Stakeholders and Takeovers: Can Contractarianism be Compassionate?

The issue of what, if any, purchase non-shareholder corporate constituencies (that is, employees, creditors, suppliers, customers, and communities) should have on the discretionary decisions of corporate management has proved to be one of the most durable, if not vexing, issues in modern corporate scholarship. Most recently, the issue has resurfaced in the context of the takeover wave of the 1980s, particularly during the latter part of the decade when control transactions became associated with high levels of leverage. At core, stakeholder advocates were riveted by the asymmetries involved in change-of-control transactions. While target shareholders earned consistent and sizeable returns from these transactions, stakeholders were left in the cold. Indeed, in some cases, control transactions were thought to be capable of inflicting highly focused losses on stakeholders. So severe were these losses that some commentators, were led to conclude it was the gains from opportunistic breaching of stakeholder contracts that motivated the transactions in the first place. As in the past, participants in the stakeholder and takeover debate generally array themselves into two distinct camps: one, which views any judicial or legislative attempt to protect stakeholders from harms not explicitly prohibited by corporate contracts as anathema (\u27non-protectionists\u27), and the other, which regards corporate responsibility for stakeholder harms as an innate and natural feature of the system of modern corporate governance (\u27protectionists\u27). In a perceptive article, Romano attributes part of the differences among scholars on divisive issues of corporate law to the starkly divergent normative beliefs that underlie each side. For non-protectionists, the underlying normative framework is individualistic liberalism, whereas for protectionists, it is usually communitarianism. Given the gulf that divides these underlying normative views, the hope for a principled and durable resolution to the stakeholder debate is indeed dim

Growing Pains: The Why and How of Canadian Law Firm Expansion

Over the last decade, the Canadian corporate law firm, like its counterparts in other industrialized countries, has undergone a profound transformation, the most remarkable feature of which has been the rapid growth of individual firms. Whereas a mere decade ago only one Canadian firm could boast of having more than 100 lawyers, today there are at least 19 firms that can make this claim. Accompanying the firms\u27 rapid growth has been their steady expansion into distant national and international markets. Significantly, even when that expansion has been confined to local markets, law firms have invoked a much broader array of growth instruments than in the past. In place of singular reliance upon the standard practice of recruitment directly from law schools and subsequent promotion through the ranks, law firms have shown themselves willing to deploy other methods including lateral recruitment (\u27cherry picking\u27), greenfielding, affiliations,and mergers. Interestingly, while the rationale for rapid law firm growth has been given belated, though careful, attention by legal academics, the issue of the mechanisms by which that growth can be achieved has been virtually ignored. This oversight is curious. By understanding the calculus governing the choice of growth instruments, important light can be cast on the structure of and rationale for the modern law firm, and on the way in which it has coped with the stresses and strains of a dramatically changing market environment

Breaking the Logjam: Proposals for Moving Beyond the Equals Approach

Over the last decade, the structure and performance of Canadian financial institutions has undergone a profound transformation. Propelled by both regulatory changes and market innovations, Canadian financial institutions have found their historically protected markets opened to intense competition from a variety of different sources. The most significant regulatory change has been the piecemeal dismantling of the pillars that have traditionally separated the core activities of banks, insurance companies, loan and trust companies, and securities dealers from encroachment by one another. With lower entry barriers, institutions have scrambled to penetrate each other\u27s markets. This entry has spurred a narrowing of differences in the structure and conduct of Canadian financial institutions. Another regulatory change that has spurred increased competition is the reduction, (or, in the case of American owned Schedule II banks, outright elimination) of the constraints that have traditionally limited the operations of foreign financial institutions in Canada. Not surprisingly, the reduction of these restrictions has spawned the growth of a highly dynamic foreign financial industry in Canada

Bad Policy as a Recipe for Bad Federalism in the Regulation of Canadian Financial Institutions: The Case of Loan and Trust Companies

This article addresses the impact of substantive policy on federal arrangements in the regulation of Canadian loan and trust companies. It is argued that reliance on market-suppressing policies (flat-rate based deposit insurance and selective bail·outs of depositors in the event of institutional failure) has undermined the value of competitive federalism in this area, and has spawned highly contentious policy initiatives such as Ontario\u27s Equals Approach. To redress the federalism problems in the regulation of loan and trusts, a useful starting point would be the enhancement of market forces in substantive policy. Here, it is argued that the commitment to secrecy regulation by financial institution regulators has impeded this enterprise

