Money Talks – Examining the Roles of Corporate Actors

There is virtually no activity, and certainly no public issue, completely free of corporate involvement. This chapter puts corporations and their many associations into the picture. We will not examine all aspects of business as a whole or of a corporation here except insofar as their characteristics affect how corporate actions touch upon or are closely integrated with deliberations and decision-making about public issues.

All too often in researching public issues, corporate actors are left out. When research concentrates solely on government activity, corporations are understood mainly only as outsiders pressing to have their views known and their influence felt through lobbying and capture. However, corporations are also well represented as constituent interest groups and their interests are frequently considered when governments make decisions about public issues. Corporations are both insiders and outsiders. You need to understand both roles.

Researching corporate actors is easier than it seems at first because corporate activity generates much accessible information. In this chapter, we provide background information about corporations, their structure and organisation, and their activities. We then present a guide to researching corporations as actors, and dealing with the wealth of information available.

1. Definitions

Corporation An entity established by law with the objective of carrying out a business activity. (Because this chapter focuses on profit-making corporations, we exclude corporations formed to operate as charities.) We use corporation here as a synonym for firm, company, and business, though technically the terms can have different meanings.
Private company A company with shares available for sale only to a limited class of investors.
Public company A company with shares that can be sold to the general public. The shares of public corporations are openly traded on various stock exchanges.
State-owned corporation Corporations that are partially or fully owned by the state. In Canada, they are called Crown corporations, elsewhere they might be called “special purpose” corporations.
Shareholder An investor who buys a piece of a corporation’s equity, commonly described as a share or security. Shareholders can be individuals, institutions, government, pension funds, and other corporations.
Corporate and securities law Corporate and Securities law are two overlapping fields of activity rooted in different spheres of regulation. Corporate law provides rules governing the creation, maintenance, and dissolution of corporate entities. Securities law imposes additional obligations arising from a corporation’s relationship with its shareholders.
Fiduciary duties of directors and officers Special obligations imposed by statute and common law on a corporation’s directors (members of its Board) and officers (its most senior staff serving management functions). In simple terms, directors and officers must always act in the corporation’s best interests, understood generally to be the best interests of the shareholders/owners.
The market The market is understood here in three different ways:

1.     The pool of customers from which the corporation draws.

2.     The pool of actual and potential shareholders who are drawn to hold sales in a company because of their assessment of its profitability, its value now in relation to other companies, and its prognosis for the future.

3.     A proxy term for the economy as a whole.

Relations between and among corporations Corporations can also be shareholders of other corporations or form other corporate entities. These are often called affiliates. A corporation is known as a parent company when it owns a controlling interest in another corporate entity. The corporate entity being controlled is known as a subsidiary.
Multinational and transnational corporations A multinational corporation is one that registers and does some or all of its operations in more than one company. Here we use the term transnational corporation to refer to the largest multinational corporations, the ones that operate on the global stage and that seem, for various reasons including their size, not to be beholden to any one nation-state.
Monopoly Exists where there is only one corporation in a particular market providing a service or product (usually assessed on a regional or national basis).
Oligopoly Exists where a few firms dominate a particular market such that entry of new corporations is virtually impossible for new competitors absent government intervention.
Cartel A group of corporations functioning in associations that control particular markets.
Trade and sector organisations Associations that generally represent the viewpoints and interests of corporates in a particular trade (e.g. investment brokers) or sector (e.g. agriculture).
Business associations Associations that represent the needs and interests of the whole of the business community.


2. Corporations: A Primer

The information below is offered as general background to orient researchers in the field. Further and more detailed information can be found, for example, in the introductory chapters of Corporations Law textbooks.

