Daniels, Ronald J.
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Publication Too Close for Comfort: The Role of the Closely Held Public Corporation in the Canadian Economy and the Implications for Public Policy(1995) Daniels, Ronald; Halpern, PaulFor several decades, American corporate scholars assumed the inevitability of the widely held Berle and Means' corporation. The argument was simple. In a rapidly developing industrial economy, economic prosperity dictated the infusion of massive amounts of capital into owner-managed corporations. Without ample capital, entrepreneurs would be unable to realize the scale economies or technological innovations necessary for industrial growth. The rub in the story, however, was that to raise the necessary capital, owner-managers had to sell off equity interests. Inevitably, the pressure for capital meant that ownership ended up being dispersed among numerous small stakes shareholders. With ownership fractured, sundry collective action problems subverted the capacity of shareholders to wield effective control over their managerial agents, which, in tum, meant efficiency losses from sub-optimal resource utilization. Recently, however, recognition of the survival of concentrated share ownership corporations in other countries, namely Germany and Japan and even in the United States, has caused American scholars to reconsider their commitment to the evolutionary inevitability of the Berle and Means' corporation. No longer the byproduct of innate economic forces, the American corporation has of late been viewed by many as merely path dependent, more particularly the result of a confluence of political, historical and cultural factors. Perhaps the most important was the restriction barring financial intermediaries from holding or voting ownership interests in commercial companies. Had these barriers not been created, ownership may have come to reside in sophisticated large stakes shareholders, who were much more likely than retail investors to control managerial agents.Publication Electricity Restructuring: The Ontario Experience(2000-04-01) Daniels, Ronald; Trebilcock, MichaelOver the last decade or so, a number of jurisdictions throughout the developed and developing world have embarked upon major competitively oriented restructurings of their electricity industries. Ontario has recently joined this list. Historically, Ontario Hydro has been the largest state-owned enterprise in Canada, having been created by the government of Ontario in 1906 initially to construct and operate a provincial transmission grid which would deliver power from privately owned hydro-electric generators to various municipally owned distribution systems. Ontario Hydro quickly broadened its vision to embrace a province-wide transmission grid and the progressive acquisition of most privately owned generating facilities in the province, as well as the construction of massive new generating facilities of its own. Ontario Hydro currently generates about 90% of the electric power sold in the province, about 60% of which is generated by nuclear facilities built in the 1970s and 1980s. Throughout its history, Ontario Hydro has occupied a unique and in many respects dominating political and economic influence in the province. It has rarely been far from the public eye, and major cost over-runs in system expansion precipitated the first of many commissions or like inquiries as early as 1920. By 1923, debts incurred on behalf of Ontario Hydro amounted to one-half of the entire provincial debt. Despite frequent public inquiries over the years into aspects of its operations, the basic vertically integrated, public monopoly structure of the industry that emerged in its first 20 years of operations has remained intact until very recently. The current Ontario government has now committed itself to wholesale and retail competition in electricity by the year 2000 and has restructured Ontario Hydro into two state-owned successor companies constituted under the Ontario Business Corporations Act. One of these will own the high voltage transmission grid and the other will own the generating facilities subject to commitments to transfer effective control of these facilities to private competitors so as to reduce Ontario Hydro's market share to 35% of price setting plant output within 3 1/2 years of market opening and 35% of all generating output sold in the province within 10 years. Significant rationalization of the almost 300 municipally owned local distribution utilities (LDCS or MEUS) in Ontario through amalgamation or privatization is anticipated (and is already occurring, albeit slowly).Publication Some of the Causes and Consequences of Corporate Ownership Concentration in Canada(2000-01-01) Daniels, Ronald; Iacobucci, Edward MThe June 1997 edition of Canadian Business ranks the top ten Canadian corporations in terms of growth. It states of its number-one performer, the Goldfarb Corporation, "Goldfarb's expansion strategy is founded on a few basic principles: First, look to invest in global companies.... Second, own more than 50% of the company in order to consolidate and control the business. Last, use Goldfarb's own marketing expertise." It states of its number-three performer, on the other hand, "Question: What turns a $395-million pipeline company into a $2.5 billion powerhouse in just three years? Answer: losing the majority shareholder. Ever since Olympia and York Developments Ltd. sold its 65% stake in IPL Energy Inc. of Calgary in 1992, IPL has grown with a vengeance. Instead of maximizing dividend payouts to satisfy cash-hungry O&Y, it has focused on expansion" ("Performance 500, Top 10" 1997, 137, 141; emphasis added). Mere pages apart, the magazine partially credits majority ownership with driving a successful company and blames majority ownership for restraining the performance of a potentially successful company. As this paper will discuss, there may be some truth to both opinions. At least since the time of Adam Smith, commentators have expressed concern about the effect of separating those who own a corporation from those who manage it, an effect resulting from the adoption of a widely held ownership structure (Smith 1937, 700; Berle and Means 1933). The suggested problem is that, if those who manage do not have a personal interest in the returns generated by the firm's assets, those assets will be utilized in a way that may be beneficial to the manager but not to the owners. Berle and Means (1933), however, were more pessimistic, predicting not only that corporations not owned