Must Boards Go Overboard? An Economic Analysis of the Effects of Burgeoning Statutory Liability on the Role of Directors in Corporate Governance

On July 21, 1992, six outside directors on the board of Westar Mining Ltd. resigned abruptly from the company\u27s board of directors. Westar was a troubled mining company operating in British Columbia. In 1991, the company had lost $62.2 million, mainly as the result of a poorly performing export coal mine. While resigning from the board, the directors assured the public that there had been no wrongdoing by the company. Rather, the reason for their departure was related to concern over personal liability for wages and other benefits that might be owed to more than 1900 of the company\u27s employees under provincial employment standards legislation should the company become insolvent. Despite the fact that their departure might not absolve them from liability for other duties and would greatly complicate the company\u27s bid for survival, the size of the personal liabilities they faced - more than$20 million - left the directors little choice. Predictably, the announcement of the resignations created considerable consternation in the financial community, the magnitude of which was enhanced when, just one week after the Westar resignations, the entire board of PWA Corp. resigned en masse from the boards of each of its subsidiaries, including Canadian Airlines Ltd. As in the case of Westar, the directors attributed their decision to the fear that they would be forced to pay employee wages, taxes or some other obligation out of their own pockets should the struggling airline run out of money . These highly publicized defections have been invoked by critics as exemplifying the rather myopic and unthinking addiction that Canadian governments have developed to the elixir of directors\u27 liability. By one legal practitioner\u27s account, in Ontario alone more than 100 different federal and provincial statutes prescribe some type of directors\u27 liability. Some critics have gone further and have viewed the board resignations as a powerful passion play that demonstrates in vivid terms the callous and hostile treatment that Canadian shareholders and business managers can expect to receive at the hands of populist legislatures

The Political Economy of Rule of Law Reform in Developing Countries

In this paper, the authors briefly review the recent experience with rule of law reform initiatives in Latin America, Africa, and Central and Eastern Europe, drawing on more detailed case studies by the authors. The authors are currently working on a similar case study on rule of law reform experiences in Asia

Challenges to the Citadel: A Brief Overview of Recent Trends in Canadian Corporate Governance

Politicians, bureaucrats, owners, managers and employees are becoming increasingly concerned with the capacity of Canadian corporations to survive and prosper in the twenty-first century. By and large, the attention focused on competitiveness has developed from the rapid international integration of goods, capital and service markets. This integration has resulted in the creation of a new borderless world, in which consumer preferences reign supreme and in which those corporations that fail to anticipate, shape and respond to these preferences with cost- and quality-competitive products face certain failure. Concern over the survival of national firms commands widespread societal attention because of the dependency of many core public policies on the economic surplus generated by robust private markets. Given the focus on globalization and competitiveness, it is not at all surprising that academics have expended considerable energy identifying and analyzing the determinants of national economic success in this new international order. Although the composition of the basket of favoured policies varies from scholar to scholar, most accord at least some importance to the quality of the system of corporate governance that obtains in a given country. Tracking the modern use of this term, most scholars look beyond the mere operation of a firm\u27s formal governance apparatus (i. e., the board of directors) and consider how a wide range of market (e.g., capital, product, managerial and takeover markets), legal (e.g., derivative and personal suits) and political (e.g., shareholder voting) devices combine to discipline managerial behaviour

The Capricious Cushion: The Implications of the Directors and Insurance Liability Crisis on Canadian Corporate Governance

One of the clearest legacies of the growing concern expressed over the international competitiveness of Canadian and American businesses has been the urgency it has lent to a very old debate respecting the efficacy of the apparatus used to govern the business and affairs of large, public corporations. For instance, Michael Porter, one of the most articulate - if not the most prolific - of the new competitiveness scholars, has suggested that American economic performance could be improved by enhancing the performance of the traditional corporate governance apparatus. In this respect, his suggestions closely track the thrust of recent reform initiatives proposed by investors and regulators who seek to increase the performance of the board by making it more responsive, indeed responsible, to shareholder interests. Although some of the current critics of the corporate board have placed exclusive faith in the ability of market mechanisms to ensure heightened board effectiveness, most initiatives rely to some extent on strengthened legal duties and responsibilities to achieve this task. And, as measured by the growing willingness of both courts and securities regulators to impose liability on directors for failing to review diligently various corporate transactions (i.e., self-interested transactions, public financings, etc.), it is clear that the reformist calls made by these critics are slowly but surely being heeded. Paralleling the trend to increased legal liability of boards for actions that are inimical to shareholder interests has been an equally clear trend towards enhanced legal responsibility for corporate conduct deemed contrary to broader stakeholder or community interests

