Proceedings of the Standing Senate Committee on
Banking, Trade and
Commerce
Issue 21 - Evidence - Morning sitting
OTTAWA, Tuesday, June 2, 1998
The Standing Senate Committee on Banking, Trade and Commerce met this day at 9:35 a.m. to examine the state of the financial system in Canada (the role of institutional investors).
Senator Michael Kirby (Chairman) in the Chair.
[English]
Senator Tkachuk: Mr. Chairman, at the last committee meeting, Bill C-28 was being considered. Senators Simard and Kolber both raised interesting questions on the bill and some very good points. Senator Simard asked at that time that the minister appear before the committee to defend the bill, and our members support that point of view.
The Chairman: We are not talking about the current budget bill. We are talking about one that is two or three years old.
Senator Tkachuk: That is right. Having the minister not appear on a bill of this importance seems harmful to the whole institution, let alone to the committee. I know that we will be dealing with the issue tonight. I am serving notice now. We can discuss it now or we can discuss it after the witnesses are finished.
The Chairman: Since we have out-of-town witnesses, let us proceed with them at this time.
Mr. Atkinson, please proceed.
Mr. Lloyd Atkinson, Chief Investment Officer, Perigee Investment Counsel: I thought we would have some discussion on the bank merger question, but I will set that aside.
The Chairman: We will deal with that when we come to the task force report in the fall.
Mr. Atkinson: With regard to that, the economics is terribly compelling. I will leave it at that.
As regards the CPP, the 20-per-cent foreign rule, we have already shifted to a situation in which we have put into place changes in CPP rates to ensure that at some point down the road it is fully funded. I do not think we must debate here whether or not the case for that is compelling. It is very compelling.
I am concerned about the large reserve fund that will inevitably follow in the wake of the sharp increases in the CPP rates. That fund must be managed exclusively according to investment strategies that are aimed at securing the best returns for the agreed-upon acceptable level of risk. That is really where the debate ought to be: What is the acceptable level of risk? Given that acceptable level of risk, what is the way in which we can best maximize the returns to the ultimate beneficiaries of the CPP?
It must be entirely free from other social or political objectives. That is not the purpose of this particular reserve fund. In that regard, I would completely eliminate the existing 20 per cent foreign investment rule. It could either be done in one fell swoop or in a smoothly phased three- to five-year pattern. That is the sum and substance of what should be the focus.
The Chairman: Your firm is involved in managing pension funds for smaller companies, but you are also involved in managing the investments of wealthy people or other individuals, is that right?
Mr. Atkinson: No, actually the bulk of our business, about 95 per cent, is corporate pension. Most of our assets are for large corporate pensions. We also have a rapidly growing business in pensions for smaller companies. Perigee Investment Counsel has assets in excess of $19 billion, which makes us now one of the larger investment counselling firms in Canada. We do the whole spectrum.
The Chairman: Can I pursue your role vis-à-vis the pension funds? I assume that your comments on the CPP would apply to the pension funds you manage. You said the objective should be to maximize return consistent with an agreed-upon risk profile. Is it reasonable to assume that you have an agreed-upon risk profile with the clients for whom you manage pensions?
Mr. Atkinson: Yes. In almost all instances, we spend a lot of time with each client, to determine the level of risk at which they are comfortable. Consistent with that, we manage respective portfolios in exactly that way.
The Chairman: From their point of view, what is the monitoring process that ensures that you remain consistent with the profile they have agreed to? In other words, how do they know that in a sense you are following the agreed-upon strategy?
Mr. Atkinson: In most instances, what we have are quantitative models, which, to a considerable extent, are historically based, that give us a measure of the volatility of their portfolios relative to the volatility of the market as a whole. It is only by setting portfolios different from the market that we have the prospect of outperforming. There is a measured degree of volatility relative to the market that is generally judged to be acceptable.
We put it in the following context. In a technical sense, we have a tracking error. How does the portfolio track in a volatility sense relative to the overall market, such as the TSE?
