Business and Government in Canada

Jeffrey Roy

• Publisher: University of Ottawa Press
• Year: 2007
• ISBN:
  9780776618586
• Topic: Politics & International Relations
• Subtopic: American Government
• Index: Politics & International Relations

Boundaries between business and government are increasingly fluid and often transcended. Yet it remains important to acknowledge and make appropriate use of the fundamental differences between these sectors.

Five areas that offer the most critical challenges to business and government in Canada today are corporate governance, lobbying and influence, security and privacy, public-private partnerships, and geography and development. This book is an exploration of the systemic dynamics of the inter-sectoral governance that shape the collective performance of Canada's national jurisdiction. Three perspectives of the relational dynamics between business and government, drawn from leading Canadian scholars, are adopted in order to frame the examination of independence, influence, and interdependence.

This book makes a case for the advancement of "virtuous hybrids, " while pointing out the challenges that remain in terms of the formation and successful performance of such hybrids in Canada, a challenge that calls for political leadership as well as social learning. An informed and engaged public, wearing multiple hats (i.e. as voter, shareholder, employee, activist etc.) would be the ultimate arbiter of sectoral and collective performance.

CHAPTER ONE

CORPORATE GOVERNANCE

This chapter introduces the topic of corporate governance as increasingly uniting rather than separating business and government in terms of their organization and conduct. Typically thought of in the realm of a private company, corporate governance denotes the mechanisms for accountability and alignment enjoining corporate management, shareholders, and stakeholders. Increasingly, however, similar terminology is found in the public sector as governments strive to rebalance traditional political control and more innovative governance models predicated on bettering performance.

While fundamental differences between each sector remain, and must be understood as such, corporate governance as a strategic balance between the competing objectives of conformance and performance denotes an increasingly shared challenge for business and government. Such a challenge calls for at least a partial transcending of sectoral boundaries in order to foster mutual awareness, collective learning, and strong performance capacities for a jurisdiction as a whole.

INFORMATION AND COORDINATION

Information is the foundation for governance in any context, be it organizational, sectoral (e.g., the marketplace or the state), or jurisdictional (e.g., a city or country). The emergence of governance as something of a unifying culture across sectors and cultures reflects the widening availability and production of information on the one hand and heightened competition for quick and effective usage of information on the other.

Across business and government, approaches to managing information flows are often contrasted: hierarchies as the basis of bureaucratic control in the public realm (a basis for Jacobs’ guardian syndrome) and competition and networks in the private realm (more consistent with the commercial behavioural syndrome). Yet such distinctions can also be fluid. For instance, after World War II, hierarchical-based bureaucratic management principles were in good currency in industry as much as in government, whereas the more recent rise of new public management seeks greater usages of networks and competitive solutions within government. Much of the present contrast between rigid hierarchy and flexible networks has to do with how people are managed within organizations, but an equally important dimension of this governance dichotomy is the availability of information and the relative degree of secrecy and propriety deemed suitable for a particular organizational context.

Throughout much of the twentieth century, across both guardian enterprises (e.g., the military) and commercial entities (e.g., IBM in its early mainframe days with its self-titled corporate motto, “big blue”), scarce information flows tended to be dominated by limited sets of organizations with the wherewithal to capture the information and translate it into specific policies and strategies. Public and private sector entities alike became inward, often benefiting from economies of scale as big proved better—so long as the external environment remained relatively stable (as was the case in the “thirty glorious years” of largely uninterrupted economic expansion that followed World War II in much of the Western world—viewed by some as a not-so-glorious period that enshrined high government-spending levels now difficult to contain¹).

