Corporate Governance: Platitudes, Principles or Best Practices

Abstract

Since 2005 corporate governance disclosure requirements for Canadian public companies have been set by the Canadian Securities Administrators. The requirements are essentially a system of voluntary compliance with “best practices” but with mandatory disclosure of compliance or explanation of how it complied “in principle.” A company would be compliant if “best practices” were not followed, as long as compensating disclosure was made about the alternative approach taken. In December of 2008 the CSA proposed revisions to their requirements. The proposed new requirements support a so-called “principles approach” to governance, a substantial change from the “best practices” which are used as benchmarks in the 2005 requirements. Our study featured 307 TSX registrants and 148 TSX Venture registrants. We found the non-compliance rate for TSX firms ranged from 11% to 20%, using the lenient test of whether the company ignored the requirement to disclose and explain the company’s approach alternative approach to governance if they did not comply with best practices suggested in the nine areas we reviewed. We did not judge the appropriateness of the alternative approaches taken by firms that complied by making disclosure of differences with best practices, just as would be done under the new proposed “principles” based policy. For TSX Venture companies, non-compliance, in individual non-required areas, ranged from 25% to 84%, are of which are significantly higher than the current TSX rates of non-compliance. Overall, the non-compliance rate should give the investment community, and therefore the CSA, cause to hesitate.

Keywords: corporate governance, disclosures, board of directors, Canada

JEL Classification: A40, L50, K22