The performance of Canadian controlled companies listed on the S&P/TSX

The positive effects of a long-term vision on environmental and social considerations and on shareholder return

Family-run businesses are the cornerstone of market economies. These companies are often imbued with a strong culture rooted in the values of their founder, a culture that develops and strengthens over time, sometimes even beyond the first generations who succeed one another at the helm of the business. They tend to make decisions with a long-term horizon, in consideration of all their stakeholders and the environment, as it is natural for them to want to ensure that future conditions remain favourable. This is the very essence of sustainable value creation.

As they grew, the largest of these companies eventually had to go public. Their founder-entrepreneurs were concerned with maintaining control over the company’s operations in order to further a culture that reflects the values central to the company’s past successes. As such, they sought to preserve the unique character of their business and ensure they could continue to uphold their long-term vision despite the presence of new shareholders, most of them anonymous and changing.

Given their own imperatives at the time of their company’s IPO, some founder-entrepreneurs were unable to raise the necessary funds without diluting their equity stake below the level required to retain control, or did not wish this risk to materialize. They therefore resorted to mechanisms to ensure that control was maintained, notably through the use of different share classes (DCS), each conferring specific rights (multiple voting rights for one of the classes, for example, or exclusive rights to appoint members to the board in order to maintain a majority).

Whether control is exercised through a direct stake or by resorting to a DCS structure, these companies are frequently targeted by categories of investors who consider their governance to be deficient, at least according to the guidelines established for companies with widely held ownership (i.e. without a controlling shareholder). This criticism is often even sharper where DCS companies are concerned, due to the control exercised without an economic stake that is commensurate with exclusive nomination rights or the percentage of votes cast. A number of pressure groups are strongly advocating that all forms of DCS structure be eliminated.

Is this criticism warranted? Does the long-term economic, social and environmental performance of Canadian controlled listed companies support this perception of “bad governance?”

These topics are fiercely debated in various governance forums and have been the focus of considerable research in academic circles. While some voices are raised against founding shareholders and their families maintaining control, others are increasingly being heard in favour of allowing new generations of entrepreneurs to use DCS structures. Several countries have recently revised their rules to allow them on their main stock exchanges, and others, such as France and Germany, are seriously considering doing so in the near future.

The aim of our study is first to situate the debate and summarize the findings of the most recent research. We then compare the performance of Canadian controlled companies in the S&P/TSX Index with that of Canadian companies with widely held ownership in the same group. Comparisons are based both on ESG ratings (Environmental, Social and Governance performance) and total shareholder return over five and 10 years.