The Chairman: That is the computer-based model that you use for tracking on a weekly basis?
Mr. Atkinson: The model is updated monthly, and then we report back to our clients.
The Chairman: How do you handle proxies? I presume that the proxies are sent to you. Do you vote?
Mr. Atkinson: Yes, we do vote them.
The Chairman: Under what rules?
Mr. Atkinson: We vote under the rules of what we regard to be our clients' benefit. Where there are doubts with respect to where the client might stand on such an issue, we often consult the clients. Now, in some instances, where we have thousands and thousands of ultimate beneficiaries, we make a judgment ourselves.
The Chairman: Do you make that judgment according to a written policy, or do you look at it issue by issue and make a call?
Mr. Atkinson: To a considerable extent, it is issue by issue. However, there are a number of firms in the marketplace who make their own assessments -- for example, Fairvest. Issues that come before us include the separation of the CEO and chairman, the question of stock option plans and the diluting effect of stock options in terms of the ultimate shareholders. Things of that sort regularly come before us. In most instances, many of the issues are not particularly controversial; in some they are.
The Chairman: If they are controversial, you attempt to get clearance from whoever, and forget the 5 per cent of your business that is not pension funds.
Mr. Atkinson: In some instances, we have clients who may or may not feel strongly about an issue, but we will often consult with them in those instances.
The Chairman: If you were unhappy with the performance and management of, say, Moore, what would be your strategy? When you are unhappy with the performance and management of a company that you invest in, do you sell you shares, or is your strategy to try to get them to improve performance, change behaviour, whatever you want?
Mr. Atkinson: In many instances, we have to make a judgment call. You had it right in the first instance: either get out, if we believe that management will not deliver the value that our shareholders or that their shareholders expect, or sit down with management and discuss things. We do not see our role as one of directing management as to how they ought to run their businesses, but there are times when they will seek our input as to the management of those firms.
The Chairman: I would characterize that as saying that you are not a proactive institutional investor, in the sense that a lot of U.S. funds, and increasingly Canadian funds, are becoming proactive?
Mr. Atkinson: It is mixed. In certain instances, we have considerable interest, but not in all.
The Chairman: Tell us a bit about what you do when you are proactive? Give us a description of what actually happens.
Mr. Atkinson: For companies that we own, or companies that we are prospectively owning, as might be in the case of proxies, we will inform management by letter of where we stand on a particular issue. We often invite ourselves to their offices or they to ours for the purpose of discussing this issue. This is not with respect to their management of the business. This, in most instances, would be issues such as governance or dilution, which would arise, for example, in the case of stock options.
The Chairman: It would not be like the cases one has seen in the U.S. -- Moore being an example -- where institutional investors decided that the company was headed in the wrong direction and attempted to influence management to change the strategic direction.
Mr. Atkinson: We have not been involved in that. We are quite rigid about the percentage of shares that we will own in particular companies because we do not want to be involved in their management.
The Chairman: When you say you are rigid, do you have a fixed upper limit?
Mr. Atkinson: We do, in the sense that, in almost all instances, we will ensure that we are under the regulatory requirements as far as filings are concerned.
Mr. Chairman: You will ensure that you are under 10 per cent.
Mr. Atkinson: That is correct. In some instances, we will be well under 5 per cent.
The Chairman: In some companies 9.9, to pick a number that is under 10, can be pretty influential.
Mr. Atkinson: That is correct.
The Chairman: As I listen to you and as the committee has evidence of what has gone on in the United States, my sense is that activism in Canada is much more passive than it is in the United States.
Mr. Atkinson: That is correct.
The Chairman: Why?
Mr. Atkinson: I do not know that I have a good answer. We are Canadian.
The Chairman: Is it culture? I am curious. You obviously followed what has gone on in the U.S. and you have seen a few high-profile cases in Canada where institutional investors have entered with some influence. In your idea, is that a good or bad thing?
