Conversions from traditionally-governed, stock-traded corporations threatened to change the landscape of the economy, the market and the boardroom in ways that few had properly anticipated.
A major step forward for Canadian taxpayers and the concept of stakeholder capitalism took place on Tuesday with the announcement by Finance Minister Jim Flaherty that the tax holiday enjoyed by income trusts is about to end. It needed to.
Income trusts are antithetical to the long-term interests of investors and everyone else who depends upon the innovation and sound governance of the modern business enterprise. No other institution is positioned to invest in the future and to address emerging social needs as is the major corporation. Income trusts demand such high payouts that any thought to research, reinvestment or innovation takes second place to the big cheques today. These creations are, for the most part, nothing more than a giant poker game where all the winnings are taken home at the end of the night. But corporations are more than casinos. They are about the lives and well being of customers and employees and communities, as well as investors. And sound governance is part of the discipline that companies need to perform over the long run and to ensure that the interests of all stakeholders –and not just those of management– are fully considered. Only a properly empowered board with an unswerving understanding of its long-term mission and an unyielding commitment to the concept of accountability can accomplish this task.
In addition to their obvious avoidance of otherwise payable income tax (a cost now measured in billions of dollars), conversion to income trust status of companies that previously sold common stock can present an opportunity to evade important corporate governance reforms that have taken place over the past number of years –reforms that came about because of a broad consensus, painfully gained by society, that when major business institutions become disjoined from proper oversight and transparency, the consequences can be catastrophic. Canadian corporate governance guidelines are already a pale imitation of the gold standard exemplified by the Sarbanes-Oxley Act of 2002. With income trusts added to the equation, any certainty of remedial protections or consistency of practices to be relied upon by Canadian investors is illusory at best. Income trusts amount to a further roll of the dice because they lack a coherent regulatory framework and employ structures that frequently compromise principles of board independence and accountability of management. What were once owners of the company are for the most part reduced to little more than coupon clipping unit holders, with significantly reduced redress and protections both in law and in corporate governance practices. These conditions threatened to dramatically change the landscape of the market and the boardroom in ways that few have properly anticipated –not the wisest situation when billions are on the line and the jobs of tens of thousands are at risk. It is disturbing how many business leaders, gate keepers and even small investors seemed unbothered by these realities.
It was a clever game concocted and promoted by a lot of whiz kids looking for fat fees and instant mansions. The game is over. Perhaps the adults can get back to work making money the old fashioned way, which includes building for tomorrow and not just joy riding today. Business needs to be managed, directed and controlled by those with a sense that the well-governed, shareholder-owned, stakeholder-driven corporation is one of the most remarkable inventions of modern society –and way too important to be just another chip on Bay Street’s blackjack table.