A. General Observations about Corporations

  • Formation:
    • Corporations can be created pursuant to corporate law statutes, which prescribe the manner of incorporation.
    • They can also be formed by special acts of federal or provincial legislatures, although this method is now less common.
  • Composition:
    • Corporate law allocates the functions, risks and responsibilities among directors, officers, and shareholders.
    • Most corporate statutes require corporations to have a Board of Directors as well as senior officers.
    • Directors make decisions affecting the corporation’s overall governance, whereas officers are senior executives tasked with overseeing the corporation’s daily affairs.
  • Two documents set out the respective responsibilities of directors and officers:
    • The Certificate of Incorporation or Articles of Incorporation brings the corporation to life as a legal entity and gives it the rights to enter contracts, own property, participate in legal proceedings, and perform a variety of other business-related functions.
    • By-laws outline how and when decisions are to be made and who, among director, officers, and shareholders, should make them. By-laws may also prescribe rules for calling special shareholder meetings, electing Board members, and/or requiring shareholder approval before certain decisions are made.
  • Accessing Information
    • Copies of a corporation’s certificate of incorporation are publicly accessible, and most are kept on file with the government agency in the jurisdiction where the corporation was formed.
    • Access to a corporation’s by-laws can be more difficult. Larger corporations often make these available on their websites, but smaller ones tend to leave them in the custody of their lawyers or keep them on file in their head offices.

B. Fiduciary Duties and Regulation

  • Among other things, fiduciary duties forbid directors and officers from engaging in conflicts of interest and other kinds of conduct that place their own interests ahead of the corporation they are serving.
  • By-laws or other key documents provide detailed guidelines outlining what kinds of conduct would violate a fiduciary duty.
  • The business judgment rule cautions courts not to intervene in Board decisions absent proof that a particular decision somehow violates the directors’ fiduciary duties.
  • There are limits to regulators’ capacity to oversee the problems generated as corporations pursue their fiduciary duties to their shareholders. The regulations may be inadequate, the cost of enforcement may be beyond the regulator’s budget, or corporations may take a regulator to court over a prospective regulation to determine if it is beyond what the agency is permitted to do, scientifically justified, or if the benefits outweigh the costs.
  • Today’s political and economic climate favours deregulation, and the capacity of regulation to control the deleterious effects of corporate activities is even more limited than it used to be.

C. Corporations as Legal Persons

  • Corporations are “legal persons” inasmuch as they can engage in business activities as if they were a person, and can be held responsible (and legally liable) for their actions or harms caused. It is the corporation, and not the Board members, officers, or staff that is responsible and potentially liable.
  • However, corporations are not moral beings. They cannot make purely ethical choices because their primary duty is a fiduciary one. With limited exceptions, they must put the financial interests of the shareholders first, and can be sued if they do not.

Question:

If corporations must always put their shareholders’ interests first, does that mean they can never make decisions on ethical grounds?

Answer:

The Board must always act in the financial interests of the corporations shareholders, but it can happen that Board members or senior managers justify “doing the right thing” as being in the financial interests of the shareholders, at least in the medium term. And officers and staff of any corporation can promote activities or argue against them on the basis that it is the right thing to do. However, these arguments must be assessed in light of their effect on the shareholders. For example, a corporate leader could argue at the Board meeting that the publicity gained from “doing the right thing” will benefit the shareholders and create a competitive advantage. Of course, “bad apples” can be fearless of litigation, scorn the regulators, and ignore the codes of conduct in pursuing what they consider to be their fiduciary duty. They are unlikely to become “good apples” by moral suasion, but do respond to public pressure, advocacy group actions, consumer revolts, new corporate and security law, actual lawsuits and the threat of new or stricter regulation. Thus, even while respecting their fiduciary duties, some corporations can act more ethically than others, or can be persuaded not to pursue distasteful or dangerous (but profitable) activities.



D. The Role of the Board

  • Be careful not to mischaracterize the election process that determines Board composition as somehow the same as shareholder control over the corporation itself.
  • Ordinarily, senior management proposes actions and strategies to the Board, which considers the proposals and decides whether or not to grant its approval.
  • However, in some circumstances, shareholders can demand more input into Board composition, the drafting or changing of by-laws, or in how the corporation is managed.
  • Where there is conflict, judges and regulators can use corporate statutes, securities statutes, certificates of incorporation, by-laws, and common law precedent to adjudicate disputes between directors, officers, and shareholders.
  • Do not assume that the directors of all corporations are elected by shareholders at annual general meetings; some directors may be appointed by the Boards themselves. The appointment of a particular director may reveal relations of power and influence between certain corporations or individuals.