Mr. Atkinson: In general -- here will be another oxymoron -- it is not inappropriate.
The Chairman: That sounds more like a political answer.
Mr. Atkinson: In some instances, the institutional investors have such a significant position within the company itself that they, in effect, can direct its activities, and not necessarily for the ultimate benefit of the shareholders. That can happen. We prefer not to be active in that way.
Senator Kolber: Why did they shoot themselves in the foot?
Mr. Atkinson: In some instances, we have seen cases where funds have in fact controlled companies and tried to achieve other objectives, other than strictly in terms of shareholder value.
Senator Kolber: Could you name one?
Mr. Atkinson: I would rather not be put in that position. Much has been written about some labour-sponsored funds that have found themselves in essentially owner positions with respect to companies and have attempted to direct management in particular ways.
The Chairman: With respect to things that you would not invest in, do you buy non-voting shares? What impact do poison-pills have on investment decisions? What about situations where a company has a controlling shareholder? Do you invest in those?
Mr. Atkinson: With respect to the latter, yes, we will vote in companies where there is a controlling shareholder. In many instances, the real question is how much liquidity there is in the market and whether or not we are convinced that even that large shareholder is influencing a company in a way that we feel is ultimately beneficial to that non-majority shareholder.
As for non-voting shares, there are very clear restrictions today, especially in terms of IPOs, which are no longer allowed. In some instances, if we think there is value in those companies, the answer is yes, we would. In most instances, since they represent such a small minority, I cannot think of a single instance today in which we actually have shares in companies where there are non-voting shares. I do not think that we have any at all.
The Chairman: I thought that a significant number of companies on the TSE had voting and non-voting shares, where the non-voting shares were a much smaller share of equity. There is also multiple voting, which has the same effect.
Senator Kolber: The one thing that worries me is the generalization. Power Corp., which has tripled in the last three or four years, is a family-dominated business. The family has shares worth 10 votes, compared to the shares of other people. The company has been a brilliant success. I can point out others that have not been. I caution against generalization.
The Chairman: Sometimes before this committee, I have argued that there is a huge advantage to having a dominant shareholder. For if the dominant shareholders have their own money at stake, they will handle things well. I was not arguing for or against it, but we have had witnesses before us who have said that there are certain types of stocks that they will not buy, almost as a matter of principle. They do not want to buy shares in which some owners have more votes than others. They do not want to buy shares in companies where clearly there is a single shareholder who can dominate, regardless of what anybody else thinks. I did not know whether you had those rules.
Senator Callbeck: With respect to institutional activism, do you feel this will increase or decrease in Canada? Do you see us becoming more aggressive in Canada, or will we continue to be passive?
Mr. Atkinson: We will probably end up becoming more aggressive over time. The pattern that we have seen develop in the United States is likely to be followed here.
Senator Meighen: That depresses me so much. It may not be right, but it is happening in the United States, so it will happen here. The Chairman has asked a lot of questions that have come up in terms of the role of pension funds. There are people who believe that in your conversations with the management of companies in which you invest, you might inadvertently or advertently become privy to privileged information. Does that happen, in your experience?
Mr. Atkinson: I am sure it must happen, particularly with some of the smaller companies that are relatively less experienced. As you suggest, inadvertently, you may find yourself in possession of information that may be material and is not part of the market.
Senator Meighen: What is your appropriate reaction at that point?
Mr. Atkinson: We try to be clear in our reaction in almost all these instances. If something comes up that we are not aware of that is in the public domain, we will often go to management and say that this appears to us to be a material fact, and ask if it is a public fact. In almost all instances where this has happened -- and I can recall two instances of smaller companies in which this has happened -- they have subsequently turned around and stated, "Yes, this became part of a speech that you may have missed." In both instances, that was our internal rule.
Senator Meighen: Do I sense from your answer that it does not happen every day and that it is the exception, rather than the rule, in your experience?
