Corporate Governance & Shareholder Capitalism

Corporate governance – basic idea

System of rules, relationships, and processes by which a corporation is directed and controlled, mainly through shareholders, the board of directors, and executives.

Shareholder capitalism – definition

View that corporations are primarily owned and controlled by shareholders, who exercise power through one share one vote and elect the board.

Residual claimants

Shareholders who receive dividends and whatever assets remain after all fixed claims such as debt, wages, and other contractual obligations are paid.

Fixed or contractual claimants

Bondholders, creditors, employees, suppliers, and others who have pre agreed claims like interest, wages, or prices rather than a share of residual profits.

Role of shareholders in governance

Shareholders elect the board of directors, approve major decisions, and can sell shares or vote against directors if unhappy with performance.

Role of the board of directors

Oversees management, hires and fires the CEO and executives, sets compensation, and is legally responsible for acting in the best interests of the corporation.

Fiduciary duty – CBCA s.122(1)

Duty of directors and officers to act honestly and in good faith with a view to the best interests of the corporation, and to exercise care, diligence, and skill.

Historical interpretation of “best interests of the corporation”

Traditionally equated with best interests of shareholders, supporting shareholder wealth maximization.

Paradigm 1 – Shareholder Wealth Maximization (SWM)

Governance paradigm where directors focus on maximizing shareholder wealth, treating shareholder interests as the main guide for decisions.

Economic foundation of SWM – Adam Smith

Idea that when each firm pursues its own profit in competitive markets, the invisible hand leads to overall social welfare.

First Theorem of Welfare Economics and SWM

Under ideal conditions, when firms maximize profits and markets are competitive, the allocation of resources is Pareto efficient.

Dodge v. Ford Motor Co. – facts

Henry Ford wanted to reinvest profits and lower car prices to benefit workers and customers instead of paying higher dividends to shareholders.

Dodge v. Ford Motor Co. – legal rule

Court held that a corporation is organized primarily for the benefit of stockholders and forced Ford to pay dividends, supporting shareholder primacy.

Paradigm 2 – Corporate Social Responsibility (CSR) or stakeholder capitalism

View that directors should consider the interests of all stakeholders, not only shareholders, when making decisions.

People’s Department Stores v. Wise (2004) – significance

Supreme Court of Canada said directors owe their fiduciary duty to the corporation itself, not specifically to shareholders or creditors.

BCE Inc. (2008) – key holding

SCC confirmed that directors must act in the best interests of the corporation viewed as a good corporate citizen, and may consider various stakeholder interests.

CBCA s.122(1.1) – 2019 amendment

Statute that explicitly allows directors to consider interests of shareholders, employees, retirees, creditors, consumers, governments, the environment, and long term interests of the corporation.

BCE quote on balancing interests

“There is no principle that one set of interests – for example, shareholders – should prevail over another,” emphasizing stakeholder balancing.

Marxist critique of SWM

Argues that shareholder primacy leads to exploitation of workers and widening inequality because capital owners capture most of the surplus.

Social contract critique of SWM

Says firms must maintain legitimacy by meeting societal expectations, and if they ignore stakeholders they risk losing trust and long term sustainability.

Criticism of CSR – complexity and ambiguity

It is impossible to satisfy all stakeholder groups at once, which can create confusion and make it hard to evaluate director performance.

Criticism of CSR – undemocratic

Allows executives to pursue their own political or moral agendas using corporate resources instead of leaving social choices to democratically elected governments.

Criticism of CSR – activism with other people’s money

Corporate donations or social projects use shareholder wealth for purposes that shareholders may not agree with.

Criticism of CSR – reduced innovation and risk taking

If directors must protect every stakeholder from harm, they may avoid risky but value creating projects, slowing innovation.

CSR hypocrisy example – State Street “Fearless Girl”

Firm promoted gender diversity with the Fearless Girl statue while facing lawsuits over gender based pay inequality, showing a gap between messaging and practice.

Reason SWM prevails – shareholder control

Shareholders elect directors, so directors and executives are incentivized to focus on shareholder returns to keep their positions.

Reason SWM prevails – executive compensation

Executive pay is often tied to stock price or total shareholder return, aligning managers with shareholder wealth maximization.