Today this old paradigm has long since given way to global competitiveness pressures and what some have termed “the age of transparency” (Tapscott and Ticoll 2003). Innovation is often viewed as the purview of small start-ups (at times created within larger corporate structures seeking to escape bureaucratic rigidness and facilitate flexibility). The collaborative and mobile work culture of Silicon Valley is put forth as the most promising ecology of shared information and learning externalities, forcing all organizations to become vigilantly insecure and outward in orientation. In this new context, prosperity has come to resemble a more volatile path of “creative destructionism,” to borrow the phrasing of a prominent twentieth-century political economist, Joseph Schumpeter (1947).

Yet a continuing need for accountability and the rising demands for more of it from all types of organizations have created new governance dilemmas. Unfettered competitive instincts and weak controls can fuel corporate scandals such as those of Enron and Nortel. Yet an excessive shift to control or guardian functions risks stifling innovation and risk taking. Similar dilemmas face government organizations: creativity can often be viewed as lax by those seeking clarity and control, while taken to an extreme this control orientation reinforces a bureaucratic, risk-averse mentality that embeds bureaucratic structures (often viewed as wasteful and unresponsive). Resolving these dilemmas requires an artful governance balance that, while not identical across the private and public realms, also carries similarities across and synergies among them.

SHAREHOLDER AND STAKEHOLDER RELATIONS

In recent times, there has been an important debate with respect to corporate governance in the private sector and the appropriate roles, objectives, and accountability frameworks for businesses. Broadly stated, two schools of thought influence this debate: shareholder value on the one hand and stakeholder value on the other.

The notion of shareholder value is both more straightforward and more readily accepted (particularly in North America) as the appropriate prism for gauging corporate behaviour and performance. Companies focus on profitability, return on investment, and widely recognized metrics of value creation such as share price. In this focus, the most fundamental and overriding accountability relationship is between owners of capital (investors) and managers.

By contrast, stakeholder value places the company within a wider set of accountability relationships that should ideally be both recognized and measured: examples include employees, communities, research partners, and clients. Investing in these relationships is the basis of sustaining capacities for performance, particularly through changing circumstances. Pursuing stakeholder value is complicated by the plurality of stakeholder relationships that exist and by disagreement over what sort of balance should be struck between shareholder and stakeholder considerations.

This debate carries overtones of Jacobs’ contrast between commercial and guardian syndromes, and defenders of a more purely shareholder-driven model of governance for private enterprise would be quick to underscore the commercial logic of linking risk, private investment, and direct lines of accountability between investors and managers. Within the limits of the law (determined by guardians), institutionalizing the generation and distribution of shareholder wealth should be business’s sole purpose.

In the United States, some observers are even prepared to extend this logic to the most extreme example, such as Enron. While many have viewed it as a failure of corporate governance, others have suggested that Enron’s illegal activities (including accounting fraud and misinformation) directly resulted in convictions against the company’s top managers, the failure of the multinational accounting firm duplicitous in the company’s schemes, and the disappearance of most shareholder value associated with this former energy giant. How could one possibly demand greater accountability for inappropriate action?

To some degree, the partial merit of such a viewpoint explains the reluctance in the United States to radically overhaul market structures and practices—for fear of tempering the entrepreneurial spirit that is viewed as the driver of wealth creation in a free-enterprise system. Instead, the emphasis has been on bolstering the guardians of market behaviour, such as state and federal oversight bodies (at the federal level, the powers of the Securities and Exchange Commission have been expanded, and a new independent body has been established under federal purview to oversee the accounting profession).

Some commentators even argue that the dubious conduct of business in cases such as Enron and WorldComm has empowered high-profile guardians such as New York State Attorney General Eliot Spitzer, who has led several high-profile investigations of corporate misbehaviour in several leading American industries, including computer manufacturing, insurance, entertainment, and securities trading. In perhaps the most notable of his cases, Spitzer’s pursuit of Wall Street firms exposed inherent conflicts of interest between the stock research and endorsement functions of brokerage housing, leading to more than $1.5 billion of fines levied (including a $100 million payment by Merrill Lynch alone) and significant changes to industry practices and regulations.

