Canadian Business and Society

ETHICS, RESPONSIBILITIES, AND

Fifth
SUSTAINABILITYAND
Edition

CHAPTER
11
Responsible
Ownership and
Governance
Prepared By:
Renée Majeau, NAIT

© 2020 McGraw-Hill Education Limited 11-1

 Learning Outcomes
1. Identify the owners of Canadian business.
2. List and explain the ethical and responsibility issues of
ownership.
3. Define and understand the challenges of responsible
investing.
4. Describe approaches to protecting owners and investors.
5. Define corporate governance and discuss the issues
relating to corporate governance.
6. Explain the relationships among ownership, corporate
governance, and social responsibility and ethical conduct.

© 2020 McGraw-Hill Education Ltd. 11- 2

 The Ownership of
Canadian Business
• Owners, also referred to as
investors or shareholders, are
key stakeholders in a
capitalist system
 Provide a major portion of the
capital to finance corporations

© 2020 McGraw-Hill Education Ltd. 11- 3

 Owners of Canadian
Business

• Investors • Corporate ownership

• Entrepreneurs • Private equity firms
• Employees and managers • Venture capital
• Customers or consumers companies
• Producers
• Not-for-profit
• Ownership through mutual
funds organization
• Ownership through pension ownership
funds • Government
ownership

© 2020 McGraw-Hill Education Ltd. 11- 4

 Ownership of Canadian
Business Cont’d…

• Shareholders have certain rights based upon voting privileges:

 Dual-class stock  more than one type of share or stock with different
voting rights and dividend payments is issued by a single corporation
 Non-voting shares  common shares without voting privileges
 Restricted shares  some limit on voting; sometimes called
uncommon shares

© 2020 McGraw-Hill Education Ltd. 11- 5

 Ownership of Canadian
Business Cont’d…
• Shareholders can be categorized as passive or active:
 Passive shareholders  those who do not attempt to influence the affairs of the
corporation even though they have a legal right to do so
 Active shareholders  those who participate in the governance to the full
extent allowed by the law
• Worker capitalism  describes employee ownership as workers are
turned into capitalists through stock ownership

© 2020 McGraw-Hill Education Ltd. 11- 6

 Employee Ownership
PROS:
•Increases morale
•Increases company loyalty
•Motivates employees, leading
to higher productivity
•Sometimes can save failing
firms
•Worker capitalism
© 2020 McGraw-Hill Education Ltd.
CONS:
•Jobs and often savings
and pensions depend on
fate of firm
•Employees seldom have
majority ownership
•Management may still not
relinquish control to
employees
11- 7
 Ethical and Responsibility
Issues of Ownership
• Actions of other stakeholders - for example governments,
other corporations, and self-regulatory organizations -
influence the owner stakeholder
• Investor owners have limited influence in making the
corporation more socially responsible
• Mutual funds can be purchased that invest in corporations
considered to have a social, ethical and environmental
focus or objective

© 2020McGraw-Hill Education Ltd. 11- 8

 Ethical and Responsibility
Issues of Ownership Cont’d…

• Some pension plans have revised their investment

strategy to acquire stock of socially responsible
corporations
• Cooperatives have been leaders in institutionalizing ethics
and responsibilities
• Accountability for economic, social, and environmental
responsibilities has become common among publicly
traded corporations

© 2020 McGraw-Hill Education Ltd. 11- 9

 Ethical and Responsibility
Issues of Ownership Cont’d…
• The accountability of corporations owned by the
government has been a major public administration issue
referred to as “accountability dilemma”:
1. Government-owned corporations may be in conflict with social
objectives in the national interest;
2. Consequences of evaluating performance based on commercial
criteria (that is, profits);
3. Degree of autonomy that should be granted the corporations and
their managements; and
4. Techniques for controlling and evaluating the commercial
corporations

© 2020 McGraw-Hill Education Ltd. 11- 10

 Responsible Investing
• Responsible investment (RI)  approach to investing that
aims to incorporate environmental, social and governance
(ESG) factors into investment decisions, to better manage
risk and generate sustainable, long-term returns
 An organization promoting responsible investing in Canada is the
Responsible Investment Association
 Decisions on RI usually use three possible approaches:
• Positive screening - investing in corporations with good social and
environmental records
• Negative screening – identifies objectionable corporations
• Best-of-sector – compares and ranks corporations within an industry

