Corporate Governance and Social Responsibility

In 1970 Milton Friedman, a Nobel Laureate, in his article to the New York Times (The Social Responsibility of Business Is To Increase Its Profits) proposed that an enterprise’s primary and sole responsibility was to the shareholder through the maximization of profits. Friedman noted: “the social mission of business is making profits, period, with other social goals best left to politics.”¹  

Corporate duty to maximize shareholder value or  “shareholder primacy,” has emerged as the dominant principle for free market capitalism. Shareholder primacy has not only been the prevailing governance norm, but it has been the capitalist manifesto wherein corporate leadership has led to a “greed is good” attitude and wherein profits are the only measure of corporate success. This has been the driving force of corporate governance and executive motivation for the past 50 years.

Critics of shareholder primacy like Joseph Stiglitz, another Nobel Laureate, argue that this has led to a generation of immoral capitalism. In his article, Moral Bankruptcy, Stiglitz conveys his concern as follows: 

We have created a society in which materialism overwhelms moral commitment, in which the rapid growth that we have achieved is not sustainable environmentally or socially, in which we do not act together to address our common needs. Market fundamentalism has eroded any sense of community and has led to rampant exploitation of unwary and unprotected individuals. There has been an erosion of trust—and not just in our financial institutions.²

Who is right? What is the primary responsibility of corporate boards? Is shareholder profit maximization king; or is there an obligation for balancing profitability and social responsibility? What exactly should Canadians expect of corporate governance? And what role does the government play in managing corporate responsibility?

Most Canadians probably don’t think of such questions unless some specific event such as a company closure, bankruptcy or disaster impacts their personal lives; but we should, every citizen should. These are important questions not only for businesses; these are the questions that define our society, our values, our relationship with the world around us and our future.

A 2014 report on Canadian corporate governance by the Allard School of Law at the University of British Columbia noted:

Common themes in academic debate include whether shareholder primacy touted as the dominant model that governs modern corporations. Common themes in academic debate include whether shareholder primacy is efficient, whether it should be the dominant model, and how it can be improved, among other things. However, for many of Canada’s legal practitioners, theoretical models of governance are foreign to the day-to-day functioning of providing legal services that support good governance practices within corporations. Academic discussions on shareholder primacy and other alternative models of governance, such as director primacy, team production, enlightened shareholder value, and labour-oriented and state-oriented models, are rarely put to the test against the backdrop of Canadian corporate practice.³  

The report makes the point that many Canadian executives and directors have been schooled in the American style of governance as a function of the U.S. market being so much bigger and therefore, it is often assumed that Canadian corporate governance is one and the same as U.S. corporate governance. While not entirely similar the two systems do have much in common. In short, the American model is about shareholder interest above all, with some protections for the stakeholder, but primarily for minority shareholder interest; these principles are closely allied with Canadian corporate governance.

Few American or Canadian board members have been held responsible for corporate malfeasance. There are of course liabilities for corrupt practices, environmental damage and civil liabilities. These liabilities however have generally relied on legislation outside of the corporate governance structure and are generally litigated through civil and criminal courts.  

As an example, in 2020 Purdue Pharma, the maker of OxyContin, pleaded guilty to criminal charges resulting in US$8.3 billion in fines related to its marketing of the addictive painkiller pursuant to charges by the U.S. Department of Justice. That settlement paved the way for the resolution of thousands of lawsuits brought against the company for its role in a public health crisis responsible for the deaths of more than 450,000 Americans. Prosecutors did not preclude the filing of criminal charges against Purdue executives, but this was pursued not as a corporate responsibility issue, but as a criminal liability matter against the corporation.⁴

One of the largest fines in Canadian history ($196.5 million) was issued against Volkswagen in January 2020 (arising from diesel engine emissions).⁵ While fines and penalties are designed to encourage compliance with environmental legislation, they are generally enacted under a strict liability framework. The company pays the fines leaving the board safe.  

Ontario Section 99(2) of the Environmental Protection Act stipulates that the government—or a person—has the right to compensation, among other things, “for loss or damage incurred as a direct result of…the spill of a pollutant that causes or is likely to cause an adverse effect…from the owner of the pollutant and the person having control of the pollutant.”⁶ The Ontario Environmental Protection Act holds companies accountable for environmental damage. These are not liabilities against corporate governance or board members; they seek damages and restitution from the corporation.