Mr. Atkinson: Management, by and large, tends to be terribly careful about this, particularly for public companies. That is largely because we do not want to become insiders. From our own point of view, we do not want to receive inside information.
Senator Meighen: Can I turn to the 20-per-cent rule for a second? You have advocated that we should either proceed with the elimination of the rule in one fell swoop or in a smoothly phased pattern. Do you have a preference, and if so, why?
The Minister of Finance seemed to indicate, both publicly and to us, that it was more a question of when, rather than if, this would happen. To move in either of these ways right now might put undue pressure on an already weak Canadian dollar. Do you buy that argument?
Mr. Atkinson: No, I do not buy the argument. We could easily imagine that there could be shifts. There might well be some shifting in the direction of the United States. In an almost mechanical sense, there will be an increased sale of Canadian stock and an intensified demand for foreign currency. Therefore, in a mechanical sense, you might come to the conclusion that you would end up with a weaker dollar.
At the end of the day, however, the Canadian dollar reflects underlying fundamentals in Canada and globally. In my estimation, the principle reason for the weakness in the Canadian dollar today is because resource stocks have been battered in the wake of the Asian crisis. This has little or nothing to do with basic fundamentals in Canada. In fact, the basic fundamentals in Canada in my view have gotten dramatically better. That is on almost all fronts. That is an argument.
The Minister also argued that we are vulnerable because of the amount of Canadian debt that is in foreign hands. At the end of the day, we feel that the critical question must be how to best secure Canadians' retirement incomes. We need a pool of retirement savings to meet their needs, especially with the dramatic aging of the population. That is what should be uppermost and foremost.
Despite the Asian crisis, I will not write off Asia. This is a bubble, and like all bursting bubbles, a huge amount of damage has been left in its wake. If I take my crystal ball and step back and look over the next 10 to 15 years and ask where in the world economy are we likely to experience the greatest increases in wealth and income, most of those increases in my view will occur outside North America. There will be good increases within North America, but larger increases outside. At the end of the day, market fundamentals outside North America will reflect that. We Canadians should also be able to benefit from that, in terms of being allowed investments above the 20-per-cent rule.
Senator Meighen: In its simplest terms, are you joining the growing, overwhelming number of witnesses who appear before us who say that they could do a better job for pension plan beneficiaries if the 20-per-cent rule were not there?
Mr. Atkinson: That is correct.
Senator Meighen: You may want to rule me out of order on this because you did not want to talk about banks. This is not about bank mergers. We have been to Europe and the United States. We are struck by one fact, and that is that in those areas, there are second-, third-, and fourth-level financial institutions that provide the services that most ordinary people want: mortgages, car loans, that sort of stuff. Some of us have been trying to think of ways and means to encourage such third- or fourth-level financial institutions in this country, some of which perhaps already exist: La Caisse in Quebec and credit unions in some parts of Canada. I am not passing judgment on them by calling them third- and fourth-level institutions.
The capital requirements to start a bank or financial institution of that nature are quite severe. Would it be helpful to lower the capital requirements and perhaps restrict the activities in which my mythical third-level institutions can engage, in order to build up some sort of strength at the local community level across the country?
Mr. Atkinson: I am not sure it is necessary to actually do that. One should never underestimate the potential strength of the credit unions. I will use that as a specific example. We have something in the order of 2,500 credit union branches in this country, and I could very easily imagine consolidating. You do not have to actively encourage it; you simply have to not discourage the consolidation.
Senator Meighen: That would depend on provincial law, would it not?
Mr. Atkinson: Yes, that would.
The Chairman: It is one of those anomalous situations in which the individual credit unions are licensed and regulated provincially, and the provincial credit union centrals are licensed and regulated federally. I do not know how we got into such a bizarre situation. It is not the credit union of central Canada that is regulated by the OSFI, it is all the provincial credit unions.
Senator Meighen: If Saskatchewan and Manitoba wanted to merge credit unions, it would take provincial authority, would it not?
