Daniels, Ronald J.

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  • 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
    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
    The Capricious Cushion: The Implications of the Directors and Insurance Liability Crisis on Canadian Corporate Governance
    (1993) Daniels, Ronald J.; Hutton, Susan
    One of the clearest legacies of the growing concern expressed over the international competitiveness of Canadian and American businesses has been the urgency it has lent to a very old debate respecting the efficacy of the apparatus used to govern the business and affairs of large, public corporations. For instance, Michael Porter, one of the most articulate - if not the most prolific - of the new competitiveness scholars, has suggested that American economic performance could be improved by enhancing the performance of the traditional corporate governance apparatus. In this respect, his suggestions closely track the thrust of recent reform initiatives proposed by investors and regulators who seek to increase the performance of the board by making it more responsive, indeed responsible, to shareholder interests. Although some of the current critics of the corporate board have placed exclusive faith in the ability of market mechanisms to ensure heightened board effectiveness, most initiatives rely to some extent on strengthened legal duties and responsibilities to achieve this task. And, as measured by the growing willingness of both courts and securities regulators to impose liability on directors for failing to review diligently various corporate transactions (i.e., self-interested transactions, public financings, etc.), it is clear that the reformist calls made by these critics are slowly but surely being heeded. Paralleling the trend to increased legal liability of boards for actions that are inimical to shareholder interests has been an equally clear trend towards enhanced legal responsibility for corporate conduct deemed contrary to broader stakeholder or community interests.
  • Publication
    In High Gear: A Case Study of the Hees-Edper Corporate Group
    (1995) Strangeland, David; Daniels, Ronald J.; Morck, Randall
    This study compares firms in the Hees-Edper Group with a number of other independent firms of similar size and in the same industries over a four-year period from 1988 to 1992, just prior to the first release of news that the Hees-Edper group was in financial trouble. During that period, HeesEdper firms recorded profitability levels comparable to (or below) those of the matched firms. The Hees-Edper firms were also shown to have been much higher risk investments well before the group's financial position began to deteriorate. They were more highly levered, but even after risk levels are adjusted for this, the risk levels of Hees-Edper firms remain much higher. Our study shows that the extreme incentive-based compensation schemes used by Hees-Edper firms encouraged managers to adopt high-risk strategies, and that the intercorporate co-insurance (allowed by the interlocking ownership structure of the firms) made this possible by increasing the group's apparent debt capacity. Since this higher risk did not improve overall performance, it was arguably at an economically inefficient higher level. The higher leverage of Hees-Edper companies should have produced a sizable tax advantage because of the deductibility of interest at the corporate level. The mediocre performance of the companies thus raises the possibility that abnormally poor performance was masked by tax breaks.
  • Publication
    State Regulatory Competition and the Threat to Corporate Governance
    (2003-01-01) Daniels, Ronald; Alarie, Benjamin
    The subject of this paper is the impact of the new globalized order on the integrity of corporate governance. Corporate governance is the system of laws, markets and institutions that seeks to control and discipline corporate activity in the service of the public interest. Over the last several years, many critics have bemoaned the growing integration of various economic markets across national boundaries because it is seen to lessen the capacity of states to regulate corporate behaviour. Essentially, the claim is that in a setting of reduced barriers to factor and product mobility, corporations are rendered much more effective in their capacity to extract regulatory concessions from host governments, and these concessions have the effect of lowering social welfare. The argument is that in a setting of high international corporate mobility, footloose corporations will relocate their operations to whichever jurisdiction offers the most congenial (meaning least stringent) regulation. In the face of certain corporate migration in response to more stringent regulation, states will have no choice but to refrain from adopting socially optimal regulation. This is because states fear the loss of benefits associated with corporate activity: namely, employment, investment and tax revenue. The effect is an international "race to the bottom" in which states are rendered helpless in countering the effect of heightened corporate mobility.
  • Publication
    Rationales and Instruments for Government Intervention in Natural Disasters
    (2006-01-01) Daniels, Ronald J; Trebilcock, Michael J
    The world, over the course even of its relatively recent history, has known many natural disasters, including earthquakes, volcanic eruptions, tsunami, hurricanes, floods, droughts, and pandemics. The 1918-1919 Spanish flu pandemic killed more than 20 million people (some estimates run as high as 50 million). The current AIDS pandemic has already killed more than 20 million people (most in sub-Saharan Africa), and there are serious concerns that a new avian flu pandemic could kill hundreds of millions of people around the world. The recent earthquake in Pakistan is estimated to have killed over 70,000 people. The tsunami in the Indian Ocean in December 2004 killed 300,000 people (Winchester 2003; Winchester 2005; Barry 1997). Richard Posner, in his recent provocative book, Catastrophe (2004), worries about much more remote but more devastating natural disasters such as asteroid collisions with the earth or extreme forms of global warming followed by an ice age.
  • Publication
    The Role of Debt in Interactive Corporate Governance
    (1995) Triantis, George C; Daniels, Ronald
    Most of the corporate governance literature rests on a premise that the interests of various stakeholder groups conflict and that managerial loyalty is more likely to be captured by shareholders than any other constituency. Yet, stakeholder interests do converge in the objective of controlling managerial slack and non-equity constituents have substantial influence over firm decisions. Although the study of governance has taken early steps to abandon its preoccupation with equity-centered solutions and identify interdependencies existing among a broader range of stakeholders, governance scholars have missed an important element of interactivity. A stakeholder reacts to the actions of others and thereby contributes to the collective interest in controlling slack. Each stakeholder has a window on the firm through which it can acquire some type of information at lower cost than other stakeholders. When a stakeholder detects an unsatisfactory state of affairs, it reacts by choosing to exit or exercise voice. The exercise of either the voice or exit option may pressure management to correct the unsatisfactory state of slack. More to the point, however, a stakeholder's exit bears important information for other stakeholders, at least some of whom may be better placed to take action that corrects the slack. This Article describes an interactive system of corporate governance and provides a stylized theory of the role of lenders within this system. The divergence in the interests of these lenders and other stakeholders does not preclude interactive governance, but it does threaten to reduce the net benefits from the process. Therefore, the authors identify a number of legal and institutional mechanisms that help to channel the efforts of the lender toward the common goal of containing and correcting managerial slack. The interactive perspective thus permits new explanations for phenomena such as debt covenants, bankruptcy preference rules and lender liability laws. For example, the definition of debt covenants and events of default in lending agreements raise the likelihood that the lender exit is prompted by slack rather than lender opportunism and thereby enhances the informational value of the exit. Bankruptcy preference rules encourage early exit before the firm becomes insolvent, thereby enabling remaining stakeholders to take action before the firm's condition becomes irreparable. Thus, debt covenants and preference rules provide a window that increases the value of lender exit in prompting the correction of managerial slack.
  • Publication
    Electricity Restructuring: The Ontario Experience
    (2000-04-01) Daniels, Ronald; Trebilcock, Michael
    Over 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 M
    The 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.