who concluded that legal environment of a country, determines the corporate governance practices which have bearing on size of the markets in different countries.La portal studies have been used as reference by many other writers on the topic of corporate governance. Subsequent studies by Swain (2002),Mock (2006) and Gray (2010), reconsider La Portia sources and further suggest that Canadian corporate governance model is more s similar to German corporate governance model rather than resembling the models of other common away countries such as the United States of America and the United Kingdom due to the fact that Canada has multiple Jurisdictions and allows pyramidal ownership structures .I will demonstrate that the distinct corporate governance structure in Canada affects the quality of investor's protection.
Corporate governance plays a significant role in protecting the interests of the I investors. If the laws and regulations relating to corporate governance are regulated and enforced by courts, regulators and market participants in an effective manner, than only the I investors are willing to n vest in capital markets. La Portia et al. Any, "When outside I investors finance firms, they face a risk, and sometimes near certainty, that the returns on their investments will never materialize because the controlling shareholders or managers expropriate may come In Tort ms sun as asset ala selling of products below market prices to related firms, empire building and installation of unqualified family members in management and paying them inflated salaries or simply stealing of profits.
La Portia et al. That the legal up roach to corporate governance is the best approach of protecting the interests of I investors. Important objections to reform in corporate governance practices come from families that control large corporations since they don't want to dilute their political influence; increase competition; and, loose their competitive advantage in obtaining finance on easy terms due to their favorable business position. Canada's large land mass and high degrees of biological and go-logical diversity have provided the country with wealth of natural resources .
An analysis of corporate geography of Canada demonstrates that the path dependent forces of Canada's resource -dependent economic development remain a principal determinant in contemporary corporate Canada. "Corporate geography of Canada has been determined more so by corporate concerns over access to resources and markets and less so by the supply side competition in corporate laws and associated regulatory frameworks. " (Gray 488). Regulatory arbitrage m earns shopping for jurisdictions whose rules suit the specific companies' circumstances.Canada has a distinct model of corporate governance characterized by lack of regulatory arbitrage n like the arbitrage possibilities in other major economies such as that of United States of America, which pr emotes positive corporate attraction competition in jurisdictions. This leads to Canadian provincial regulatory lock in and associated managerial entrenchment.
The lack of competition in Crown corporations can hamper performance of these entities.Moreover, there is great role of politics in the functioning of Crown corporations. In Canada, although the federal government is present in most regulatory settings; it remains secondary to its provincial counterparts which signify loose federalism thereby making the Canadian corporate governance model an aggregate of 13 distinct corporate governance models. According to Gray, "There is no homogeneous Canadian model of Corporate governance but rather a mosaic of 13 provincially distinct models.
"(489).This has important implications on quality of corporate governance because provincial governments may be more inclined towards the management as compared to shareholders; as they are inextricably entwined with corporations operating within their Jurisdiction. A recent example is bail out of General Motors Canada by Ontario provincial government which signifies the favoring of Ontario based employment at expense of nationally and internationally distributed shareholders. This leads to an adverse effect on investor protection apart from creating inefficiencies in Canadian capital market.
Canadian corporate ownership differs from the widely accepted U. S model of diffused ownership. In the context of this paper, controlling shareholders refers to shareholders which have ownership in form of control blocks. These blocks are held usually by a wealthy family which is a family firm. Canadian corporate ownership is characterized by presence of significant controlling shares, business groups which are pyramidal in structure and prevalence of dual class shares which offer differential voting rights. Dual class shares and Pyramiding permits the block holders to have access to rights; which vastly exceed their actual.
I Ana controlling usually emollient toe Dora ala so are entrusted with governance of those firms. According to Mock and Young , " Pyramiding lets a wealthy individual or family magnify control over one large firm into control over a huge constellation of firms. (287). This governance problems of Canadian corporate sector more closely resemble those in Italy and Latin America rather than those in other common law countries such as U. S and U. K.
Due to several disadvantages of Pyramiding, the Pyramiding practice has been effectively eliminated in both the United States and the United Kingdom.In deriving private benefits, controlling shareholders lead to an adverse effect on corporate governance, since the way they run their corporations need not align with the interests of public shareholders. This flags the confidence of the investor in the capital market leading o less active Canadian stock markets and depressed valuations of Canadian companies. By empowering and emboldening public shareholders in form of greater legal rights and better investor protection; Canada can improve its capital markets and also pr emote the efficient allocation of the nations' collective savings.A series of reforms can improve capital allocations in order to advance general Canadian prosperity.
"For most countries, the improvement of investor protection requires radical changes in the legal system. Securities, company, and bankruptcy laws generally need to be amended. ( La Portia et al. 20).
Improvement can be made in the corporate governance quality in Canada to bolster investor protection. In order to improve the efficiency of board of directors, a certain number of independent directors must be made mandatory on the board to improve the protection of public shareholders.The institutional I investors should disclose their voting policies and records; dual class shares should require periodic renewal by majority of inferior voting shares; Toronto Stock Exchange should drop pyramid member firms with dual class shares from major indexes; greater emphasis on the enforcement of fiduciary duties of directors towards the shareholders and stakeholders of the company; enforceability of International Financial Reporting Standards to improve transparency and accurate financial disclosures to shareholders and stakeholders ; and, Board of Directors of crown corporations need to have skills of private boards.Efforts can also be made to dilute duplicative provincial regimes through a single national regulator. Moreover, the auditors of the company should perform their duties in an independent manner and objectively report the financial irregularities; thereby appreciating the code of professional thick.
The strategy for reform in corporate governance not Just calls for a set of rules, but also effective enforcement of these rules.Apart from legal rules and regulations, the directors of the company should realize the importance of protection of interests of I investors for long term survival of the company. They should follow self-regulation and abide by the principals of good corporate governance reflecting ethical leadership. My paper has shown that the quality of Canadian corporate governance practices clearly need improvement in order to build he investor's interests in the Canadian capital market; improve capital market size; expand the size of capital market and improve the allocation of the savings of the I investors.The corporate governance practices can be significantly improved by p policy reforms in security market regulations . The I investors should be aware of their rights as sneering ala they snowy make Investments In companies Toll owe ethical corporate governance practices.
