Peter Dey is the chairman of Paradigm Capital and an executive in residence at the University of Toronto’s Rotman School of Management. He is a co-author of the recent report 360º Governance: Where Are the Directors in a World in Crisis?
Corporate governance standards are quickly transitioning from shareholder primacy to stakeholder primacy, a system that doesn’t just maximize profits but rather creates long-term value for stakeholders: customers, employees and local communities, among others, as well as shareholders. But was this transition in play in the recent, ugly struggle for control of Rogers Communications Inc.?
What has transpired at Rogers graphically illustrates the lack of power and influence of stakeholders in some fundamental corporate actions.
If a corporate action has to be approved by a board of directors, the interests of stakeholders will be factored into the decision. This was made clear by the Supreme Court of Canada in the 2008 BCE decision, which held that the board of directors of a corporation has a fiduciary duty to act in the best interests of the corporation and, in doing so, may take into consideration the interests of a broad range of stakeholders.
The role of stakeholders in the Rogers controversy depended on the direction the company wanted to take and the process it used to do so. Had the decision at Rogers simply been to terminate the CEO, the interests of stakeholders would have been taken into account because it would have been a board decision. But the decision to terminate the CEO became secondary to the decision to replace five directors.
The constitution of a board is more art than science. Generally, it is the responsibility of the board to recruit directors who address its needs in terms of skills, experience, diversity and other factors, such as the interests of the corporation’s stakeholders.
Rogers chairman Edward Rogers effectively removed the board from this decision-making process and thereby relieved himself and the board of the legal responsibility to take into consideration the interests of stakeholders in the constitution of the board.
Mr. Rogers may have had the right to exercise the votes attached to his shares, but the process of identifying the replacement directors could have been a board decision had it been managed with greater sensitivity to the interests of stakeholders. This would have included a shareholder meeting supported by the proper disclosure and an opportunity for all shareholders, voting and non-voting, to attend and ask questions.
But Mr. Rogers, at least until recently, appears to be a man in a hurry. If ever there was a company that should invest heavily in the management of stakeholders, it is Rogers. It is a service business, wholly dependent upon the goodwill of one group of stakeholders, its wireless customers. How Rogers deals with its stakeholders generally can significantly affect its ability to increase its wireless customer base, particularly in the current period of flux being generated by its acquisition of Shaw Communications Inc.
Instead, Rogers stakeholders have been sidelined in the creation of one of the most fundamental instruments of corporate governance, the board of directors.
Much of the controversy over this exercise of power arose because Rogers has two classes of shares: non-voting, which are responsible for more than two-thirds of the equity of the company, and voting common shares, which account for the rest.
There has been much commentary recently on the merits of corporate law allowing corporations to authorize voting and non-voting shares and on the treatment of the holders of non-voting shares. Rogers can’t be held responsible for the law allowing two classes of shares. But does the turbocharged power of voting shares impose a duty on the holder in relation to the company and other stakeholders?
As noted above, directors’ duties are clear. They have a fiduciary duty to act in the best interests of the company. On the other hand, controlling shareholders are not fiduciaries and may act in their own best interests provided their actions are not oppressive.
Corporate law allows stakeholders to obtain relief when the exercise of powers by the corporation or its affiliates, such as a controlling shareholder, is oppressive, unfairly prejudicial or unfairly disregards stakeholders’ interests. These are the boundaries within which controlling shareholders must exercise their powers.
The exercise of power by Mr. Rogers has not been challenged as oppressive. But controlling shareholders of all corporations must operate within the boundaries created by the oppression remedy, and if their power is created through classes of voting and non-voting common shares, that power must be exercised with even greater care to avoid being considered oppressive.
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