But to date, the effectiveness of these rules has been low. For example, according to a recent Business Week article, the independent audit committees, which are required for listing on major US exchanges, commonly use a disclaimer to cover themselves, thus evading the intent of the requirement. One example noted in the article is that some audit committees add a disclaimer to their opinions that the committee does not guarantee that financial disclosures adhere to generally accepted accounting principles.

This behavior is consistent with the findings of a McKinsey study of corporate governance in emerging markets, which found that corporate governance standards in these countries were still far behind those in the US and Europe despite initiatives to improve corporate governance practices. It concluded that the initiatives were generally either ignored or only applied with a spirit of compliance to the letter of the law.

The TSX has recently released for comment the proposed revisions of its governance rules for listed companies, including those on its subsidiary, the Canadian Venture Exchange. In contrast to the prescriptive regimes adapted by the major US exchanges, the TSX’s current rules are disclosure oriented.

The proposed revisions of the TSX’s governance rules continue to rely on disclosure rather than mandatory rules. By taking this approach, the TSX is encouraging better corporate governance in a fashion that promotes innovation and the ability of public companies to tailor their governance structures towards the needs of their specific investors.

Is there anything that Canadian public authorities can do to improve corporate governance? The McKinsey study provides some insight on what steps they could take. The study proposed that more fundamental institutional reforms are a better tool for improving corporate governance than prescribing specific rules.

The recent reforms of the Canada Business Corporations Act that eased restrictions on shareholder communications is a good example of this type of reform. There are some other institutional reforms that Canadian authorities can make that would significantly improve corporate governance.

One reform that will make companies more accountable to their shareholders is to ease barriers that inhibit Canadians and Canadian institutional investors from investing anywhere they choose. The greatest institutional barrier to investor choice is the foreign content rule, which compels pensions and registered retirement plans to invest 70 percent of their funds in Canadian investments. Because of the small size of the Canadian equity market, the rule effectively reduces shareholder power over the Canadian business establishment by restricting alternatives to the limited selection of Canadian equities.

If it is true that corporate Canada has been “hollowing out” from merger and acquisition activity, maintaining the foreign investment rule could pose a significant threat to the quality of Canadian corporate governance. As has been repeatedly argued in the past, there are a number of other benefits to Canadians that could be obtained by the abolishment of this rule such as higher risk-adjusted returns on retirement investment portfolios.

Easing the barriers created by securities regulation to access to capital by public companies would also significantly improve corporate governance. The primary motivation for a public company to act in the interests of its shareholders is to reduce its cost of capital. Less onerous regulation would make capital markets more attractive as a source of new funds for public companies, thus strengthening the incentives for companies to act in shareholders’ interests. As is the case with the foreign investment rule, there are other benefits to pursuing this course, notably easier access to capital for Canadian businesses.

Another way to improve corporate governance is to foster regulatory competition. Currently, only one stock exchange, the TSX, operates within Canada. A regulatory market that facilitates the entry of other exchanges would help ensure that governance requirements set by exchanges for listed companies are amenable to the interests of investors providing the commissions do not intervene to establish uniformity. Public authorities could also explore how to foster a more competitive environment in the corporate charter market. Evidence in the US shows that competition amongst states for corporate charter business has resulted in corporate codes more sensitive to investor concerns.

Rather than creating new regulation, the best approach to improving corporate governance in Canada is to undertake structural reforms such as getting rid of rules that weaken the incentives for corporate management to act in the best interests of shareholders.