I’m writing this post in response to a chapter about the history of Canadian corporate governance and Canadian politics that appeared in Randall Morck, ed, A History of Corporate Governance Around the World: Family Business Groups to Professional Managers (Chicago: University of Chicago Press, 2005). You can read the chapter, “The Rise and Fall of the Widely Held Firm: A History of Corporate Ownership in Canada” by Randall Morck, Michael Percy, Gloria Tian, Bernard Yeung, here.
It may seem strange that I would write a lengthy blog post in response to something that was published more than half a decade ago. The authors of this piece are prolific scholars and have published many other things since then. This post may also strike some as presumptuous. Randall Morck, the lead author, is a very distinguished scholar. He is the Stephen A. Jarislowsky Distinguished Chair in Finance and University Professor at the University of Alberta. I hesitate to publish anything critical of such an illustrious academic. However, the chapter written by Morck et al. contains some very problematic ideas about important subjects, so I think that I must say something about it here. I believe that what I say in this post will be of interest to many people both in Canada and other countries, as the topic has big implications for how we think about the political economy of corporate governance.
Morck et al., argue that in the early 20th century, large pyramidal corporate groups controlled by just a handful of wealthy families or individuals dominated Canada’s non-bank corporate sector. By the 1960s, he says, most of the large companies in Canada were widely held. Ownership of Big Business became democratized—instead of a few magnates holding huge chunks of companies, there were vast numbers of small investors each owning a few shares in enterprises like Bell Canada.
Then, starting in the 1970s, the pyramidal corporate group controlled by families came back in a major way. Whereas the trend in the decades leading up to the 1970s was towards the wider dispersion of corporate equities, the data presented by Morck et al., show that the opposite trend has been at work in the last few decades. The authors suggest that the Canadian economy is now dominated by a few family groups. In this sense, it is much more like a continental European country or even a Latin American oligarchy than Britain or the United States, where the widely-held corporation is relatively common. Like most other Anglo-American academics, Morck regards the widely held corporation as the socially optimal arrangement. I will note here that not all scholars agree with this idea, although I won’t go off on a tangent about the literature about the merits of the family firm.
I don’t have any qualms with the raw data presented by the authors of this paper. I suspect that the trend evident in their data does correspond to the reality. I do, however, find their explanation for this trend to be very problematic. I particularly object to the political part of the explanation they offer.
It seems to me that the authors have overlooked the most obvious explanation for why the trend reversed itself in the 1970s: the period since the 1970s has been one of neo-liberalism in Canada and most other Western countries. In the 1970s, the post-war Keynesian consensus frayed, the role of the State in actual production has been dramatically curtailed, the welfare state came under attack, taxes became less progressive, unions became weaker. In contrast, the trend in Canada (and most other Western countries) from the 1930s to the 1970s was for a steady increase in the role of the state and more egalitarian distribution of income and wealth.
I will not dwell on the factual errors that appear here and there in this piece. “The new Tory prime minister, John Diefenbaker, an upstart lawyer born in a shack in rural Saskatchewan, had little use for great nation-building schemes or business lobbyists. The decade and a half following the war was probably the apogee of free market philosophy in Canada.”
Really? Diefenbaker sought to divert Canada’s foreign trade away from the United States. He also planned massive nation-building infrastructure projects in the far north. He expanded the government’s role in the redistribution of wealth. He did end the state’s monopoly over television broadcasting by permitting the creation of a commercial TV network, but I would hardly call Diefenbaker an apostle of the free-market economic philosophy we now associate with Ronald Reagan and Margaret Thatcher.
Morck et al., blame Trudeau for the decline of the widely held firm and the re-emergence of the family held pyramids. People on the left might argue that the simplest explanation for their re-emergence is Trudeau’s elimination of succession duties in 1972. For more about the end of the inheritance tax see here
This seems like a pretty plausible explanation to me. After all the imposition of the inheritance taxes by Canadian governments early in the twentieth century were followed by the trend towards widely-held ownership that Morck et al. document so well. The decision of the allegedly left-wing government of Pierre Trudeau to eliminate the inheritance taxes was followed by the reversal of the trend towards the widely-held firm. Of course, the fact that B followed A does not prove that A caused B. Post hoc ergo propter hoc is a common logical fallacy. However, the timing would appear to provide us with a working hypothesis that we could then test. I’m a big fan of Occam’s Razor, so maybe I have a personal bias here.
Instead of investigating the actual impact of the repeal of the inheritance taxes, Morck et al. construct a complex theory that rests on the unproven assumption that family firms will be more proficient at rent-seeking than widely-held corporations. They argue that in the 1970s Canada shifted from being a largely free-market liberal democracy to a social democracy with a Byzantine array of neo-mercantilist regulations. In such a social democracy, the business that are best at manipulating politicians are the ones that succeed. According to the authors, such a political regime favours family-controlled groups over widely-held corporations because the former have more political clout and are therefore better at rent-seeking. (They don’t cite any actual evidence from Canada or any other country to support this assertion, upon which their entire intellectual edifice rests). According to Morck et al., social democracy rather than the elimination of the succession duties, was the real reason for the re-emergence of the pyramidal groups.
“Now, suddenly, the Trudeau government’s hand was visible everywhere, and there was no longer a single point of contact for business. Numerous agencies, oﬃces, and authorities now took part in regulating the economy. The Trudeau-era federal government was large and complicated, with interconnected lines of control that did justice to the most complicated corporate pyramids. Increasingly estranged from this new public sector, business leaders were repeatedly hit with regulations, laws, and decisions that seemed to come from out of the blue…”
“Other widely held ﬁrms joined other great pyramidal groups during the Trudeau years.”
