Reversing the Decline of Canadian Public Markets

It is the best of times for Canada’s public markets, it is the worst of times for Canada’s public markets. It is an age when markets have been rewarding public companies with the highest valuations seen in generations. It is an age of a rapid decline in Canadian companies opting to go public. Given that Canada’s reliance on public markets is far higher than that of any other country — double that of the next-highest country — we should be alarmed that fewer and fewer companies are choosing to go public. Companies that stay private are, on average, less successful, less productive, less likely to grow into national champions, and more likely to be sold to foreign buyers. The current decline of public markets may go to the heart of what is arguably the biggest long-term policy issue in the country: our innovation gap and declining relative productivity growth. There is no shortage of advantages for a company to go public. Public companies grow faster, grow larger, become both more productive and efficient, and have cheaper access to capital. An IPO permits early investors to exit while allowing managers to continue to build the company. What is evidently causing more and more Canadian executives to avoid going public, despite all these advantages, is a regulatory and governance ecosystem that has grown increasingly hostile to and distrustful of corporate leadership. Executives who consider going public face an environment in which their compensation levels will be high; indeed, pay for senior executives at public companies has grown remarkably in recent years. However, because of increasingly onerous regulatory disclosure requirements, earning those rewards comes at the cost of having their pay disclosed to the public, debated by shareholders and scrutinized by the media. Companies that go public also face a growing loss of control over their own governance due to pressure to adhere to an ever-evolving list of so-called universal best practices that can run dozens of pages long. These practices exact costs but don’t generally improve results. The result is a dominant one-size-fits-all governance model that does not in fact fit many, or even most companies. The key factor creating this hostile environment is a massive intrusion by outside forces on the powers traditionally exercised by boards and executives. Corporate governance used to arise from the bargaining and experimentation of the private parties that coalesce around corporations. Now governance is frequently imposed ex post on public companies by third parties with their own agendas. Particularly problematic are third-party commercial proxy advisors, ostensibly representing the interests of institutional shareholders. Their short-term, faddish, complex, and value-harming governance practices diverge dangerously from the interests of long-term flesh-and-blood investors. The innovations over the past three decades in governance rules were designed to reduce agency costs and improve corporate performance. Those that have proven failures at doing so, and there are several, should be scrapped. Rather than helping Canada’s markets become stronger, public markets have grown substantially weaker, and rather than making Canadian companies better, we now face an environment where companies would rather sell to a foreign buyer and leave the country, than go public here. The repercussions can only be adverse for Canada.