© 2020 McGraw-Hill Education Ltd. 11- 11

 Responsible Investment
Criteria
Activities that might be considered socially irresponsible or unethical include:
•poor employee/labour relations
•failure to promote racial and sexual equality and affirmative action programs
•the manufacture of controversial weapons
•involvement in the nuclear industry
•use of fossil fuels, especially coal
•the manufacture of “sin” products such as alcohol or tobacco
•the conducting of business in repressive regimes
•the violation of human rights
•failure to involve Indigenous Peoples
•environmentally damaging operations, for example, those that pollute
•unsafe goods and services, questionable marketing practices, and exploitive marketing
in developing countries
•use of animals in product testing
•involvement in gambling and pornography
•factory farm production of animals
•genetically modified product
•child or forced labour
TABLE 11.2
© 2020 McGraw-Hill Education Ltd. 11- 12
 Responsible Investing
Cont’d…
• Challenges to ascertaining a socially responsible investment:
 Data relied upon are sketchy and the research is selective
 Ratings not completely objective
 Screenings are tainted by anachronistic, contradictory, idiosyncratic,
and ideologically constructed notions of social responsibility
 Claims of the growing financial impact are questionable
 No coherent case has been made for why the criteria used for social
responsibility are better at effecting social change
 General approach of social investment advocates is one of vindication
of the true believer, not investigation

© 2020 McGraw-Hill Education Ltd. 11- 13

 Protecting
Owners and Investors
• Shareholder democracy  exercise of power of owners
to ensure they are treated fairly and enjoy equally the
privileges and duties of ownership
• Basic shareholder rights:
 Voting power on major decisions
 Transfer to ownership when desired
 Entitlement to dividends
 Accessibility to accurate and timely financial information

© 2020 McGraw-Hill Education Ltd. 11- 14

 Protecting Owners
and Investors Cont’d…
• Several stakeholders attempt to ensure shareholder
rights:
 Governments:
• e.g. Canada Business Corporations Act, US Sarbanes-Oxley Act,
2002, The RCMP’s Integrated Market Enforcement Teams
 Self-Regulatory Agencies and Organizations:
• e.g. Stock exchanges, Securities Exchange Commissions (SEC),
Investment Industry Regulatory Organization of Canada (IIROC)
 Shareholder Activists:
• e.g. Small Investor Protection Association

© 2020 McGraw-Hill Education Ltd. 11- 15

 Corporate Governance
and the Board of Directors

• Corporate governance  processes, structures, and

relationships through which the shareholders, as
represented by a board of directors, oversee the activities
of the corporation
 Concerned with intrinsic nature, purpose, integrity, and identity
of the institution, with a primary focus on the entity’s relevance,
continuity, and fiduciary aspects

© 2020 McGraw-Hill Education Ltd. 11- 16

 Responsibilities of
the Board
• Board of directors  group of individuals elected by shareholders to govern or
oversee the corporation’s affairs
 Monitor corporation’s activities and performance
 Power to select, evaluate, and terminate CEO/top managers
 Provide shareholders with financial and other statements
 Planning for longer term (strategic planning process)
 Ensuring continuity and succession in the management team
 Evaluating and approving major transactions and ventures
• Fiduciary duties  obligations owed by directors to shareholders that are
prescribed by laws or regulations

© 2020 McGraw-Hill Education Ltd. 11- 17

 Board Structure and
Membership
• Most boards comprise 10-15 members who also serve on
various committees:
 Audit, finance, human resources, pension, compensation,
nominating, governance, and strategic planning
 Most experts recommend separation between role of board chair
and CEO
• Independent (unrelated) director  director who is free
from any interest and any business or other relationship
which could, or could reasonably be perceived to,
materially interfere with the director’s ability to act in the
best interests of the corporation

© 2020 McGraw-Hill Education Ltd. 11- 18

 Board Diversity
• Recruitment of women and minorities is receiving increased
attention
 In December 2014, Canadian Securities Administrators (CSA)
issued the Disclosure of Corporate Governance Practices rule;
required corporation to disclose:
• Corporate governance practices including the number women on
boards of directors and in executive officer positions
• Policies relating to the identification and nomination of women
directors
• Targets for women on boards and in executive officer positions
 Institutional investors and organizations advocating for gender
representation on boards have set a 30% goal by 2022