In Canada, as in the United States, neither environmental nor social responsibility are integrated into corporate governance; accountability and liability are pursued outside of the board governance structure. This system contributes to a culture of calculated risk management assessed solely against the principle of maximizing shareholder profits.  Liability becomes a calculable risk, wherein those risks worth hedging can be ignored or allowed and only those that damage the bottom line are worth avoiding or averting. $196.5 million might seem a substantial fine, but when paid decades after the violation it only represents a fraction of the profits accrued from the fruits of the misconduct in the interim.⁷  

The Ford Pinto exemplifies this culture of calculable risk management most vividly. The Ford Pinto was designed with its gas tank vulnerable to being punctured by bolts protruding from the differential and it was estimated that a full tank would be emptied of fuel after an accident in as little as a minute. The risk of fire was obvious, but Ford hadn’t realized this until just before the car debuted. The Ford Corporation executives calculated the cost of fixing the problem against what it would cost to pay off anyone injured or killed as a result of a lawsuit and when the second number ended up being lower, Ford decided not to fix the problem.⁸ This was a deliberate calculation of the value of human life against stakeholder interests, a calculation that resulted in dozens of deaths and injuries.

Stakeholder profit maximization contributes to boards seeking innovative and disingenuous means of maximizing gains and adding, in some form or another, to the bottom line. Even donations, corporate events that support social issues, environmental responsibility and fair trade all become calculable corporate projects only supported to make either financial gains or add to the “good will” of a company’s consolidated balance sheet. 

While companies like Starbucks, sensitive to their reputations, offer their customers “fair-trade” alternatives that promise decent labour conditions, agricultural standards and fair wages, critics note that in reality only about 5 per cent of the world’s coffee is fair-trade. Critics also note that on balance it remains unclear if premium prices actually result in improved net compensation for farmers who incur added costs for gaining certification. Further, growers attracted by higher prices tend to increase land use for cultivation, add to oversupply, depressing prices for non-fair trade farmers. Nonetheless fair-trade coffee makes an important contribution to Starbucks’ good will.

Good will is that non-tangible commodity, lumped together with patents and other intellectual property, added to calculating a company’s worth which is reflected in its annual financial report. Good will is a measure of what a company is worth beyond the tangibles it owns, which is largely the reputation value of its brand. 

The “good will” asset of Novartis as an example, increased from (US dollars in millions) $12,039 in 2009 to $29,692 in 2010, to $31,090 in 2011 to $26,524 million in 2019, to $29,999 in 2020.⁹ Disney Corporation’s goodwill value in 2015 was reported to be (US dollars in millions) $27,826 rising to $31, 269 by 2018 and $77,689 in 2020.¹⁰   

The 2019 Annual Fiscal Report for Starbucks notes goodwill to have decreased from $3,541.6 in 2018 to $3,490.8 in 2019. That report also notes: 

Effectively managing growth can be challenging, particularly as we expand into new markets internationally where we must balance the need for flexibility and a degree of autonomy for local management against the need for consistency with our goals, philosophy and standards. If we are not successful in implementing our strategic initiatives, such as large acquisitions and integrations, we may be required to evaluate whether certain assets, including goodwill and other intangibles, have become impaired. In the event we record an impairment charge, it could have a material impact on our financial results.¹¹

his allows Starbucks to claim $87.2 million in impairments for 2017, $37.6 million in 2018 and $10.5 million in 2019. All corporations are entitled to impairments against goodwill assets. But goodwill is only calculated by what the public perceives, not that which remains concealed.¹² 

Consider the anti-sweatshop movement. Despite decades of advocacy by special interest groups Apple turned a blind eye to gross abuses by its suppliers (Foxconn) in China.¹³ Russell Athletic/Fruit of the Loom closed its factories in Honduras rather than recognize their workers’ right to unionize. And there were the sweatshops in Bangladesh, which remained out of sight and out of mind and out of the calculations for goodwill of many companies until May 2013, when a building collapse killed more than 1100 workers producing goods for sale by major European distributors and retailers.¹⁴

No corporate project, tangible or intangible, is undertaken without a careful and calculated decision about its impact on the company’s bottom line. Corporations are not incentivized to allocate expenditures if not compelled and are more likely to abdicate responsibility via the ‘back door’ if they can go unnoticed.  

