Introduction

The role of corporate boards in Canada has significantly evolved over the past century. Scholars, such as Alan Hutchinson, associate this ongoing change with the development of democracy. Specifically, in the 1940’s corporate democracy became a new fascination and the board of director’s focus shifted from acting as corporate trustees to acting as shareholder representatives.[1] Investors wanted their voices heard in the business arena as well as in the political world.[2]   That is, they wanted to vote, be on a level playing field with other investors and know what strategic decisions corporations were making and why.

Today, corporate boards, for the most part, take on a supervisory and monitoring role.[3] That is, they not only appoint management positions, they also oversee management activities. The qualities that generally lead to an effective board of directors are debatable. However, most scholars agree that boards need to be sufficiently independent if they are to be successful at all.[4]

Corporate Governance and Democracy

Voting is one part of a country’s democratic health. Arguably, the same can be said for corporate governance. Hutchinson argues that Canadians do very well in terms of the average conditions of life.[5] They have access to health care, education, employment, and housing. Thus, Canada is in the highest rankings of the United Nations’ annual evaluations of human development.[6] According to Hutchinson, there needs to be a comparable level of accessibility in the corporate world. In order for Canada to truly be democratic, he asserts, democracy needs to operate within Canadian corporate structures as well as within politics.[7]

Democracy integrates the best of both capitalism and socialism, wherein the gap between the high and low economic social classes is reduced.[8] In order for corporations to be ‘democratic’, market exchange must not be top priority, but rather, a fuller kind of political participation is necessary.[9] The market must be transparent, visible, and connected to the public.[10]

Corporations stand between the market and the government and corporate power needs to be democratized if there is to be any real progress in closing the economic gap between social classes.[11] Relationships between corporations and the state, corporations and the public, and the relations between shareholders, directors, officers, and employees need to be transformed.[12]

The public requires greater participation and control over the institutions and practices that most affect their lives; increased public participation and corporate transparency will surely advance democracy in Canada by not only reducing the gap between the economic classes but also reviving Canada’s present democratic practices.[13]

The Evolution of the Board of Directors

Over the course of the 20th and 21st centuries the legal community has viewed directors as trustees for the community and shareholders as well as representatives, and even agents, of the shareholders.[14] Academic and judicial definitions of the appropriate status of directors, were influenced by different understandings of the role of corporations in society.[15]

In the early 20th century directors were seen as trustees and this notion was influenced by the progressives concerns about the concentration of private and public power.[16]  In the 1940’s corporate democracy became a new fascination and the board of director’s status shifted from acting as trustees to acting as representatives of the shareholders.[17] Directors were labeled as representatives because their status was seen as analogous to the status of democratically elected representatives.[18]

Later in the 20th century, there was an emergence of a new theory of the corporation, which recognized no internal power or hierarchy.[19] It gave rise to the idea that directors were not representatives but merely the shareholders agents whose task was limited to monitoring the executives.[20] This is the dominant function of boards today. Thus, it is important that boards remain objective and that they do not align their interests with those of management.

Qualities of a Successful Board

Independence is an important measurement of a board’s success.[21] As a case study of Lehman Brothers shows, however, it is not necessarily a guarantee of it.[22] Nor do supermajority independent boards succeed any more than non-independent boards.[23] Thus, while independence is a desirable feature of corporate boards it is not sufficient in and of itself to generate an effective board of directors

Jeff M Hauswirth, Han Van Halder and Patrick Walsh’s 2012 essay What Boards Must Get Right, argues that, on top of independence, boards need to focus on three critical areas: strategy oversight, CEO succession and management and risk management.[24] In reality, however, for most corporate boards today, there is an insufficient amount of time, expertise and experience.[25] Thus, innovation is needed to bring corporate boards in step with modern global market place.[26]

 

 

[1] Dalia Tsuk Mitchell, “Legitimating Power: The Changing Status of the Board of Directors” in Cynthia A. Williams & Peer Zumbansen, eds, The Embedded Firm (Toronto: Osgoode Law School, 2011) 60 at 69.

[2] Ibid.

[3] Jeff M. Hauswirth, Han Van Halder & Patrick B Walsh, “What Boards Must Get Right” (January 2012), Spencer Stuart (blog), online: <https://www.spencerstuart.com>.

[4] Ibid.

[5] Allan C Hutchinson, The Companies We Keep (Toronto: Irwin Law, 2005) at 59-81.

[6] Ibid.

[7] Ibid.

[8] Ibid.

[9] Ibid.

[10] Ibid.

[11] Ibid.

[12] Ibid.

[13] Ibid.

[14] Supra note 1.

[15] Ibid.

[16] Ibid.

[17] Ibid.

[18] Ibid.

[19] Ibid.

[20] Ibid.

[21] David F Larcker & Brian Tayan, “Lehman Brothers: Peeking Under the Board Façade” (4 June 2010), Stanford Closer Look Series (blog), online: <https://www.gsb.stanford.edu/faculty-research>.

[22] Ibid.

[23] Ibid.

[24] Supra note 3.

[25] Ibid.

[26] Ibid

 

 

Bibliography

Secondary Material

Hauswirth Jeff M; Han Van Halder & Patrick B Walsh “What Boards Must Get Right” (January 2012), Spencer Stuart (blog), online: <https://www.spencerstuart.com>.

Hutchinson Allan C. The Companies We Keep (Toronto: Irwin Law, 2005).

Larcker, David F & Brian Tayan. “Lehman Brothers: Peeking Under the Board Façade” (4 June 2010), Stanford Closer Look Series (blog), online: <https://www.gsb.stanford.edu/faculty-research>.

Mitchell, Dalia Tsuk. “Legitimating Power: The Changing Status of the Board of Directors” in Cynthia A. Williams & Peer Zumbansen, eds, The Embedded Firm (Toronto: Osgoode Law School, 2011).

 

 

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