Corporate Governance Requirements in Canada and the United States: A Legal and Empirical Comparison of the Principles-Based and Rules-Based Approaches

Abstract

We present a first-time comparison of the principles-based corporate governance regime in Canada and the rules-based corporate governance regime in the United States from a theoretical, legal and empirical perspective. This comparison is of value to both firms considering a listing in Canada and/or the United States and institutional investors who hold equity stakes in either of these two countries. Under the Canadian principles-based approach, with the exception of mandatory rules relating to audit committees, companies are required to publicly disclose the extent of their compliance with the suggested best practices and, where a firm's practices depart from such guidelines, to describe the procedures implemented to meet the same corporate governance objective. Hence, the Canadian approach is in the form of comply or disclose. In contrast, the U.S. rules-based approach is oriented toward mandatory compliance with legislation and stock exchange requirements, with a much greater emphasis on regulatory enforcement rather than voluntary compliance. Our empirical evidence illustrates that the different regulatory regimes in Canada and the United States has to a certain extent resulted in considerably different corporate governance practices. Our research shows that Canadian firms, in comparison to U.S. firms: have smaller boards with fewer independent directors; have boards that hold more meetings; have directors that sit on a greater number of boards than directors of Nasdaq-listed firms, and sit on a fewer number of boards than directors of NYSE firms; are less likely to have CEOs also serving as the chairman of the board; and are less likely to have compensation, nominating and corporate governance committees, and the fraction of independent directors sitting on these committees is significantly lower. We conclude that there are pros and cons associated with both the principles-based and rules-based regimes. The extent to which the made-in-Canada approach to governance is found to be effective largely depends upon whether investors remain confident in regulation of the Canadian capital markets.