© 2020 McGraw-Hill Education Ltd. 11- 19

 Executive and Director
Compensation
• Compensation of executives and boards is an issue receiving increasing attention:
 Importance of disclosure and transparency
 Securities regulation requires disclosure of executive compensation in publicly traded
corporations
• Say-on-pay  ability of shareholders to vote on the remuneration of executives
• “CEO pay ratio”  ratio of the compensation of the corporation’s chief executive
officer (CEO) to the median compensation of the corporation’s employees

© 2020 McGraw-Hill Education Ltd. 11- 20

 Disclosure and
Transparency
• Corporate governance reform has focused on disclosure and transparency:
 Financial reporting
 Disclosure of how board functions
 Management information circular  document used to communicate with shareholders
• Audit committee  oversees the internal and external accounting auditing
function to ensure that financial statements accurately and appropriately
represent the condition of the corporation and that regulated disclosures are
made

© 2020 McGraw-Hill Education Ltd. 11- 21

 Evaluation
• Evaluation of board performance one of most challenging governance reforms
to implement
• The Globe and Mail - “Board Games: Annual Corporate Governance Rankings”
 Board composition and diversity
 Independence of directors and management
 Board evaluation and director assesment
 Committee structure
 Compensation of the CEO and directors
 Board output
 Shareholder engagement 

© 2020 McGraw-Hill Education Ltd. 11- 22

 Ownership, Governance,
and CSR
• Disclosure of “Ethical Business Conduct”
 National Instrument 58-101, Clause 5, requires that corporations
disclose the following in relation to ethical business conduct:
• Disclose whether board has adopted written code
• Describe steps the board takes to ensure directors exercise
independent judgment
• Describe steps board takes to encourage and promote a culture of
ethical business conduct

© 2020 McGraw-Hill Education Ltd. 11- 23

 Ownership, Governance,
and CSR Cont’d…
• Directors are encouraged to ask five questions about the
corporation’s ethics management:
 What is the strategy to manage ethics?
 Who is responsible for ethics in our company?
 Are people in our firm equipped to recognize and resolve moral
dilemmas?
 Are people in our firm provided with a safe opportunity to discuss
ethical issues of concern?
 Do we reward or punish ethical integrity and moral courage if it
has a negative impact on the bottom line?

© 2020 McGraw-Hill Education Ltd. 11- 24

 Summary
• Although other stakeholders have an influence on the
corporation, it is owned by shareholders or investors. There
are several types of owners including investors,
entrepreneurs, managers, employees, producers, and
mutual, pension, and investment funds. (LO 11.1)
• Several issues relate to ownership with one in particular
being of interest, the influence of owners on the
corporation’s social responsibility. One approach used by
investors is to sponsor shareholder resolutions advocating
that the board of directors and corporate executives take
action on a particular economic, social, environmental, or
governance issue. (LO 11.2)
© 2020 McGraw-Hill Education Ltd. 11- 25
 Summary Cont’d…
• Responsible investing is the screening of investments by
corporations or mutual and pension funds for their response
to social or ethical responsibilities as well as their financial
or economic actions. Investments are examined by a screen
comprising negative or positive criteria, and best-of-sector.
(LO 11.3)
• It is necessary to protect the rights of owners through
government legislation, self-regulatory agencies, industry
association, and individual and institutional activists.
Corporations are mindful of owners and often have investor
relations departments to maintain good relations. (LO 11.4)

© 2020 McGraw-Hill Education Ltd. 11- 26

 Summary Cont’d…
• The definition of corporate governance has changed over the
years to reflect developments in the area.
• The board of directors is elected by the shareholders and is
mandated to represent shareholder interests. The board oversees
all the affairs of the corporation and today this includes the
ethical conduct and social responsibility of the corporation.
• Many corporations now have charters specifying the board’s
mandate. Several issues are related to corporate governance,
including the board structure and membership, board diversity,
executive and director compensation, disclosure and
transparency, and evaluation. (LO 11.5)

© 2020 McGraw-Hill Education Ltd. 11- 27

 Summary Cont’d…

• A connection exists between ownership, corporate

governance, and ethical conduct and CSR. In fact,
governance is now considered one influence on
corporations to conduct their affairs appropriately in the
interests of shareholders and other stakeholders, and as a
part of the corporation’s overall corporate social
responsibility. (LO 11.6)

© 2020 McGraw-Hill Education Ltd. 11- 28