“The Trudeau Liberals sought a just society and distrusted markets. An alphabet soup of federal agencies began micromanaging “strategic industries,” like energy and the media. Complicated systems of taxes and subsidies redistributed income across corporations and regions.”
“The Trudeau Liberals probably lessened competition in the 1970s and early 1980s through an extensive program of nationalization, aimed at restructuring the economy to limit foreign control and execute industrial policies of various sorts. The most invasive, and economically disastrous, of these was the National Economic Policy… ordinary rules of competition clearly ceased for the duration of the program…”
I see several big problems with this explanation.
First, it isn’t proved that there was less rent-seeking in Canada in the earlier periods of Canadian history than in the Trudeau era. In fact, I think we could find some plausible data to argue that the opposite was true. Manipulating the tariff is a classic case of rent-seeking. Canada developed highly protectionist tariffs after 1879 via a process that would today be regarded as legalized bribery. Railway charters were also granted through a corrupt process. In the post-1945 period, as Canada became steadily more social-democratic (i.e., adopting socialized medicine) and it also moved in the direction of free trade, largely due to the various rounds of tariff reduction under the GATT and then the WTO. In effect, these trade agreements tied the hands of policymakers and made tariff-based rent-seeking more difficult.
Second, every Western country because increasingly regulated in the 1970s. This was the apogee of the interventionist state in the post-war Western world—the closest the Western democracies approached to a command economy since the Second World War. The trend towards government intervention in the economy, which was seen in Trudeau’s Canada, was visible in other countries as well. President Nixon set up the EPA and imposed wage and price controls. There was even gasoline rationing in the United States. Carter imposed new controls, although by the end of his presidency the US had adopted some neo-liberal policies, such as deregulating the airlines. The UK had all sorts of exchange controls and nationalized some of the car companies in the 1970s. Australia lurched to the left under a Labor government. The nominally centre-right government of Robert Muldoon in New Zealand had an extremely interventionist economic policy between 1975 and 1984. How is it, then, that these economies didn’t experience the same trend away from widely-held firms that Trudeau’s mercantilism allegedly caused in Canada?
Third, judging from Figure 1.5 on page 99, Morck et al. don’t distinguish between companies in different sectors. They do exclude financial companies from their analysis but they fail to break the data down into manufacturing companies, mining companies, media companies, etc. That’s a problem, since it keeps us from isolating trends in the ownership patterns of federally-regulated firms from companies that are mainly regulated by the provincial governments. It also prevents us from isolating the types of firm that were most subject to new federal regulations of the 1970s (e.g., radio stations, which now had to play a certain amount of Canadian music) from ones that weren’t really impacted much by Trudeau’s policies (e.g., retail).
Fourth, the authors’ analysis doesn’t pay any attention to the province of incorporation or the nitty-gritty details of corporate law in each province. The authors say nothing about the evolution of shareholders rights in Canada outside of the Province of Ontario. Each province in Canada has its own securities regulator. In Canada, a company may be incorporated under either federal or provincial legislation. I’ve recently been reading extensively about the importance of the fine-grain details of company law in corporate governance. The law and economics literature (La Porta et al.) strongly argues that strong shareholders rights help to promote the widely-held firm. It also suggests that shareholder rights are strongest in jurisdictions where the legal system is derived from that of England rather than the legal traditions of continental Europe. Weak shareholders rights (e.g., no right to call an emergency AGM and no right to fire the CEO) help to produce the family-controlled pyramidal firms so common in many civil law jurisdictions. Morck et al. say that this explanation doesn’t hold any water. They say: “If widely held ﬁrms become more viable when shareholder rights are stronger, they should have been rare until circa 1960 and then more common. But Canadian shareholder rights were consistently weak up to the 1960s, while diﬀuse ownership inexorably expanded. Then, in the 1960s, shareholder rights were abruptly strengthened, and widely held ﬁrms began to fade away. Changing shareholder rights seem a poor candidate to explain the rise and fall of the widely held ﬁrm.” [Italics added by me].
They authors aren’t really talking about Canadian shareholder rights. They are really talking about rights in companies regulated by the Ontario government. Their statements about shareholder rights are based on two secondary sources, both by historian Christopher Armstrong, whose focus was on Ontario. Morck et al. say nothing about how shareholder rights evolved in the civil-law jurisdiction of Quebec or any of the other Canadian provinces in this period. In this section of their chapter, the author appear to forget that Canada is a bijural and bilingual country.
Fifth, the authors say nothing about widening inequalities of income or wealth. I suppose this is understandable, given than they wrote this paper in 2005, before the Occupy Movement had raised the issue of inequality. Today, everyone is talking about inequality. Last week, the cover story in The Economist, a neo-liberal publication was about inequality. Nowadays we are all thinking about the impact of rising inequality. So we need to take trends in inequality into account in thinking about the data presented by Morck et al.
There is certainty data showing that income inequality in Canada has increased since about 1980, although not as dramatically as in the United States or the United Kingdom. Perhaps this provides the best explanation for the trend in share ownership documented by Morck et al.
Sixth, neo-mercantilism and social democracy are not synonymous. Some of the least protectionist and least mercantilist societies on the planet are also the most social democratic. The Scandinavian countries also have famously high levels of transparency and very low levels of corruption.
This map is from Transparency International’s 2011 Corruption Perceptions Index. As you can see, the Scandinavian countries are shaded lightly to indicate they are among the least corrupt in the world.
 Rafael La Porta & Florencio Lopez-de-Silanes & Andrei Shleifer & Robert W. Vishny, “Law and Finance,” Journal of Political Economy 1998; Thorsten Beck, Aslı Demirgüç-Kunt, and Ross Levine, Law and Finance: Why Does Legal Origin Matter? (Cambridge, Mass: National Bureau of Economic Research, 2002).