Closer to home, take for instance the approximately 95,000 inactive wells and 69,000 abandoned wells across Alberta, Saskatchewan and British Columbia.¹⁵ According to the Alberta oil and gas liabilities management program, Alberta’s current approach to governing the clean up of these wells was put in place decades ago, when the oil and gas industry was largely focused on growing production and building new infrastructure. As the province’s oil and gas sector has matured, a new approach is required to more actively manage reclamation of sites throughout their life cycle.¹⁶ Too many companies simply walked away without doing the right thing.

In 2017, the Alberta government loaned the Orphan Wells Association $235 million for the reclamation of oil and gas well sites that no longer have a responsible owner. That loan was extended by up to $100 million in 2020^.17

The federal government is now expected to spend $1.7 billion to help clean up orphaned and abandoned oil and gas wells in Alberta, Saskatchewan and B.C. That $1.7 billion are expenses evaded by the corporations that put the wells there in the first place.  

It’s anticipated the cleanup fund will create 5,200 jobs in Alberta alone. The Canadian prime minister noted: “Cleaning them up will bring people back to work and help many landowners who have had these wells on their property for years but haven’t been able to get them taken care of and the land restored.” ¹⁸ 

The program that the federal government will now create will, however, inevitably be paid for by taxpayers. In other words, the $1.7 billion is the cost that the average Canadian now inherits instead of the corporate stakeholders who made millions in profits.

It is unlikely that governments will pursue restitution of damages from existing corporations and it’s less likely that the independent land owners can muster the capacity or funds to launch a class action lawsuit against the companies responsible.    

The Canadian and American corporate governance model is based on five normative principles¹⁹:

1. Ultimate control over the corporation should rest with the shareholder class
2. The managers of the corporation should be charged with the obligation to manage the corporation in the interests of its shareholders
3. Other corporate constituencies, such as creditors, employees, suppliers, and customers [which, together with shareholders, are included as “stakeholders”] should have their interests protected by contractual and regulatory means rather than through participation in corporate governance
4. No controlling shareholders should receive strong protection from exploitation at the hands of controlling shareholders
5. The market value of the publicly traded corporation’s shares is the principal measure of its shareholders’ interests

The overarching principle: managers are charged with the obligation to manage corporations in the interests of their shareholders; in other words profit maximization.  This need not be the case however. There are alternative principles being applied elsewhere.

As an example, South Africa was the second country after the United Kingdom to publish a shareholder stewardship code. The Code for Responsible Investment in South Africa (‘CRISA’),²⁰ influenced by the UN Principles of Responsible Investment, advocates emphasis on responsible investing over and above shareholder engagement based on the inclusion of environmental, social and governance factors (ESG factors).²¹ The Institute of Directors of Southern Africa, an industry body representing directors, convened under the leadership of former High Court judge Mervyn King, compiled the first Code of Corporate Practices and Conduct, initially released in 1994. The Code has since been reviewed three times, leading to the current version King IV Report on Corporate Governance for South Africa 2016 (‘King IV’).²²

What makes King IV different and progressive is its definition of corporate governance. King IV incorporates sustainable development as a core consideration for corporate governance.  King IV encourages corporate leadership to “expand its view of success in terms of long-term, positive outcomes for business, society and the environment.”²³ Corporate governance as defined by King IV is viewed as the exercise of ‘ethical and effective’ leadership by a governing body towards the achievement of four governance outcomes:²⁴

• Ethical culture
• Good performance
• Effective control
• Legitimacy

Unlike the overarching principle of our own corporate governance, King IV is framed within a “triple context”—the economy, society and the environment. King IV stresses that these three components must not be seen as separate, but rather combined to leverage the three as an integrated and intertwined part of the whole; this presents an obvious contrast to primacy of shareholder profit maximization. 

While King IV and King Codes remain voluntary, they position South Africa as a world leader. Its impact is so important and useful that many of its elements have been enshrined into legislation, including South Africa’s Companies Act.²⁵ The South African framework sets out the philosophy, practices and outcomes of corporate governance and in so doing should serve as a benchmark for corporate governance everywhere.