Nevertheless, such corrective measures stemming from the logic of guardians overseeing the otherwise unfettered activities of commercial actors are insufficient. Equally important are the failures of governance mechanisms within the market sphere itself. In the most spectacular US example, Enron, such failures fuelled not only the widespread and dramatic financial losses of millions of Enron investors (including employees whose pension funds were wiped away) but also the collateral damage to other industries (as investor confidence stagnated) and other sectors, such as governments and individual consumers facing rising energy bills and new supply challenges due to the dubious activities of Enron management.

Chief among these failures is the board of directors, the body supposedly convened as the representatives of shareholders to watch over management and ensure that the interests of investors are taken into account. In essence, management serves as the agent of the principals or the owners (i.e., shareholders), a key indirect aspect of marketplace accountability, since the individual shareholder (unless an institution yielding considerable clout) is unlikely to possess the information and the means to effectively scrutinize corporate activity. This separation of powers is akin in some respects to the ideal role of parliamentarians in their representation of voters in the public sector realm.

In the case of Enron and many other such examples (including Nortel in Canada), the board of directors proved impotent due primarily to (1) a lack of independence from management, in large part because of the excessive influence of corporate executives in appointing board members, including the chairperson, and (2) conflicts from shared as opposed to separate interests with management as short-term price became the defining prism of corporate activity (often with board members themselves holding shares) as opposed to long-term growth and sustainability.

Although this latter term may be invoked in a strictly financial or shareholder value sense (i.e., viewing investment returns over a longer time horizon), invocation of the term “sustainability” also conjures up the notion of stakeholder involvement for companies as they balance their multiple obligations not only to investors-shareholders but also to other groups impacted by corporate operations, such as employees, communities, governments, and other civic and societal partners, such as research entities and collaborative undertakings of one sort or another.

Although some business theorists view a focus on anything other than profit as misguided from a commercial perspective, there is an equally influential contingent of business advocates that stresses the importance of long-term relationship building to business success (Kennedy 2000; Miles and Roy 2001). Time is a particularly contentious variable here, with advocates of shareholder value often more focused on short-term proxies such as quarterly earnings and share price, whereas those preferring stakeholder balance and sustainability-oriented outlooks often invoke longer time horizons, arguing that great companies can only be judged as such after several years, if not decades, of proven success (Collins 1994, 2001).²

The ecological context of business operations is a closely related aspect cutting across many of these stakeholder ties (also introducing new ones such as environmental groups more hostile to corporate objectives). Accordingly, much of today’s focus on corporate social responsibility (CSR), as well as the steadily expanding influence of ethical investment funds (seeking to reward corporate performance on CSR-type activities as well as financial results: i.e., multiple dimensions of a balanced scorecard), stems from environmental processes such as roundtables that emerged in the 1990s following the high-profile, UN-sponsored Earth Summit in Rio de Janeiro in 1992.

The complexities of sustainable development and the intermixing of industrial production and environmental resources have led some leading proponents of ecosensitive business models to either implicitly or directly counter Jacobs’ dichotomy of commercial and guardian orientations. One such example is Paul Hawken (1993), who viewed Jacobs’ approach as dangerously limiting, placing the environmental onus firmly on guardians (to craft and enforce rules and punish misdeeds) in an era when multinational corporations and business interests carry enormous resources and influence themselves.

Hawken’s preference for a sustainability compact encompassing all sectors in a progressive and productive hybrid model find echoes today in Al Gore’s global campaign for a greening of industry in response to global warming. Similar influences underpin the reforestation policies of lumber companies engaged in environmental roundtables, attempting to balance short-term economic opportunity with a longer-term nurturing of a potentially renewable resource.