Mr. Atkinson: I am not a lawyer, I do not know.
The Chairman: The Credit Union Central of Manitoba and that of Saskatchewan could merge with federal approval.
Mr. Atkinson: One could imagine better community service arising out of even greater centralization. It is centralized primarily to meet the capital and technology requirements. At the same time, the communities themselves will be much better served. In fact, there may be an outgrowth of possible merger activities if these are allowed to go forward. We could see initiatives being undertaken by them to fill what many people might regard as the emergence of a void. It does not seem necessarily to be one in which you need to reduce the capital requirements themselves. I do not think you ever, at the end of the day, benefit much by somehow trying to reduce the safety and security. I know a number of people in the credit union movement who feel that that is not the critical element. In the wake of merged banks, if they go forward, we are likely to see provincial credit unions merging at some level.
Senator Oliver: I wanted to go back to some of the things you said about corporate governance. When the Chairman was asking you general questions about your role in getting directly in touch with some of the companies in which you have an interest, you said that you sometimes inform management of your position on things by way of a letter. You went on to say that this would not be in relation to the management of that particular company's business, but in relation to corporate governance.
What types of corporate governance things would you talk about: the role of the Chairman, the separation of the Chairman from the CEO, independents, directors, those types of things? Could you comment about corporate governance for the funds themselves, not the companies in which you invest?What do you have to say about the separation of the fund's management from the independent board? What about the independence of the directors on your fund? Could you talk a little bit about the corporate governance principles of both those sectors?
Mr. Atkinson: Our firm has recently gone through this in some detail. Just a few weeks ago, Perigee went public with an IPO. We adopted full board the TSE and OSE guidelines with respect to corporate governance. From the point of view of a fund manager, we separated the Chairman and the CEO. We have an 11-member board. Six are unrelated, and they form the majority. Our compensation, audit and governance committees are made up entirely of outside directors.
Senator Oliver: However, the five are internal management people?
Mr. Atkinson: No, there are three internal management people. We have a strategic relationship with Mutual Life Assurance, and they have too, but because of the amount of business that we do with Mutual Life, even though they are not involved in our day-to-day management, they are judged to be "related" and we will not press the point. So that was the reason we ultimately went to an 11-member board, with six of them unrelated.
Senator Oliver: What about conflict-of-interest provisions? Do you have your own internal code for that?
Mr. Atkinson: Yes. We have one of the most restrictive internal codes with respect to funds managers. The strictest would be a complete prohibition on internal trading. We have decided to be somewhat less restrictive. The only companies, for example, that any of our people can invest in are the TSE 100, and it is difficult to imagine anybody front-running a Royal Bank or any of the TSE 100. Second, we do not have restrictions with respect to fixed income. Some of our employees, who in fact manage money for their parents, want their parents to be in strip bonds. We do not have funds that would allow them to do that. Outside of that, we have almost a prohibition. We are quite strict. We feel that how we manage our affairs is critical to the management of our funds.
We have at times owned companies which did not have as strict guidelines with respect to governance, partly because of the history. When those issues come to the floor, we inform management in terms of how we are voting. We certainly inform our largest shareholders in those funds as to how we are voting their shares.
Senator Oliver: What would you write in a letter to one of the companies that you have an interest in, respecting corporate governance?
Mr. Atkinson: I would certainly write about the issue of related or unrelated directors.
Senator Oliver: What about the separation of the chairman and the CEO?
Mr. Atkinson: We were on record at the bank meetings. We actually voted against management at those bank meetings and argued that the chairman and CEO should be separate. In fact, one of the largest pension organizations in Canada, PIAC, Pension Industry Advisory, has taken the same position. We support the PIAC position.
Senator Oliver: Are there corporate governance principles that you have developed that you could send to us, so that we can read them and compare them with others that we have received?
Mr. Atkinson: I would be more than happy to send that to you, yes.
