Supporters of a national securities regulator expect much from the proposed new authority, including improved enforcement, better policy-making and greater efficiency. But the creation of a single regulator could also be the key to jump-starting shareholder democracy in Canada, argues a recent report.

In fact, the working paper — published by the U.S. National Bureau of Economic Research and written by Randall Morck, a finance professor at the University of Alberta Business School — makes the case that shareholder democracy in Canada is in poor shape. The report suggests that corporate Canada is currently less democratic than in either the U.S. or Britain and arguably less democratic than it used to be in the past. This situation, the report adds, undermines corporate performance and overall economic performance.

The Morck report states corporate Canada is less democratic “because corporate insiders dominate the shareholder meetings of listed Canadian firms to an extent generally not seen in either the U.S. or [Britain], and because Canadian legislatures, courts, regulators and exchanges accept and passively perpetuate this.”

The report points to the prominence of dual-class share structures and family-controlled firms in Canada as entrenching controlling shareholders. But with the advent of national securities regulation, the report suggests, reforms to improve shareholder democracy are possible.

For one thing, the Morck report says, a federal regulator in Canada would be well positioned to correct perceived failings of the corporate law system that effectively “subordinate public policy to a private elite of corporate officers, directors and controlling shareholders so as to undermine both social and shareholder democracy.”

A federal regulator could also help repel political interference in corporate takeovers, such as the Canadian federal government’s recent blocking of Australia-based BHP Billiton Ltd.’s bid for Potash Corp. of Saskatchewan. Says the Morck report: “The episode’s aftermath may well be an anti-takeover defence in federal securities regulations that prevents [such future] embarrassment.”

The report suggests that reform of the takeover rules would be one way that a national securities regulator could help bring about more vibrant corporate democracy in Canada — and it points to what had transpired in Britain in the 1960s as a possible model.

At that time, new rules were adopted in Britain that increased protection for minority shareholders and required potential acquirers to bid for an entire company once their stake reached a certain threshold. At the same time, institutional investors pressured firms to do away with share structures that concentrated control.

“Federally regulated firms might therefore be subjected to ‘all or nothing’ takeover regulation [in which] acquirers must buy 100% or stay away,” the Morck report proposes, noting that this sort of regime encourages an active market for corporate control and “genuine democratic accountability of corporate insiders.”@page_break@At the same time, the Morck report suggests that a single national regulator could placate insiders by allowing firms to adopt voting caps — such as those that currently protect the Canadian banks from being bought out — as a takeover defence. Although this policy would provide firms with some protection from takeovers, it would not necessarily serve to entrench existing management — unlike other defensive measures, such as staggered boards.

Along with reform to takeover rules, activist institutional inves-tors are key to this vision. Corporate democracy could flourish if, at the same time, institutional investors were powerful enough to oust underperforming management the Morck report suggests: “For example, if institutional inves-tors could readily nominate and campaign for opposition slates of directors, voting caps would lose much of their force.”

The Morck paper also suggests that pension funds could use some reforms of their own to make them more directly accountable to their plan members: “Clearly, real shareholder democracy would empower the ultimate owners of the [pension fund’s] shares: workers and retirees. For shareholder democracy to capture the centre ground of Canadian politics, democratic accountability of institutional investor management to beneficiaries would have to be part of the picture.”

None of these suggestions would be easy, however. The Morck paper notes that a national regulator would have to contend with some long-standing, established interests to make meaningful change. For one, the report says, the current system is geared too much toward the interests of traditional corporate Canada and not enough toward small, growing firms. Says the report: “A federal regulator is in a position to make a new start, but will encounter entrenched lobbies that press for a continuation of the traditional model.”

Indeed, some financial services industry-watchers fear that rather than swinging the balance toward more innovative, dynamic firms, a federal regulator is more likely to tilt the regulatory regime in Canada even more heavily toward the interests of the senior market. That is one of the reasons for Alberta’s persistent opposition to a national regulator. And, there seems to be a growing concern about this in British Columbia, too.

In a recent speech, Paul Bourque, executive director of the B.C. Securities Commission, warned that the advent of a national securities regulator could spoil some of the successes that provincial regulators have had in developing venues for small, growing companies to raise capital, such as the exempt market and the venture exchange: “The care and feeding of small business is of extraordinary significance, not only to B.C. but to Canada as a whole. We doubt that any national regulator would intentionally put any of this at risk. However, a national regulator is going to have its hands full on issues affecting, primarily, senior markets and participants in those markets.”

Specifically, he suggests, a national regulator could be preoccupied by some of the reform issues that have emerged from the financial crisis, such as how to deal with systemic risk, enhancing oversight of the over-the-counter derivatives market and introducing a regulatory regime for credit-rating agencies, among other things.

The risk, according to Bourque, is that a national regulator “will focus on these issues to the detriment of paying attention to responsible regulation of junior markets” and that the existing expertise in regulating the junior markets “may be lost or not heeded in an organization mostly dealing with new rule initiatives directed at senior markets.” IE