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Shareholders Deserve More

Updated: Mar 31, 2018

First published in The National Post

By: Anita Anand

Terence Corcoran recently claimed that "corporations are not public institutions, nor are they shareholder or economic democracies" (The Subversive Campaign Against Private Enterprise -- May 15). Mr. Corcoran was criticizing Mr. Verdun, a shareholder of Onex Corp., for disputing the appointment of Heather Reisman, spouse of the CEO of Onex, to the Onex board. Mr. Corcoran's view of the corporation represents a fundamental misunderstanding of corporate law.

The corporation is indeed a profit-maximizing entity, as Mr. Corcoran notes. However, Canadian corporate statutes embody a number of rights for shareholders. These rights include the right to elect directors, appoint auditors, make shareholder proposals, solicit proxies and issue dissident proxy circulars, requisition meetings, launch derivative actions or oppression claims. In short, there are firm bases in Canadian corporate statutes for referring to the corporation as a shareholder democracy.

Shareholders have every right to object to the composition of the board. Indeed, recent proposals for corporate governance reforms have followed shareholder complaints that boards do not contain a sufficient number of independent directors. While independence itself is not a panacea for bad governance practices, it is certainly within Mr. Verdun's rights qua shareholder to object to the composition of the board.

It is true, as Mr. Corcoran states, that shareholders who disapprove of a company's governance practices can sell their shares and "move on to other private companies." However, exiting the corporation is not a shareholder's only option. Nor is it always a realistic alternative if the shareholder owns a significant position in a company with a relatively small public float. The fact that the corporate statute contains procedures for shareholders to voice their views in numerous ways, including via the selection of the corporation's directors, fully supports this claim.

I would argue that the corporate statute does not go far enough - that many of the rights it provides to shareholders give the appearance of being strong but in reality are weak rights. Take, for example, the right to appoint auditors. In practice, management selects the auditor and places its name on the proxy or meeting agenda for shareholders to appoint.

Shareholders are presented with the name of an auditor; they can vote in favour or against this name. In other words, they simply confirm or reject a decision that has been made by management. The proxy process wherein shareholders cede their vote to management (or refrain from voting altogether) exacerbates the problem. Thus, in terms of their relationship with auditors, and the input they have into decisions relating to auditors, shareholders' rights are limited.

A similar argument can be made in terms of the shareholders' right to elect directors. Typically, shareholders are presented with a "slate" or roster of names of proposed directors. They vote in favour of or against the slate. In a slate that contains three names, for example, there is no opportunity to approve one of the names and disagree with the other two. Admittedly, cumulative voting procedures are permitted under Canadian corporate statutes, which allow shareholders to aggregate their director votes and allocate them to specified members of the slate. However, these voting procedures have their own limitations and are rare in Canada in any case.

Under current law, corporations are indeed shareholder democracies. But in many ways, the law does not provide shareholders with an effective voice in the corporation. As the corporate entity's most significant stakeholder, shareholders deserve more.

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