Senator Stewart: Relative to the 20-per-cent rule, we have been told in this committee that derivatives are sometimes used by some large institutional investors as a way to circumvent the 20-per-cent rule. If that is true to a considerable degree, then it seems to me that the 20-per-cent rule becomes quite difficult to defend. In your experience, how important is this technique of circumvention?
Mr. Atkinson: It has been used increasingly by a large number of managers. However, in almost all instances, it is used at the clients' direction. For example, we find that with respect to private clients. We also find it with respect to some institutional clients. The derivatives are a simple way of essentially achieving that foreign exposure without violating the 20-per-cent rule. However, it is certainly growing.
Senator Stewart: You talked earlier about using risk models, then you mentioned the Asian crisis. Did your risk model take into account the possibility of the Asian crisis? The reason I ask that question is not to suggest that your model was not good, but I have been told that, in investment, there are two levels. One takes into account the facts, the fundamentals. The other level looks at what the market is doing, regardless of the facts. In the case of your risk model and the Asian crisis, on which foot did you put your weight, the fundamental facts or on the market?
Mr. Atkinson: With respect to the model itself, we did not rely upon the model at all with respect to Asia. The risk models that we use are for the purpose of looking through the rear-view mirror. On the basis of historical experience, we must measure our clients' risk, when moving forward.
We use a rather rigorous forecasting methodology. It was so rigorous that at the time I did not correctly forecast, for example, that Thailand would go in July, but I certainly understood fairly quickly the risks that Thailand and several of the other Asian countries were exposed to at the time that the bubble began to burst. At that particular time, we dramatically reduced our holdings in that part of the world. We anticipated a lot of ugly fallout. However, in answer to your question, these risk models are a tool to assist us. When there are fundamental, rocking changes taking place in the world economy, those models are less than useful.
Senator Stewart: You spoke quite confidentially just now about the future of Asia. Asia covers a lot. I was just wondering whether this was based on some model, intuition or hope?
I have read that the Asian miracle, insofar as Thailand, Indonesia and Malaysia are concerned, was really the result of very unusual circumstances. One was the great surge in the worldwide importance of Japan. One argument now is that Japan, as an Asian leader insofar as South-East Asia is concerned, probably has had its day. The argument is that Japan is an aging population, that its political structure is not very strong or competent, and that that flows over into the management, the governance of its financial institutions, particularly its banks and some of its major corporations. That is one argument, and whether that is true or not is another question.
The other line of argument relative to the Asian miracle is the rise of China. Here is a very well disciplined labour force. It is apparently pretty well governed, at least as far as peace and order are concerned. As this economic power comes on the world stage -- and we are told that by 2020 it will pass the GDP in the U.S. -- the prospect of cheap exports from China is likely to mean that places like Indonesia have had their day.
So combining what has happened in Japan and what seems likely to happen in China, insofar as certain Asian countries are concerned, the Asian miracle is history. Why is it that you, as a person engaged in investing a very large sum of money, are so bullish about Asia?
Mr. Atkinson: The bullishness, to a considerable extent, stems from an examination of what their potential could be. This derives from the quality of the workforce that we find in all of these countries: South Korea, Indonesia, Malaysia and Thailand. Their educational systems ultimately serve these populations well; the literacy rates are high. If I look at the communication systems, the infrastructure, the technology in place in several sectors of these economies, and if there are not a whole series of policy mistakes or external forces over which they have no control, their future could indeed be quite bright.
I do not call this an Asian miracle. I much prefer to look at developments that have taken place in these countries. We have seen progress because they have gotten some of the fundamentals right. Unfortunately, the fact that it was viewed as a miracle gave rise to a perception that investments in these countries would guarantee the investor outsized gains. The Economist magazine called the real problem "Golfnomics" because many more funds were in fact devoted to investments in golf courses that could not possibly return what was promised. Therein lies a real fundamental problem. Policy mistakes were made by managers that poured huge amounts of funds into those countries. The problem is that those become illiquid overnight because they are so small.