E. Shareholder Rights

  • Corporations can issue different classes of shares, each carrying different kinds of rights or privileges.
  • Corporate statutes require at least one of these classes of shares to give the shareholders the right to vote at a corporation’s annual meeting.
  • Some classes of shares may provide additional voting rights.
  • Corporations recognise the diverse interests among their shareholders, and often use shareholders agreements to articulate the various rights and obligations attached to each class of shareholder.
  • Directors who are elected at the annual general meeting must eventually face these shareholders for re-election and account for decisions made since the last election.
  • Shareholder votes are weighted in terms of the number of share they hold. Thus those who hold large or controlling blocks of shares can have significant power in relation to the election of directors.
  • Private equity firms exist only to hold shares of companies. They often buy and thus control enough shares to have a major impact on the corporation.

Question:

Who controls a company? If the Board of directors makes the decisions, and the officers are responsible for day-to-day activities, what actual power to change things do the shareholders have?

Answer:

Board membership confers legal duties and responsibilities for the corporation, and senior officers play major roles but neither is the same as control. Control is linked to ownership, that is, shareholdings. However, a shareholder need not control a majority of the voting shares in a corporation in order to exercise control. If shareholding is widely dispersed such that many shareholders are involved, each with a relatively small proportion of the total number of shares, control can be exercised by the shareholder(s) holding a small block of shares, one that is sufficient to outweigh any other individual shareholder or likely grouping of shareholders. Control can sometimes be exercised with as few as two per cent of the shares.

It is obvious that the major shareholders or those with controlling shares exercise influence in corporate decision making, but ordinary shareholders, diverse and dispersed though they may be, play a crucial role, especially in public corporations.  Keeping such shareholders, voting or not, happy is essential.  Happiness in this instance translates into being willing to maintain ownership of the shares in question, as opposed to selling them to other potential shareholders either privately or through a stock market.  Shareholder loyalty is often minimal, especially with today’s stock trading practices, with shareholders willing to take their money elsewhere quickly if they feel the corporation is not delivering enough benefits and if the alternatives seem attractive.



E. Shareholders versus Customers and Lenders

  • A corporation’s relationship to its customers is different than its relationship to its shareholders. The duty to its customers depends on variables including applicable consumer protection laws, common law precedent, competition in the marketplace, or basic realities of supply and demand.
  • As a very rough generalisation, corporations tend to run their business on other people’s money: bonds, various forms of credit, going public with an IPO, changing the value of each share, etc. Access to such “capital” is crucial to weather changes in the market, for new product and market development, for innovation, and to “grow” the company and increase the value of the shares.
  • Lenders have different interests from shareholders but they are powerful, sometimes exercising as much control as the major or controlling shareholders.

F. The IPO

  • The process of issuing shares to the general public for the first time is known as an initial public offering (IPO). The same process is also described as “going public”, “floating”, or “offering”.
  • Transitioning from a private to a public corporation is a major change in a corporation’s evolution. Among other things, becoming a public company requires meeting additional regulatory obligations, most of which are monitored and enforced by securities regulators.
  • During an IPO, a prospectus will be generated to provide information about the share offering, and press releases and other materials produced at this time can provide a variety of relevant data about a particular corporation’s activities.
  • The reverse of an IPO is a process known as going private. Companies might go private because of high compliance costs, as a business strategy if shares stagnate or decline in value, or to avoid intensified regulatory scrutiny.
  • In order to go private, all outstanding shares must be purchased. Where there are some “hold out” shareholders refusing to sell, a series of special votes can allow their shares to be cashed out without their owners’ consent once a minimum percentage of outstanding shares is purchased.