by their managers would underperform corporations owned by managers but also that these widely held corporations would eventually become the norm in developing industrial economies. The argument was simple. As an economy grows and firms strive for scale economies, entrepreneur-managers are not capable of raising money to finance the firm's growth on their own and thus are compelled to go to equity markets to finance expansion. In repeatedly going to equity markets, of course, the entrepreneur eventually loses control of the firm. Because of the unceasing demand for capital in a rapidly industrializing society, the economy will in time largely comprise widely held corporations, which, given their inadequate governance by disinterested managers, does not bode well for the efficiency of the economy. It is apparent, however, that Berle and Means overstated the likelihood of an economy replete with widely held firms. While the widely held corporation is indeed the norm in the United States, firms controlled by very few shareholders remain predominant in other industrialized countries, such as Germany, Japan, and Canada. In Canada, for example, Morck and Stangeland (1994) report that just under 16 percent of the 550 largest corporations in Canada in 1989 were widely held in the sense that no single shareholder owned more than 20 percent of outstanding voting stock. Using the same definition, Demsetz and Lehn (1985) had found earlier that almost 50 percent of the largest 511 corporations in the United States were widely held. We first provide. a brief outline of the literature on corporate governance and ownership concentration. l Next, we examine legal issues that, as a positive matter, may have contributed to the concentrated ownership structure in Canada. We then examine the normative implications of these causal relations.Publication Private Provision of Public Infrastructure: An Organizational Analysis of the Next Privatization Frontier(1996-07-01) Daniels, Ronald; Trebilcock, MichaelConstrained by severe, ongoing fiscal pressures and sensitive to concerns over bureaucratic inefficiency, policy-makers in a number of countries are re-evaluating both the goals and instruments of the modern state. In doing so, some have endorsed the need for government 'reinvention,' a term that is admittedly susceptible of a broad range of meanings, but which nonetheless contemplates a significant shift away from reliance on governmental provision of goods and services in favour of provision by the for-profit and third sectors.' Although not uncontroversial, the claim is that, in comparison with governmental supply systems, both for-profit and third sector modes of delivery offer a superior means for organizing productive activity because of the greater incentives that exist within these organizations for lower-cost, innovative production. Although the claim has been made in a number of different policy contexts, we focus on its salience in the context of government's role in supplying traditional physical infrastructure projects such as roads and highways, bridges, dams, water and sewage systems, and airports.Publication Stakeholders and Takeovers: Can Contractarianism be Compassionate?(1993) Daniels, Ronald J.The issue of what, if any, purchase non-shareholder corporate constituencies (that is, employees, creditors, suppliers, customers, and communities) should have on the discretionary decisions of corporate management has proved to be one of the most durable, if not vexing, issues in modern corporate scholarship. Most recently, the issue has resurfaced in the context of the takeover wave of the 1980s, particularly during the latter part of the decade when control transactions became associated with high levels of leverage. At core, stakeholder advocates were riveted by the asymmetries involved in change-of-control transactions. While target shareholders earned consistent and sizeable returns from these transactions, stakeholders were left in the cold. Indeed, in some cases, control transactions were thought to be capable of inflicting highly focused losses on stakeholders. So severe were these losses that some commentators, were led to conclude it was the gains from opportunistic breaching of stakeholder contracts that motivated the transactions in the first place. As in the past, participants in the stakeholder and takeover debate generally array themselves into two distinct camps: one, which views any judicial or legislative attempt to protect stakeholders from harms not explicitly prohibited by corporate contracts as anathema ('non-protectionists'), and the other, which regards corporate responsibility for stakeholder harms as an innate and natural feature of the system of modern corporate governance ('protectionists'). In a perceptive article, Romano attributes part of the differences among scholars on divisive issues of corporate law to the starkly divergent normative beliefs that underlie each side. For non-protectionists, the underlying normative framework is individualistic liberalism, whereas for protectionists, it is usually communitarianism. Given the gulf that divides these underlying normative views, the hope for a principled and durable resolution to the stakeholder debate is indeed dim.Publication Growing Pains: The Why and How of Canadian Law Firm Expansion(1993-04-01) Daniels, Ronald J.Over the last decade, the Canadian corporate law firm, like its counterparts in other industrialized countries, has undergone a profound transformation, the most remarkable feature of which has been the rapid growth of individual firms. Whereas a mere decade ago only one Canadian firm could boast of having more than 100 lawyers, today there are at least 19 firms that can make this claim. Accompanying the firms' rapid growth has been their steady expansion into distant national and international markets. Significantly, even when that expansion has been confined to local markets, law firms have invoked a much broader array of growth instruments than in the past. In place of singular reliance upon the standard practice of recruitment directly from law schools and subsequent promotion through the ranks, law firms have shown themselves willing to deploy other methods including lateral recruitment ('cherry picking'), greenfielding, affiliations,and mergers. Interestingly, while the rationale for rapid law firm growth has been given belated, though careful, attention by legal academics, the issue of the mechanisms by which that growth can be achieved has been virtually ignored. This oversight is curious. By