Reason SWM prevails – market for corporate control

Poor stock performance can invite hostile takeovers, so managers are pressured to keep share prices high.

Reason SWM prevails – regulation of stakeholders

Labour, environmental, and human rights laws already provide some protection for stakeholders, allowing directors to focus more on profits.

ESG – definition

Environmental, Social, and Governance criteria used by investors to rate companies on sustainability, social impact, and governance practices.

ESG as “social credit system”

Idea that ESG scores function like a social credit rating, rewarding firms that meet certain social goals and penalizing those that do not.

ESG criticism – ratings and bias

ESG scores can be opaque, inconsistent across rating agencies, and influenced by political or ideological preferences.

Canadian corporate governance trend

Movement from pure shareholder primacy before 2004 to a stakeholder balancing approach after People’s and BCE, though SWM still dominates in practice.

MacIntosh on fiduciary duty

Argues that directors’ fiduciary duty should run primarily to shareholders, who bear residual risk and upside.

MacIntosh – role of contracts for other stakeholders

Creditors, employees, and suppliers can protect themselves through contract terms such as interest rates, covenants, and wages, so they do not need fiduciary protection.

MacIntosh – risk taking and innovation

Claims that if directors must consider all stakeholders equally, they will avoid risk, leading to economic stagnation.

MacIntosh – strike suit concern

Worries that broad stakeholder duties invite lawsuits by many groups, increasing uncertainty and legal costs for boards.

MacIntosh – overall key takeaway

Stakeholder doctrines in People’s and BCE are, in his view, jurisprudentially flawed and bad public policy because they weaken shareholder primacy and efficiency.

Friedman doctrine – core statement

The social responsibility of business is to use its resources to increase its profits, so long as it stays within the rules of the game such as law and fair competition.

Friedman – role of corporate executives

Executives are agents of shareholders and must focus on maximizing shareholder wealth rather than pursuing personal social or political goals.

Friedman – CSR as “taxation without representation”

When managers spend corporate money on social causes, they are effectively taxing shareholders and deciding how to spend the money without democratic approval.

Friedman – social issues are political

Problems like pollution, poverty, or inflation should be handled by governments and individual citizens, not by corporate managers.

Friedman – view of CSR rhetoric

Says businessmen who talk about social responsibility are often engaging in window dressing and, in extreme form, preaching a kind of socialism.

Business Roundtable (BRT) 2019 – main shift

Statement by 181 CEOs redefining the purpose of a corporation from serving only shareholders to creating value for all stakeholders.

BRT 2019 – key stakeholder commitments

Promises to deliver value to customers, invest in employees, deal fairly with suppliers, support communities and the environment, and generate long term value for shareholders.

BRT 2019 – symbolic vs legal

Statement is a moral and reputational pivot but does not change corporate law, which still largely centers on shareholder rights.

BlackRock and Larry Fink – public message

Fink’s annual letters urge companies to embrace purpose, focus on stakeholders, and align with climate goals such as net zero by 2050.

BlackRock’s use of voting power

As one of the largest asset managers, BlackRock uses its proxy votes to pressure companies on ESG issues, influencing board elections and policies.

BlackRock – Exxon example

BlackRock supported activist fund Engine No. 1 in replacing three Exxon directors to push the company toward reduced fossil fuel production.

Ramaswamy’s critique of BlackRock

Argues that BlackRock’s stakeholder capitalism is hypocritical and amounts to using private capital to impose climate policy and political preferences on firms.

Governance stages – timeline overview

Classical Friedman profit focus in 1970, traditional shareholder primacy in law, Canadian shift to stakeholder consideration after 2004, BRT stakeholder statement in 2019, and ESG conflicts in the 2020s.

Benefits of shareholder capitalism

Provides clear objective of profit maximization, strong accountability through markets and takeovers, and incentives for risk taking and innovation.

Benefits of stakeholder capitalism

Aims for fairness, long term sustainability, and social legitimacy by recognizing the interests of employees, communities, and the environment.

ESG as modern phase of governance

Integrates environmental and social goals into investment and corporate strategy, but raises concerns about measurement, politicization, and concentration of power in large asset managers.

Overall exam takeaway on profit and purpose

Modern corporate governance debates focus on how to balance profit maximization with stakeholder and social responsibilities without destroying accountability or the benefits of capitalism. /