Question:

Why does it matter, for the purposes of my research, whether a company is public or private?

Answer:

You care about the difference between public and private corporations because it affects the amount and kind of information that will be available. You care about the process of going public because it generates a large volume of publicly available documents that can be accessed through the records of the security regulators as well as the corporation. You care about going private because it removes such documents from public and government scrutiny.



G. State Owned Corporations

  • Although governments may determine the fundamental structure and purpose of government-owned corporations, many such corporations are managed very much like their private sector, profit-seeking counterparts.
  • The legislation mandating their operations might require that specific activities be performed, but such activities are assessed and carried out in a way that maximizes the general benefit of the corporation.

H. Not for Profit Corporations, Cooperatives and Non-Profit Organisations

  • Some corporations are set up to be not-for-profit. They are not commonplace, and the laws about them are in transition.
  • Shareholders of these corporations do not reap the benefits (or losses) associated with shareholding.
  • Profits must be kept within the corporation and used to further its activities.
  • Cooperatives can be for-profit, but are organised differently from for-profit corporations because each shareholder has one vote regardless of the number of shares held.
  • Non-profit organisations are dealt with in the chapter on Advocacy.

I. Relations Between and Among Corporations

  • The premise of most capitalist economic systems is that there will be competition between and among corporations offering comparable services or products.
  • In theory, competition ensures that these corporations deliver enough customer satisfaction to keep their customers from choosing their competitors, and to remain profitable. Markets are seldom fully competitive, but some are not competitive at all. Unfair trading practices flourish especially where competition is limited or absent.
  • Traditionally, governments provide regulation when competition is deemed to be seriously compromised.
  • Corporations can also be shareholders and form other corporate entities. There is a variety of parent-subsidiary arrangements.
  • A common configuration is to have a specific kind of parent, known as a holding company. A holding company exists solely for the purpose of holding a controlling interest in subsidiaries formed to carry out discrete business activities.

J. Multinational and Transnational Corporations

  • There are many ways that corporate activities can span two or more jurisdictions. In such cases, the corporation is often referred to as a multinational corporation.
  • A multinational corporation can be structured to have semi-autonomous groups of subsidiaries, each with their own management structure and organisational culture. Alternatively, decision-making may be more centralised, leaving subsidiaries with less managerial discretion.
  • All corporations have a home base in one nation state. That is, all are incorporated under the laws of a particular nation state, notwithstanding that they or their affiliates may also be incorporated separately in the nation states where they operate.
  • The home base of a multinational corporation may be chosen because laws, regulations, and tax provisions are attractive to the corporation in its attempts to minimise legal and regulatory constraints and maximise profits.
  • The use of the term “transnational corporation” emphasises the lack of power of nation-states to oversee, regulate and control corporations through their law.
  • “Transnational” refers to corporations that are so large, or control so many activities, or operate in so many jurisdictions that they can set at least some of their own rules of the game.

K. Trade and Sector Organisations

  • These organisations often conduct research, prepare briefs and position papers, appear at conferences, send delegates to national and international meetings, operate think-tanks, and participate (sometimes as observers) in deliberations and decisions on public issues.
  • The interests of all corporations even within a single trade or sectoral organisation are not the same.
  • Trade and sectoral organisations often carry the burden of participation in the decision-making about public issues, release public statements, distribute publications, and sit on committees or delegations set up by governments and others. Thus, they can be a valuable source of information about the corporations operating in a particular trade or sector.
  • Business, trade and sector organisations have no control over the actions of their members, except insofar as they adopt codes of conduct or sign contracts about specific things. Even then, many codes are vague in their prescriptions and lack effective compliance mechanisms.
  • Membership in trade and sector organisations is open to all corporations in the trade or sector, but some choose not to join, or they set up organisations of their own.

