by P. Someshwar Rao and Clifton R. Lee-Sing, Micro-Economic Policy Analysis, Strategic Investment Analysis, Industry Canada, March 1996
Summary
The recent upsurge of interest in corporate governance issues in Canada and other industrial countries is a reflection of the recognition of the rising importance of corporate governance for strong economic performance of firms and nations. For example, in Canada, the TSE report on corporate governance examined the role of the board of directors in corporate governance and decision making in some detail and recommended several measures to improve the current governance structure and practices.
The corporate governance debate in Canada and other countries to date, however, has mainly concentrated on the role of the board of directors in ensuring shareholders' interests and the minimization of agency costs. As a result, both the research and policy debates have been too narrowly focused. In addition, much of the past corporate governance research in Canada is primarily qualitative and not based on any rigorous empirical analysis.
To broaden these research efforts, Industry Canada has prepared an in depth, firm specific empirical analysis of the interactions between corporate governance, corporate decision-making, and corporate performance in Canada. A financial activity-based database on 3000 United States and 766 Canadian firms was created to examine these linkages within Canada. The Canadian findings were compared and contrasted with similar results for United States companies.
The findings of this paper suggest that the governance structure of Canadian companies differ significantly from those of their American counterparts, especially with respect to the nature and concentration of corporate ownership, institutional ownership, inside ownership, and the composition of the board of directors. The following are some of the major findings of our study:
- Corporate ownership in most Canadian firms is concentrated in the hands of very few, very large shareholders. On the other hand, most American firms are owned by a large number of very small shareholders.
- Institutional ownership is much higher in the United States than in Canada. They control on average over 50 percent of the voting shares of American corporations, compared with less than 40 percent in Canada. However, the importance of institutional ownership is increasing in the two countries, as well as in many of the OECD countries.
- The CEO is also the Chairperson of the Board in 60 percent of American companies, compared with less than 35 percent of cases in Canada.
- The correlation between the governance structure, decision and performance variables, as expected, is significant and strong in American firms. In Canada, on the other hand, the relationship is weak and not robust. These results imply that the differences in corporate ownership play a crucial role in determining the impact of the governance system on corporate decision making and corporate performance.
In short, the findings indicate that corporate governance structures matter in the decision making process, which in turn, impact upon corporate economic performance. However, although the regression results are fairly strong, a large part of inter-firm variation in the corporate decision-making and performance variables is left unexplained. Efforts to develop data on variables relating to corporate management practices might be helpful in shedding further light on the importance of corporate governance for firms' adaptability, flexibility, and dynamism of firms.