understanding the calculus governing the choice of growth instruments, important light can be cast on the structure of and rationale for the modern law firm, and on the way in which it has coped with the stresses and strains of a dramatically changing market environment.Publication Must Boards Go Overboard? An Economic Analysis of the Effects of Burgeoning Statutory Liability on the Role of Directors in Corporate Governance(1994) Daniels, Ronald J.On July 21, 1992, six outside directors on the board of Westar Mining Ltd. resigned abruptly from the company's board of directors. Westar was a troubled mining company operating in British Columbia. In 1991, the company had lost $62.2 million, mainly as the result of a poorly performing export coal mine. While resigning from the board, the directors assured the public that there had been no wrongdoing by the company. Rather, the reason for their departure was related to concern over personal liability for wages and other benefits that might be owed to more than 1900 of the company's employees under provincial employment standards legislation should the company become insolvent. Despite the fact that their departure might not absolve them from liability for other duties and would greatly complicate the company's bid for survival, the size of the personal liabilities they faced - more than $20 million - left the directors little choice. Predictably, the announcement of the resignations created considerable consternation in the financial community, the magnitude of which was enhanced when, just one week after the Westar resignations, the entire board of PWA Corp. resigned en masse from the boards of each of its subsidiaries, including Canadian Airlines Ltd. As in the case of Westar, the directors attributed their decision to the fear that they "would be forced to pay employee wages, taxes or some other obligation out of their own pockets should the struggling airline run out of money". These highly publicized defections have been invoked by critics as exemplifying the rather myopic and unthinking addiction that Canadian governments have developed to the elixir of directors' liability. By one legal practitioner's account, in Ontario alone more than 100 different federal and provincial statutes prescribe some type of directors' liability. Some critics have gone further and have viewed the board resignations as a powerful passion play that demonstrates in vivid terms the callous and hostile treatment that Canadian shareholders and business managers can expect to receive at the hands of populist legislatures.Publication Bad Policy as a Recipe for Bad Federalism in the Regulation of Canadian Financial Institutions: The Case of Loan and Trust Companies(1993) Daniels, Ronald J.This article addresses the impact of substantive policy on federal arrangements in the regulation of Canadian loan and trust companies. It is argued that reliance on market-suppressing policies (flat-rate based deposit insurance and selective bail·outs of depositors in the event of institutional failure) has undermined the value of competitive federalism in this area, and has spawned highly contentious policy initiatives such as Ontario's Equals Approach. To redress the federalism problems in the regulation of loan and trusts, a useful starting point would be the enhancement of market forces in substantive policy. Here, it is argued that the commitment to secrecy regulation by financial institution regulators has impeded this enterprise.Publication Breaking the Logjam: Proposals for Moving Beyond the Equals Approach(1993) Daniels, Ronald J.Over the last decade, the structure and performance of Canadian financial institutions has undergone a profound transformation. Propelled by both regulatory changes and market innovations, Canadian financial institutions have found their historically protected markets opened to intense competition from a variety of different sources. The most significant regulatory change has been the piecemeal dismantling of the pillars that have traditionally separated the core activities of banks, insurance companies, loan and trust companies, and securities dealers from encroachment by one another. With lower entry barriers, institutions have scrambled to penetrate each other's markets. This entry has spurred a narrowing of differences in the structure and conduct of Canadian financial institutions. Another regulatory change that has spurred increased competition is the reduction, (or, in the case of American owned Schedule II banks, outright elimination) of the constraints that have traditionally limited the operations of foreign financial institutions in Canada. Not surprisingly, the reduction of these restrictions has spawned the growth of a highly dynamic foreign financial industry in Canada.Publication Challenges to the Citadel: A Brief Overview of Recent Trends in Canadian Corporate Governance(1994) Daniels, Ronald J.; Waitzer, Edward J.Politicians, bureaucrats, owners, managers and employees are becoming increasingly concerned with the capacity of Canadian corporations to survive and prosper in the twenty-first century. By and large, the attention focused on competitiveness has developed from the rapid international integration of goods, capital and service markets. This integration has resulted in the creation of a new borderless world, in which consumer preferences reign supreme and in which those corporations that fail to anticipate, shape and respond to these preferences with cost- and quality-competitive products face certain failure. Concern over the survival of national firms commands widespread societal attention because of the dependency of many core public policies on the economic surplus generated by robust private markets. Given the focus on globalization and competitiveness, it is not at all surprising that academics have expended considerable energy identifying and analyzing the determinants of national economic success in this new international order. Although the composition of the basket of favoured policies varies from scholar to scholar, most accord at least some importance to the quality of the system of corporate governance that obtains in a given country. Tracking the modern use of this term, most scholars look beyond the mere operation of a firm's formal governance apparatus (i. e., the board of directors) and consider how a wide range of market (e.g., capital, product, managerial and takeover markets), legal (e.g., derivative and personal suits) and political (e.g., shareholder voting) devices combine to discipline managerial behaviour.