3. Steps in Research

A. Survey the Economic Landscape

  • Start by surveying the economic landscape, with the goal of getting a sense of the corporations involved, what these corporate actors do and how or why they do it concerning your public issue. Your purpose is also to get a general sense of developments related to the public issue of concern.
  • This requires constant, ongoing monitoring of news stories to appreciate what is going on. Consult the business pages of newspapers regularly.
  • Collect names, dates, events, reports, and other details.
  • Try to trace the movements of some or all corporate actors, including their changing relations with each other.
  • The result of this step should be literally hundreds of entries in your chronology files, including entries not directly affecting your issue or the corporate actors you know to be involved. Sometimes an indirect event, such as currency devaluation, has profound implications. You need to know it happened, and when.

Question:

Business news is vast and confusing. There are so many sources, updated daily: how do I know where to look?

Answer:

You could start with some of the mainstream sources that are well-known throughout the business world: The New York Times, Wall Street Journal, Inc. Magazine, Harvard Business Review, Fortune Magazine, Entrepreneur, The Economist, Forbes Magazine, Business Week, Investor’s Business Daily, Financial Times, and Barron’s are but a few.  Some of the content found in these publications are syndicated stories from Agence France-Presse, Reuters, Bloomberg or the Associated Press.  Most of these news organizations also provide readers with links to social media sites, such as Facebook and Twitter, a practice which begat the concept of trending, that is, gauging which stories have attracted the most interest.

Business related blogs are crucial.  However, in looking for concrete data, such as names, places, dates, and events, take care to cross-reference material from more reliable sources to ensure accuracy. This can be tricky when stories are being recycled across several websites and news organizations, a trend that has migrated from conventional news-gathering.

Business news is replete with experts giving their views on one thing or another.  It is generally written for an investing audience. It offers predictive opinions about the future direction of business or specific corporations based on events that have occurred or are about to take place. These prognostic writings are of little interest as your goals are quite different. Your aim is to gather information about economic developments such as devaluations of currency, bankruptcies, mergers or new government decisions that affect the corporations directly involved in the public issue of concern.  Conferences and gatherings of business and/or government leaders are always of interest. All of these refer to events that have happened and actions that have been taken.



B. Focus on Formal Associations Between Companies

  • Now zero in on the formal associations between and among companies, specifically trade, sector, and business associations.
  • Virtually all sectors have one or more associations, and many participate in business organisations like the International Chamber of Commerce.
  • Conduct another media search using the names of the relevant associations as your guide. Most of the associations will have websites with lists of reports and publications, and there is likely to be a magazine or newsletter aimed at members.
  • Keep in mind that often business, trade and sector organisations participate in committee meetings, give briefs to government, provide expertise, and write reports. Look for relevant legislative committee meetings, inquiries and especially the hearings of relevant regulatory bodies.
  • Remember that there can be more than one association in a sector. Often discovering how and why associations formed or split can be valuable information for your research.

C. Focus on Influential Corporations

  • Choose one or more corporations you now know to be influential in your public issue.
  • If you have access to the membership lists of sectoral organisations, pick those corporations with direct involvement, choosing the larger corporations first. However, such lists are rarely provided to the public.
  • You can depend on news media searches, government reports and consultant reports to government, and other information in your files to make your choice(s).

D. Assess the Prominence of Corporations in Your Study

  • You now need to decide how deeply you will probe corporate activities, as the research quickly becomes very detail-oriented and time consuming.
  • Decide beforehand whether the actions of the corporate actors are likely to figure heavily in the eventual story you will tell on the basis of your research.
  • Some projects will require only a general understanding of corporate involvement in your issue. If this is the case, you can stop at this step.