South Africa is not the only jurisdiction to include a wider array of ethics and practices as guidelines for responsible corporate governance. Thailand has undertaken a universal application of a ‘sustainability and self-sufficiency’ framework defined by its Corporate Governance Code 2017.²⁶ Thailand’s philosophy of sufficiency framework for socio-economic development highlights a “balanced way of living based on the principles of moderation, reasonableness, and self-immunity—along with the conditions of morality and knowledge.”²⁷ 

The philosophy of sufficiency economy, adopted under the patronage of late King Bhumibol, conveys a new approach for addressing current challenges for institutional governance, human capital, environmental sustainability and the role of government. 

This philosophy is intended as a new paradigm for corporate governance and improved societal and environmental development goals, requiring all development goals to be conceived, designed, implemented and concluded with both long-term profitability and sustainability as equally important goals. As with King IV, Thailand’s model places institutional governance, human capital, environmental sustainability and the role of government on an equal footing, all integrated and intertwined as part of the whole; this is once again in obvious contrast to primacy of shareholder profit maximization.

While this might not, on its face, appear to be distinguishable from our environmental impact studies required in support of industrial development, it does signal a fundamental cultural shift, one in which social responsibility becomes a moral imperative. Language, policies and intent all work to define the cultural norms that guide corporate governance.

Taken together the King IV Report and Thailand’s Corporate Governance Code demonstrate that it is possible to integrate sustainable development as an element of good governance, competitive economy, shareholders interests, society and the environment without an adversarial amongst them, a view for which there is now an increasing willingness amongst North American executives.  

In 1992 JPMorgan Chase CEO Jamie Dimon, representing chief executives of 192 large companies, was noted as admitting, “Americans deserve an economy that allows each person to succeed through hard work and creativity and to lead a life of meaning and dignity,” and that business as usual is no longer sustainable.²⁸ 

This group, representing America’s most powerful chief executives, agreed that the singular perspective that companies must maximize profits for shareholders above all else be abandoned for better balancing the needs of shareholders with customers, employees, suppliers and local communities.²⁹ This marked a noteworthy shift in responsible corporate stewardship; one which promised to align with the ideals for meeting our needs without sacrificing those of our children or our children’s children—the basis of sustainability.

The large-scale catastrophe of the 2008 financial collapse resulted in greater oversight and transparency requirements set out in the Sarbanes–Oxley Act of 2002. More importantly, it also led to a concerted effort by many in the corporate sector to undertake voluntary certification standards in an effort to shore up their reputations—another step towards sustainable stewardship. Companies like Citigroup committed to collaborating with the World Bank on voluntary environmental standards for third-world lending, Walmart committed itself to green retailing and Ben and Jerry’s owners committed to putting the public good ahead of profits.³⁰

As the World Economic Forum notes, there is no universal definition of sustainability, but many point to the United Nations’ 1987 Brundtland Report that calls for sustainable development that meets our needs today without compromising the needs of those in the future.³¹

This represents a major opportunity to reframe the role and responsibilities of corporate stewardship. An opportunity in which all Canadians, given our collective stewardship of the extraordinary natural resources in an increasingly competitive world, for increasingly limited resources, in an increasingly fragile world, should have an informed and vested interest in advocating for policies that ensure self-sufficiency and sustainability. Canada possesses amongst the richest, most fragile and beautiful ecosystems on the planet.  

It may be time for Canada to reexamine the accountability and responsibilities of our corporate boards and executives, to include and integrate the principles of King IV (‘triple context’—the economy, society and the environment) and those of Thailand’s sufficiency economy (institutional governance, human capital, environmental sustainability) and the role of government, all on an equal footing, all integrated and intertwined as part of the whole; to reexamine the primacy of shareholder profit maximization.

Anil Anand is a research associate with the Frontier Centre for Public Policy.

