The boardroom feud at Rogers Communications Inc. has highlighted shortcomings in how Canada regulates companies across the country, a number of corporate governance experts said as they reacted to a recent court decision that appeared to bring an end to the saga.
Out-of-date rules, they argued, pose a problem at both the provincial and federal levels and can allow undemocratic business practices to go unchecked.
“Rogers is a teachable moment for our corporate governance not keeping up with the times,” said Richard Leblanc, a governance professor at York University in Toronto.
Friday’s ruling from the British Columbia Supreme Court, which found that Edward Rogers has the right as head of the controlling Rogers family trust to replace independent directors without holding a shareholders meeting, is a prime example, he said.
“The most basic tenet of shareholder democracy is to vote for directors at the annual meeting.”
Leblanc said B.C. is the only province where such an action would be allowed, highlighting the fact that Canada does not have a national securities regulator to co-ordinate such rules. At the same time, key federal guidelines on corporate governance haven’t been updated since 2005, making them “wholly inadequate” to cover current expectations around best practices, he said.
Daniel Waeger, Canada Research Chair in corporate governance at Wilfrid Laurier University in Waterloo, Ont., said independent directors should act as an important check in corporate governance and are a factor investors consider before committing their money.
Waeger said that while a controlling shareholder could obviously replace independent directors at an annual meeting, he still found it surprising that B.C. law would allow them to be replaced “so quickly, so unceremoniously” as in the Rogers case.
“That’s a bit jarring, because then all of these independent directors, that just means it’s completely fair-weather structure in that fence,” he said.
Edward Rogers was able to fire the directors because of the dual-class share structure at the company founded by his father. That structure sees the family trust he chairs controlling the vast majority of voting shares, while institutions and average shareholders hold non-voting shares.
The dual-class structure is something the Canadian Coalition for Good Governance has long been pushing to change.
Catherine McCall, the coalition’s executive director, said in a recent editorial that dual-class shares violate the principles of fairness and accountability on which capital markets depend and that the creation of sustainable long-term value requires factoring in the interests of all corporate stakeholders.
She said the coalition advocates for some kind of sunset clause on dual-share structures, either making the separation dissolve after a certain amount of time or after certain events like the death of a founder. Alternatively, the coalition argues for subjecting the structure to a periodic overall shareholder vote.
University of Alberta business professor and economist Randall Morck said dual-class structures do have some uses, especially in the fast-moving high-tech world where a company founder may have specialized knowledge. He said a longer-term investment horizon also helps but that dual-class setups become more problematic when they get handed down to a second or third generation.
“Then that concentrated power becomes much less defensible and often a problem,” he said.
Morck said other countries have ways of putting limits on dual-class structures. He cited Israel, which forces a company to combine the shares if it ever issues new ones, as well as other jurisdictions where major decisions such as corporate takeovers must be approved by both classes of shares.
He said the issue getting far less attention through the Rogers dispute is the use of family trusts in general, which he says are used to reduce inheritance taxes and act as the main tax loophole for the super-rich in Canada.
“In a world where we worry about extreme inequality, it might make sense for us to wonder, kind of, does the whole idea of a family trust really make sense in a democracy that’s committed to some elements of economic equality?”