Governance Matters

The Issue

We believe the stakeholder theory of the firm best articulates the purpose of modern public corporations: to create value for shareholders, but also for other key stakeholders — bondholders, employees, customers, communities and society in general. But public trust in corporations has been eroded by a succession of stories about unethical business practices, creating a perception that companies are engaged in a relentless pursuit of short-term profit at the expense of the environment and society. Aggressive corporate tax practices shift the burden of supporting economically-vital public services to individuals and small businesses, and have become a lightning rod for public outrage — as have bloated compensation pay-outs to top executives. Meanwhile, women and minorities continue to be under-represented on corporate boards, while too few directors have real expertise on emerging corporate sustainability issues.

ESG Perspective

When companies come to grief, all too often they have failed to follow basic good governance practices, ignored the concerns of responsible investors, and focused on short-term financial performance to the exclusion of other considerations. The costs and regulatory penalties associated with failure to effectively supervise and manage emerging ESG risks can be devastating. High-risk tax approaches can interfere with business strategy and create reputational risk for companies. Board diversity is associated with both financial and sustainability success — while very high compensation and extreme pay disparity do not correlate with outperformance and contribute to systemic risk in the economy.

Our Response

We engage companies in dialogue on:

  • building an ethical business culture that is based on a stakeholder theory of the firm

  • enhancing board effectiveness, including diversity of identity (representation of women and minorities) and perspective (expertise on environmental, social and governance issues)

  • supervision and management of critical non-financial risk issues, including anti-corruption and cybersecurity

  • responsible tax policy, practices and disclosure

  • curbing excessive and inequitable pay, and linking compensation to strategic financial, environmental and social metrics of long-term value.

We apply these principles in our proxy voting practice and provide feedback to companies on how we voted, and why.

We engage with regulators and standards-setters on enhancing governance practices and disclosure, and on advancing a stakeholder-based perspective of the purpose of the corporation and the duty of directors.

We are active within the Canadian Coalition for Good Governance and the International Corporate Governance Network.