Rewarding Whistleblowers: The Costs and Benefits of an Incentive-Based Compliance Strategy

Canadians today are very much concerned about corporate crime and about corporations that do not comply with regulatory requirements, especially those related to the environment, securities law and occupational health and safety regulations. This increased concern has led to proposals to extend liability for illegal corporate conduct (by making directors personally liable for the actions of their companies, for example); it has also led to arguments in favour of greatly increasing the sanctions on corporations (and individual wrongdoers within those corporations) for wrongful conduct. The recent academic literature reflects a lively debate as to the effectiveness of such proposals in reducing illegal behaviour in corporations and their consequences for the functioning of the corporation as an economic institution. With some notable exceptions, the focus of the debate on sanctions and liability rules has resulted in the relative neglect of an essential ingredient in effective deterrence; the capacity to monitor and detect wrongdoing within the corporation. The lack of attention to the potential for increased compliance through improved monitoring and detection is surprising for several reasons. First, as Jennifer Arlen notes, [m]any corporate crimes - such as securities fraud, government procurement fraud, and some environmental crimes cannot be readily detected by government . Second, there is a significant body of literature on regulatory reform that relates the ineffectiveness of many traditional command and control forms of regulation to the costs and difficulties which are inherent in government monitoring and detection of wrongdoing. Third, one of the most generally held tenets of contemporary criminology is that increasing the likelihood of detection and prosecution tends to be a more effective means of strengthening deterrence than making sanctions more severe. In other words, it is better to put another cop on the beat than to build more jail cells. This study is intended to help redress the inadequate emphasis on monitoring and detection in the current debate on corporate criminal and regulatory responsibility. Accepting the proposition that direct monitoring of corporate conduct by government as a means of detection is unlikely to be cost-effective, our concern is to identify agents within the corporation who can be enlisted in the cause of monitoring and detection, and to consider how public policies can provide stronger incentives, and make it easier, for these agents to identify and disclose wrongdoing within the corporation. In conducting this analysis, we begin by considering one such policy that has generated sustained public attention and controversy over the last decade: so-called whistleblower protection

Reforming the Reform Process: Privatization in Central and Eastern Europe

As communist regimes throughout Central and Eastern Europe have fallen one by one under the weight of economic failure and popular discontent, the task of transforming these countries into stable and vibrant liberal democratic societies has commanded the attention of many Western governments and international organizations. Given the rapid and extremely destabilizing deterioration in the levels of production and employment in each of the Newly Liberalizing Economies (NLCs), economic renewal has become an urgent priority of the transformation process. Initially, the greatest importance was attached to reforms involving stabilization and liberalization of prices, lowering of trade barriers, fiscal restraint, and currency convertibility. Nevertheless, at a relatively early point in the reform enterprise, it became strikingly apparent that extensive micro-economic reforms would also be necessary for the transformation process to succeed. At the core of these micro-economic reforms stands privatization - the policy aimed at reducing the role of government, or increasing the role of the private sector, in an activity or in the ownership of assets. However, unlike the relatively straight-forward adoption of many of the measures aimed at macro-economic reform, the pace of privatization programs in the NLCs, as measured by the amount of existing assets transferred from the state to the private sector, has been extremely disappointing. In Czechoslovakia, Hungary, and Poland, for instance, there have been very few large-scale privatizations, although recently there have been some impressive results obtained with respect to small-scale privatization. In attempting to identify the sources of delay in the process, Western commentators have attributed the lion\u27s share of responsibility to policy-makers in the NLCs. This line of attack implicitly assumes that the programs devised by Western policy analysts (largely economists) are fundamentally sound, and that it is only the lack of commitment to, or intellectual appreciation of, the rather unassailable case for radical privatization policies that has impeded successful policy implementation. If this assessment is accurate, then the possibilities for hastening the pace of privatization programs are extremely limited. In this article, we advance a rather different explanation for the debilitating delays and uncertainty that have plagued privatization in Central and Eastern Europe. Instead of focusing on implementation difficulties, we argue that the source of the faltering pace of privatization in the NLCs lies within the basic architecture of the programs themselves