3.3 Shareholder rights and the quality of earnings
An important aspect of best practices in corporate governance deals with shareholder
rights, which reflect shareholders’ ability to exercise their control over firm assets,
remove ineffective or opportunistic management, monitor the conduct of the board of
directors or initiate ownership changes that increase firm valuation (Ashbaugh et al.,
2004). One of the most effective means of controlling management’s behavior is to
grant shareholders the right to vote on major issues, such as electing directors and the
chairperson and approving senior executive appointments, and important changes
affecting the firm such as mergers or liquidation. Normally these rights are
proportionate to the shareholder’s equity ownership. However, these rights are often
severally limited under a governance system that allows dual-class share structures,
which are very common in Canada