Does corporate governance help or harm companies?

There have been numerous headlines over the past several years touting the success of environmental, social and corporate governance best practices for companies who have adopted this new trend. But have you ever wondered if these new governance models are improving the ways companies are run?

A new book by Professor Bryce Tingle, KC, the Faculty of Law’s N. Murray Edwards Chair in Business Law, demonstrates that governance changes made in the last decade or so haven’t made any difference to the success of a company, and in some cases, have actually made things worse. 

“The tools that were used 30 or 40 years ago to increase shareholder value can’t easily be used to reduce carbon emissions,” explains Tingle. “Aside from the problem that tools were originally designed for a different purpose, the tools actually utterly failed to have the positive economic effects we hoped they would. Almost none of the reforms we have made to corporate governance during this time have improved corporate outcomes.”

Book explores failed attempts to improve society

Hard Lessons in Corporate Governance explores the variety of failed attempts of using corporate governance to improve society. Tingle argues that these rules are harming companies, especially Canadian companies, more than they are helping them, and are in fact, largely counterproductive. 

“Corporate governance rules make it very unlikely for companies to go public, especially in Canada, and so it is easiest for business owners to sell the company, usually to a larger firm in the United States,” says Tingle. “In fact, these corporate governance rules and standards make the Canadian startup and business environment less competitive, less innovative, and they expand inequality within corporations.”

So, what can be done to improve the environment for companies to go public in Canada? 

“It ultimately comes down to the securities commissions and provincial governments recognizing that there are no governance 'best practices' supported by the empirical evidence.” 

Tingle suggests a few things that Canadian regulators could do: permit the use of legal devices — common in the United States — that give corporate managers slightly more independence from shareholder pressure; provide companies with more freedom in the way they structure their governance arrangements; and regulate third parties, like shareholder voting advisory firms, that wield enormous power over governance arrangements in Canada. 

Let companies determine how to best operate under governance rules

Finally, when it comes to improving the environmental and social impact of Canadian companies, Tingle has simple advice: “It is a waste of time pretending that corporate governance can somehow, magically, overcome the constraints of competitive markets and cause companies to voluntarily and unilaterally change their behaviour. We need to regulate just as we always have, and leave companies free to manage how to best operate under those regulations.”

Tingle has a warning: “If we pretend that corporate governance is sufficient to solve serious social and environmental issues, when it inevitably fails, we will breed increased distrust in some of our most important institutions. At this point in history, does anyone think we need more cynicism and anger against Canadian elites?”