Conrad Black is back in Canada and back in the news following his recent release from jail. Black’s trials are a reminder of ongoing differences between Canadian and American corporate and legal cultures, along with the dynamism and vulnerability ofCanada’s corporate sector since he began his business career. These realities are epitomized in another major business story: the successful efforts of Bill Ackman and his Pershing Square team to oust the senior management of Canadian Pacific, Canada’s most highly publicized proxy fight of recent years.
Lord Black burst onCanada’s business scene in the late 1970s with his capture and dismantling of Argus Corporation, a central pillar of what Peter Newman described as the “Canadian Establishment.” His aggressive business tactics shook up the often cozy world of corporate Canada before he found his creative niche as an international newspaper tycoon, and his avocation as Canada’s leading practitioner of the “great man” theory of history. Black’s business career has been a living example of Schumpeter’s view of capitalism as a dynamic system based on “creative destruction.” Half ofCanada’s 40 largest companies in 1964 had, 40 years later, been taken over or had gone out of business (including most of Argus’ major subsidiaries); another 18 percent are either in a substantially different business, or have merged with a major competitor. And since 2004, if anything, the pace of corporate turnover has accelerated.
Black’s downfall was his failure to recognize and respond effectively to the changing management and regulatory environment for publicly-traded firms, especially in theUnited States. The 1990s led to rapid growth in public stock market participation acrossNorth America, along with a growing activism among institutional shareholders and new market actors, including hedge funds. Rather than deferring to the judgments of corporate executives as previously, these actors increasingly challenged management practices and performance, asserting their rights as shareholders and often supporting hostile takeovers in the market. After 2000, these trends were reinforced in both countries by regulatory changes accelerated by public responses to prominent corporate governance scandals.
In earlier years, Black’s response to his critics – if you don’t like it, sell your shares – would have been that of virtually any corporate executive with a supportive board. By the early 2000s, it was an invitation not only to lawsuits, but to the kind of aggressive regulatory and criminal investigations that resulted in Black’s loss of control, the ultimate break-up of Hollinger, and Black’s long (and unsuccessful) fight against U.S. federal prosecutors.
There is little doubt that had Hollinger maintained its Canadian base rather than bringing itself under American oversight, Canada’s more relaxed regulatory environment would have resulted in very different legal – if not necessarily business – outcomes. For example, institutional shareholders may have been successful in forcing Frank Stronach to relinquish his controlling ownership of Magna Corporation after many years of creative, if sometimes self-indulgent leadership. However, it took years of bad publicity and a more than billion dollar payout before the elimination of the dual-class share structure that had enabled Stronach to tap capital markets while maintaining control of Magna as a closely-held firm.
Widely-held firms face much stronger scrutiny in the marketplace. The growing activism ofCanada’s major public pension funds and other institutional investors is a key factor in these changes. Operating at arms’ length from governments,Canada’s six largest public pension fund managers: the Canada Pension Plan Investment Board (CPPIB),Quebec’sCaisse de Dépôt,OntarioTeachers, Ontario Municipal Employees (OMERS), BC and Alberta Investment Management Corps., control assets equivalent to one-third of TSX capitalization. Although Teachers’ hostile takeover bid for BCE Enterprises in 2007 was ultimately unsuccessful, the subsequent management shake-up has substantially increased returns to shareholders.
Similar pressures are visible in the now-successful efforts by Bill Ackman and his New York-based Pershing Square Management to shake up the board of Canadian Pacific, a company whose performance has been widely seen to lag that of its major competitors.
Some observers may lament the effects of shareholder activism in increasing the vulnerability of venerable Canadian firms to takeover and sometimes break-up. However, these trends are useful reminders of private property ownership’s centrality for market systems, and the importance of market disciplines, in promoting stronger managerial and economic performance. They also demonstrate the importance of effective and impartial legal systems if market participants are to be secure in the exercise of their ownership rights and responsibilities.
