A Lesson in Capitalism?

The Saskatchewan Wheat Pool takeover of Agricore United: A lesson in capitalism? Judy WilsonPhotoby Photography By Paul Earl n late fall 2006, Saskatchewan Wheat Pool later, UGG president Mac Runciman echoed (SWP), now known as Viterra, launched a Fowke, describing the corporate purpose of his successful bid to take over Agricore United company as giving “the guy who puts his life (AU). This was a watershed event in the history and his bucks into farming…absolute control- Iof western Canada, marking the end of almost a ling input into how his business is handled.” century of farmer control of the grain handling industry–an era that began in 1906 with the Fowke was on the left of the political spectrum. formation of the Grain Growers Grain Com- Runciman, who also served inter alia as director pany (GGGC). In 1917, the company changed of a number of large Canadian companies (the its name to United Grain Growers (UGG), and Royal Bank of Canada and Power Corporation, in 1923 and 1924, the three provincial wheat to name but two) and as chair of the Board of pools–Alberta Wheat Pool, Saskatchewan Governors of the University of Manitoba, was Wheat Pool and Manitoba Pool Elevators–were not. Both, however, could agree on why the created. These four companies then dominated large agricultural co-ops existed. the western grain industry for almost 70 years. For over four decades following the end of The purpose of these companies, wrote Vernon the Second World War, modernization of the Fowke in his classic 1957 work The National grain handling and transportation system was Policy and the Wheat Economy, was to balance delayed by misguided government policies, and “the bargaining strength of agricultural produc- as a result, by the 1990s, the industry required ers…with that of the groups to whom farmers a massive recapitalization and renewal. Each sell and from whom they buy.” Over 40 years of the four co-ops approached this problem somewhat differently. 20 MARKETPLACE March/April 2010 In 1993, UGG issued “limited voting public possible.” There is no doubt that today, Fried- cited the duty of directors as defined in the shares,” but largely maintained its co-op gover- man’s view–commonly called “shareholder Canada Business Corporations Act, which is nance, with 12 out of 15 directors being elected primacy”–predominates. that directors must act “in the best interests of by farmers. In 1996, SWP followed suit, but the corporation.” The court observed, how- retained a fully farmer-elected board. AWP and Serving society’s needs ever, that “the phrase the ‘best interests of the MPE raised the necessary capital through bor- The second answer is provided by business corporation’ should be read not simply as the rowing, but were unable to handle the result- professor Henry Mintzberg and two of his col- ‘best interests of the shareholders’.” Rather, the ing debt load. In 1998, they combined to form leagues, respectively from the Harvard Business court said, “In determining…the best interests Agricore, but by 2001 were forced into a second School and Oxford University. They dismiss of the corporation it may be legitimate…for merger with UGG to form Agricore United. shareholder primacy as “a fabrication”–one of the board…to consider, inter alia, the interests SWP, in part because of some unfortunate busi- “five half-truths” or “assumptions that we have of shareholders, employees, suppliers, creditors, ness decisions, came close to bankruptcy and in constructed, not truths we have discovered.” consumers, governments and the environment.” 2005, converted to a Canada Business Corpora- Ominously, they claim that “we are all cap- tions Act (CBCA) company. tive” to these assumptions, that they “shape the The second is the much-publicized case of BCE way we think about business and the way we Inc. v. 1976 Debentureholders. Some observers The following year, SWP launched its takeover do business.” Even more seriously, they claim anticipated that the BCE case would reverse bid for AU. Although AU was the larger and that the impact of these assumptions may be or nullify Peoples and clearly establish the more successful company, the directors of the “destroying the very thing we cherish.” They go shareholder primacy principle in Canadian law. company did not oppose SWP’s bid, which is on to say that “the current worship at the altar However, it did not do so. On the contrary, it somewhat puzzling given the company’s history. of shareholder value is…a reversal of our prior cited with approval the findings of Peoples and Runciman had retired before UGG redefined beliefs” which were “that corporations exist to said: “The fiduciary duty of the directors is a its financial and corporate structure, but his serve society” and were “designed to serve a broad, contextual concept. It is not confined to vision had been carried forward in the 1992 balanced set of stakeholders, not just the narrow short-term profit or share value…It looks to UGG Act, under which the company operated economic interests of the shareholders.” the long-term interests of the corporation. The until its disappearance. content of this duty varies with the situation at Which answer is correct? hand.” This legislation defined the corporation as consisting of both members and shareholders, Corporations are formed under corporate Beyond shareholders law, and the Delaware Court of Chancery is retained farmer control, and said “it is desirable It appears, then, that considerable contrary to maintain … the historic connections with probably the preeminent court of corporate law in the English-speaking world. So when evidence exists to the proposition that corpo- farmers of Western Canada.” Although these rations exist solely to maximize shareholder provisions seem to mandate a corporate purpose William Allen, the former chancellor of that court, speaks, we are hearing an authorita- value. Mintzberg and his colleagues provide an that was wider than the interests of sharehold- intellectual argument against it. Allen and his ers, both members of the board and senior tive voice. An article in the 2002 University of Chicago Law Review, co-authored by Allen and co-authors advise that the Delaware court has management had evidently come to believe that refused to endorse it. And judgements by the the fundamental purpose of the company had two sitting vice-chancellors, says: “We begin a new century with a question that is old but Supreme Court of Canada point clearly to a changed from serving its members to maximis- spectrum of corporate responsibility that goes ing shareholder value. persistent [namely] what is the purpose of the corporation? In rough terms, the question is… beyond shareholders. Why do modern corporations whether corporation law exists solely [for] shareholder…welfare or whether [it recognizes] Perhaps, therefore, we all have a responsibility– exist? values in addition to implementing shareholder academics and businesspeople alike–to spend However, AU’s stated reason for failing to resist will. On this question, we think that the corpo- more time pondering what the true purpose of the SWP bid raises a most interesting ques- ration law of Delaware remains ambivalent.” a corporation actually is, and asking whether tion: Why do modern corporations exist? It is Vernon Fowke, Mac Runciman and AU were clear that AU changed its position from the The article in its entirety deals with what they onto something. Perhaps the balance of power one articulated by Runciman and Fowke and call “The Great Takeover Debate” and analyzes between the many participants in our economic embodied in its legislation to the one it held by these two competing concepts. As the above society–investors, employees and citizens at the fall of 2006. But it is a question that also quote indicates, Allen and his colleagues do not large–is not as it should be. applies to publicly owned businesses: What is choose between them. their ultimate purpose? It turns out that there And perhaps that is what a close examination of are two answers. Allen, however, writes from an American per- the current business environment, of which the spective. What does Canadian law say about the AU takeover was but one element, would show. Shareholder primacy issue? Two recent cases argued before the Su- preme Court of Canada provide some guidance. Paul Earl, PhD, is assistant professor of supply The first was given by Milton Freidman in chain management at the Asper School of Business. an oft-quoted article in the New York Times [email protected] Magazine, namely, “to conduct the business in Canadian view accordance with [shareholders’] desires, which The first is the 2004 decision in Peoples Depart- generally will be to make as much money as ment Stores Inc. v. Wise. In that case, the court March/Apri 2010 MARKETPLACE 21 .

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