Edward Waitzer

For about forty years, corporate governance and corporate law focused on minimizing “agency costs” by aligning the interests of shareholders and managers through a series of techniques, including regulatory standards, independent directors, take‐overs and activist shareholders. These means, combined with implicit acceptance of the “Efficient Market Hypothesis” (EMH) reinforced belief that share prices reflected objective corporate performance and that maximizing shareholder wealth was the purpose of the corporation. This author, however, argues that proper corporate governance requires more than just faith in efficient equity markets and strong managerial incentives. Despite the desire for simplicity, there is no one “right” governance model. Governance is highly contextual and, ironically, the existing corporate law and regulation have tended to frustrate dynamic adaption and have led to governance systems that underperform. The author offers Systems Theory as a better way to think about corporate purpose and governance. Systems are more than the sum of their parts, they are comprised of subsystems which in turn are comprised of other subsystems on so on, and the overall health of the system depends on the continued health of each of its essential subsystems, as well as of the larger system. Systems theory counsels against focusing on any single metric (and in favor of the need for new ones — the relevance of metrics inevitably run down over time). Metrics such as profits, employee turnover, and customer satisfaction are not ends in themselves. Rather, they are a source of information about whether the corporation is relevant, resilient and sustainable. The systems challenge is to bring about a paradigm shift that restores connectivity between investors, employees, management, other corporate stakeholders and governments. This will require thinking differently about how the constituent elements interact and produce results.

Corporate purpose does not lend itself to any clear or constant definition. Rather, courts’ understanding of corporate purpose adapts over time to reflect evolving social norms and expectations as to the proper role of the corporation in society. We use the oppression remedy under Canadian corporate law to explore how Canadian courts have and will continue to play a key role in shifting legal and market understandings of corporate purpose towards a more long-termist, stakeholder-focused perspective. We begin by exploring the rationale for moving the law in this direction, outlining some of the causes and effects of short-term horizons on corporate and investment manager decision making, and how ideology and overly conservative legal advice contribute to this dynamic. We then outline an emerging role for judicial activism in breaking the log jam and helping us to re-focus on the real strength of capitalism—its flexibility to evolve and respond to a society’s expressed needs.