E. Collect and Analyse Detailed Documents Regarding the Chosen Corporations

  • Now burrow deep into the information about the corporation(s) you have chosen.
  • Begin by returning to the news magazines and the business, trade and sector associations’ websites and publications. Now you are looking for detail about particular members, often provided in news stories.
  • These documents can be complicated and highly specialised. The best approach is probably just to scan: to look for information about subsidiaries, for example, rather than trying to assess the implications of a balance sheet.
  • Corporate life generates a large number of documents, including certificates of incorporation, by-laws, shareholder agreements, prospectuses, annual reports, and quarterly earnings statements. These materials are often publicly available.
  • Information you might glean from annual reports, prospectuses and other offering documents includes:
    • The date, value, and nature of transactions;
    • The corporations parents, subsidiaries or other corporate affiliates;
    • The composition of the Board of directors as well as other subcommittees;
    • Director membership and participation in advocacy groups;
    • The corporation’s management structure;
    • Significant transactions;
    • The corporations short, medium, and long-range business development goals; and
    • Details surrounding significant litigation or other legal/regulatory proceedings.
  • Information released by public corporations can be cross-referenced with significant legal or regulatory changes by using your chronology.
  • You can also consult indexes for details about the history of the corporation and basic information such as business activity, size, linkages among directors, the distribution of shares, and major shareholders.
  • Keep in mind that throughout your search you are usually dealing with a cluster of corporations linked together through ownership, directors, affiliates and subsidiaries. You cannot gauge the whole without looking at the larger network of financial relationships. The same holds in reverse: you cannot judge the whole without at least a basic overview of the many parts of any complex corporate entity.
  • Thus far, we have been talking mainly about public corporations, although regulatory, legislative committee, and legal proceedings involve both public and private corporations.
  • With privately held corporations, the business press is helpful, but it is likely that interviews will be needed. Do not expect to find out much about the financial decisions of such corporations. Officers of such corporations may be willing to talk about the range of their business activities, the locations where they operate, and their agenda for the future. They will say how and when they get involved with other corporations, associations, and with governments, and may be vocal about their views of what government is doing and should do.

Question:

The guide refers to all kinds of different documents and information. What resources can I use to find this information?

Answer:

Many public corporations may publish some of the information you are looking for on their own websites. Annual reports and other publications on a regulating agency’s website may provide details of when and how public issues involving specific corporations have been dealt with. Other databases and search platforms you could use include:

Canada

System for Electronic Document Analysis and Retrieval (SEDAR) <sedar.com> provides information on Canadian public companies.

All provinces and territories, and the federal government offer some kind of searchable corporate database. The federal government operates a directory of Canadian companies available at: <http://www.ic.gc.ca/eic/site/ccc-rec.nsf/eng/home&gt;

Also see: Canadian Trade Index; the Canadian Business Directory; Scott’s Corporate Directories; Hoover’s Directories.

United States

Electronic Data Gathering, Analysis, and Retrieval system (EDGAR) <http://www.sec.gov/edgar.shtml> provides information on US companies.

Standard & Poor’s Register Of Corporations, Directors And Executives remains the leading source for corporate information.

In the US, Standard & Poor’s Register Of Corporations, Directors And Executives remains the leading source for corporate information.

Fortune magazine releases an annual online database of the 500 largest American corporations (according to revenues).

Other Jurisdictions

Kompass offers a fee-based, searchable database containing information on companies in more than 60 countries.

Mergent’s online (formerly Moody’s) and Bloomberg both offer internet-based access to information such as recent annual reports, company profiles and financial statements about foreign and domestic firms, including thousands of Canadian companies.

Company Annual Reports Online (CAROL) provides annual reports on firms based in the US, Europe and Asia.



F.  
Locate the Chosen Corporations in the Landscape

  • Now relate the information gathered on specific corporations back to the more general discussion of the economic landscape.
  • Turn to the information you collected in the first step, and consider how the actions and events you have identified relate to your chosen corporation(s), and vice versa.

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Once you have read this chapter, you should be able to:

  1. Have a basic understanding of the nature and structure of corporations, and relevant terminology.
  2. Understand the concept of fiduciary duties and how it shapes corporate action, the roles of various parties involved in a corporation, and the significant events in a corporation’s life.
  3. Identify and analyse the network of companies interacting in a particular field.
  4. Select a one or more corporations to focus on, and locate information relevant for your research.

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