Even with some consensus on the importance of addressing environmental issues, the contrasting assessments of Hawken and Jacobs underline the absence of any consensus on the sectoral boundaries appropriate for any solutions, much less on corporate governance practices to balance shareholder and stakeholder considerations (the latter an inherently contested notion). Despite corporate governance reforms to refurbish the board as an independent mechanism to oversee management on behalf of shareholders (most predominant among them a focus on independent directors and a non-executive chair), board membership remains largely shareholder and financial in orientation. What has emerged is something akin to a global consensus—under the auspices of the OECD guidelines on corporate governance, that stakeholder interests should be accounted for—with little specific guidance on the appropriate means to reach such a consensus.

Nonetheless, the rising tide of stakeholder relations reflects more than knee-jerk reactions to crises; it is intertwined with the expansion of markets and the corresponding heightened influence of private corporations. The growing power (and by extension impacts and responsibilities) of corporations in today’s globalizing environment, coupled with heightened and more knowledgeable classes of investors, means that a return to cozy, shielded working relationships involving executive managers and their board counterparts appears unlikely. An increasingly diverse set of both collaborative and competitive interests can be expected to attempt to shape corporate behaviour, rendering patterns of governance more complex and the management of such patterns more consequential.

In 2006, for instance, Microsoft announced on its corporate website that it had commissioned a study of its external stakeholder relationships to better navigate what is today often characterized as a corporate ecosystem of various actors and interests. Along with its still predominant annual financial report, the world’s leading technology company produces an annual report of responsible corporate behaviour, and beyond the company’s actions the evolution of Microsoft founder Bill Gates from chief executive to a global advocate of health and antipoverty strategies further demonstrates the widening role of business interests in non-commercial matters.

The Guardian’s Response: Exhortation or Regulation?

From the government’s perspective, these corporate governance challenges raise two interrelated responses. First, from a guardian perspective, public sector authorities carry certain regulatory obligations in terms of enforcing rules and/or promoting specific governance practices within the marketplace. At the most basic level, the judicial system is a case in point, upholding the legal dimensions of commercial exchange and contractual duties that are major aspects of a well-functioning corporate governance environment. Beyond legal enforcement and redress, however, the government can choose to largely empower private companies to self-monitor their behaviour, or it can empower specific institutions such as professional bodies and stock markets to administer ethical guidelines and rules beyond basic legal standards and requirements. In Canada, such powers reside across a diverse set of actors, including predominantly provincial regulatory authorities for investing and stock markets, the stock market authorities themselves (notably, the Toronto Stock Exchange [TSX], by far the country’s largest venue of publicly traded companies), the Canadian Institute of Chartered Accountants (overseeing the auditing profession), and indirectly numerous federal agencies with regulatory and law enforcement powers.

In the aftermath of scandals such as Enron, WorldComm, and Nortel, the TSX took the lead in concert with several other industry groups in developing stricter governance codes for listed companies. The results of such actions have not been negligible in fostering what the TSX described as a stronger governance culture for companies and for the country as a whole. Today there are stricter rules in place for companies listed on the TSX, the impacts of which are visible on any corporate website. More balanced board representation (with a separation of chief executive and board chair and the vesting of the latter in a non-executive party), greater independence for auditing committees, and stricter guidelines for information disclosure have become norms of market activity that were exceptions less than a decade ago.

For industry leaders, despite the negative impacts of scandals such as the Nortel collapse, Canada is well served by a light-handed approach that relies on tough guardians in extreme cases but also on more sensitized commercial behaviour in the mainstream. As the head of the Canadian Council of Chief Executives puts it,

The Council’s emphasis on voluntary action has been portrayed by some people as a “laissez-faire” attitude, a go slow approach that is out of touch with today’s market realities. It is true that the Council favours a principles-based rather than rules-based approach to improving governance practises. But that is because we believe that comprehensiv...

Table of contents

• Contents
• Preface
• Introduction
• Chapter 1: Corporate Governance
• Chapter 2: Lobbying
• Chapter 3: Procurement and Partnering
• Chapter 4: Security and Privacy
• Chapter 5: Innovation and Development
• Conclusion
• Notes
• References
• Index