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1. Friedman, Milton. “The Social Responsibility of Business is to Increase its Profits”, The New York Times Magazine, September 13, 1970 See:http://umich.edu/~thecore/doc/Friedman.pdf
2. Stiglitz, Joseph E. “Why are we letting Wall Street off so easy?”, Mother Jones, January-February 2010, See: https://www.motherjones.com/politics/2010/01/joseph-stiglitz-wall-street-morals/
3. Carol Liao, “A Canadian Model of Corporate Governance” (2014) 37:2 Dal LJ 549-600. See: https://commons.allard.ubc.ca/cgi/viewcontent.cgi?article=1412&context=fac_pubs
4. Hoffman, Jan and Benner, Katie. “Purdue Pharma Pleads Guilty to Criminal Charges for Opioid Sales”, New York Times, Oct. 21, 2020, See: https://www.nytimes.com/2020/10/21/health/purdue-opioids-criminal-charges.html
5. Shepardson, David. “Canadian prosecutors seek to fine Volkswagen C$196.5 mln for diesel emissions” Nasdaq, January 22, 2020, See: https://www.nasdaq.com/articles/canadian-prosecutors-seek-to-fine-volkswagen-c%24196.5-mln-for-diesel-emissions-2020-01-22
6. Environmental Protection Act, R.S.O. 1990, c. E.19.  See: https://www.ontario.ca/laws/statute/90e19
7. Ibid.
8. Joseph, Jacob. “Famous for Catching Fire: Ford Pinto” Car Buzz, December 23, 2012.  See: https://carbuzz.com/news/famous-for-catching-fire-ford-pinto
9. Novartis Annual Report 2020, See: https://www.novartis.com/sites/www.novartis.com/files/novartis-annual-report-2020.pdf
10. Walt Disney Co. (NYSE:DIS), Stock Analysis on Net, See: https://www.stock-analysis-on.net/NYSE/Company/Walt-Disney-Co/Analysis/Goodwill-and-Intangible-Assets
11. Starbucks Corporation Annual Report 2019, November 15, 2019, See: https://www.annualreports.com/HostedData/AnnualReports/PDF/NASDAQ_SBUX_2020.pdf
12. Ibid.
13. Merchant, Brian. “Life and death in Apple’s forbidden city”, The Guardian, June 18, 2017.  See: https://www.theguardian.com/technology/2017/jun/18/foxconn-life-death-forbidden-city-longhua-suicide-apple-iphone-brian-merchant-one-device-extract
14. Thomas, Dana. “Why Won’t We Learn from the Survivors of the Rana Plaza Disaster?”, New York Times, April 24, 2018.  See:  https://www.nytimes.com/2018/04/24/style/survivors-of-rana-plaza-disaster.html
15. Government of Alberta. “Oil and gas liabilities management”. See: https://www.alberta.ca/oil-and-gas-liabilities-management.aspx
16. Ibid.
17. Ibid.
18. Anderson, Drew. “$1.7B to clean up orphaned and abandoned wells could create thousands of jobs”, CBC News, April 17, 2020.  See: https://www.cbc.ca/news/canada/calgary/federal-oil-and-gas-orphan-wells-program-1.5535943
19. Carol Liao, “A Canadian Model of Corporate Governance” (2014) 37:2 Dal LJ 549-600, See: https://commons.allard.ubc.ca/cgi/viewcontent.cgi?article=1412&context=fac_pubs
20.   The Code for Responsible Investment in South Africa (‘CRISA’) See: https://www.iodsa.co.za/page/CRISACode
21. About Principles for Responsible Investment (PRI), See: https://www.unpri.org/pri/about-the-pri
22. Corporate Governance in South Africa, European Corporate Governance Institute, See: https://ecgi.global/content/corporate-governance-south-africa
23. Ibid
24. Ibid.
25. Companies Act and Regulations.  See: https://www.iodsa.co.za/page/Companiesact
26. Corporate Governance Code 2017 See: https://www.sec.or.th/cgthailand/en/pages/cgcode/cgcodeintroduction.aspx
27. Ibid.
28. McGregor, Jenna. “Group of top CEOs says maximizing shareholder profits no longer can be the primary goal of corporations”, Washington Post, August 19, 2019. See: https://www.washingtonpost.com/business/2019/08/19/lobbying-group-powerful-ceos-is-rethinking-how-it-defines-corporations-purpose/
29. Ibid
30. Kuttner, Robert. Can democracy survive global capitalism?. WW Norton & Company, 2018.(P. 244)
31. “Report of the World Commission on Environment and Development: Our Common Future”, United Nations, 1987. See: http://www.ask-force.org/web/Sustainability/Brundtland-Our-Common-Future-1987-2008.pdf

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