One of the most valuable and enduring outcomes of the global financial crisis – not to mention the major corporate blowups of the early 2000s – has been the elevation of corporate governance to a daily topic of conversation.
A combination of regulation, pressure from stakeholders and plain common sense has led to dramatic evolution in Canadian boardrooms. Directors are more independent, professional and accountable than ever. The slightest slip-up can land a CEO or board on the front page. Shareholder democracy has evolved dramatically with the introduction of majority voting, "say on pay" and now the emergence of proxy access.
Beneath this progress is an underlying assumption that the paragon of good governance is to be found among large, publicly listed and widely held corporations. This group is nearly always the first to adopt cutting-edge best practices; they consistently lead the way in public transparency. In this assumption, we often relegate corporations that don't fit the mould to the status of second-class citizens.
Controlled corporations, especially those that are family controlled, form the bulk of this lower class and are usually dismissed in conversations about good governance. When was the last time a board was complimented for having fewer independent members, or a company was praised for its dual class share structure?
To many savvy investors, however, today's most treacherous governance risk doesn't manifest as a boardroom policy or practice, but as a larger corporate philosophy: short-term perspective. They worry that an obsession with quarterly results drives managers and boards to myopic decision making at the expense of future success. But family controlled companies may represent a unique antidote to short-termism. Inherently concerned about the wealth of future generations, family firms ought to be resistant to the allure of quick gains. Indeed, two years ago, the Clarkson Centre for Business Ethics and Board Effectiveness found that Canadian family controlled corporations outperformed the S&P/TSX Composite Index by 40 per cent over 20 years.
Granted, it may be a stretch to argue a direct link between corporate governance and corporate performance.
Nonetheless, after seeing this result, our first instinct was to ask whether our governance assumptions had been wrong from the beginning. But what about the dearth of independent chairmen, the prevalence of dual share classes and the existence of two, three, even four people with the same last name on many of these boards?
Could the widely held and publicly listed paragon have been a myth all along? The truth is hardly that simple. Once we expand the dialogue of "good" governance so that it considers the best and most successful elements of all structures, we will get closer to an answer.
The idea of implanting a family owner into every company is clearly absurd, but the culture and values espoused by families may be portable into the widely held context. Rather than simply dismissing the governance of family controlled corporations off hand, we must discover what can be learned from their success – even if we rewrite conventional wisdom in the process.
David Beatty is Conway Director and Matt Fullbrook is manager of the Clarkson Centre for Board Effectiveness at the University of Toronto's Rotman School of Management.