In the case of Japan, I am concerned that a series of policy mistakes continue to be made. We are looking at a country that is on the precipice of a recession that, certainly by all outward signs, will be dramatically worse than the 1991-92 recession we suffered here. We are looking at banking institutions that, for all intents and purposes, would be regarded as technically insolvent. These are serious problems.
You are right in the case of Japan. There are aspects about the governance of that country that must be regarded very favourably. They are undertaking reform of state-owned enterprises. Unfortunately, they have also been hurt and damaged because of the devaluation that you have seen in this part. But the optimism, in almost all instances, derives from good fundamentals. However, those may be damaged, not necessarily irreparably, but for a long period of time, because of policy mistakes. We have seen lots of those.
Senator Callbeck: Not very long ago, we were in Washington talking with people in the financial service sector. The Community Reinvestment Act came up. You are familiar with that. My understanding is that when it first went into effect, the banks really opposed it. Now, they have accepted it, although they would like to see it expanded into the financial sector. What are your views on that, as far as Canada is concerned?
Mr. Atkinson: First, the banks accepted it, partly because they read the public sentiment, which was for continuing it. That is essentially the price you pay for the kind of position that you enjoy in the financial services sector.
If you were to eliminate the law, however, many of those people would in fact withdraw. They feel that there is some coercion associated with that. Ultimately, the government needs to establish the legitimate price that needs to be paid for the favourable position that many financial institutions enjoy.
I do not think it is critical. Particularly if some of the restrictions that are currently holding back a lot of the credit unions were relaxed, we would most likely see that kind of community investment take place, without necessarily a government mandate.
Senator Callbeck: Can you be specific about the relaxation of certain measures?
Mr. Atkinson: I am speaking of the interprovincial aspects, which were referred to here.
Senator Callbeck: Do you think that this is something that the Canadian government should consider, or not?
Mr. Atkinson: In my estimation, no. I do not think it is something that should be.
Senator Callbeck: Since I have joined the committee, every witness has indicated that the 20-per-cent rule should be dropped. Some people say that it is tough enough for small business to get money now and that if the rule is dropped, it will be even tougher. How do you reply to that?
Mr. Atkinson: In general, I do not think of that as the case at all. I suspect that if you were to try to examine something in the nature of a paper trial with respect to access to funds and the 20-per-cent rule, you would probably not find that there was much of a connection. The 20-per-cent rule, to a considerable extent, keeps some funds in Canada, and these funds go either into the fixed-income market or into companies that are regarded as better capitalized and that will push up the multiples. It does not necessarily end up in the hands of those who might best need or want it.
I am not overly concerned about the small businesses being able to get access. That is partly a consequence of my experience at the Bank of Montreal. Not every lender understands the businesses they are investing in, however, this is where the bread and butter of the Canadian banks is. I am not sure how much information the banks will give you in terms of what is proprietary, but the bulk of the money that is made by the Canadian banks is not on the corporate side. That is small potatoes by comparison with what they earn on the commercial and retail side. That is where the margins are. They want to be a part of that business. If you have to sit as a credit officer, the problem is, how do you judge? I do not think there is much of a link between the 20-per-cent rule and access by small businesses to funds in Canada.
Senator Callbeck: This is a complaint you hear all the time, that small business is having a tough time. Are you really saying that you do not think that it is a legitimate complaint?
Mr. Atkinson: There are certainly lots of small businesses having difficulty. Inevitably, the question must be explored as to why they are having difficulty.
These banks try to bend over backwards to find a way to accommodate them because the business is so profitable. I think that too much emphasis has been placed on collateral requirements, particularly for new businesses. The important collateral is what people have between their ears. I am talking about knowledge-based businesses, and those assets walk out the door every night at five o'clock.
Senator Kolber: Did the Bank of Montreal use that as a criterion?
Mr. Atkinson: I once asked in a meeting, "At what point did Bill Gates become bankable? At what point did his ideas become bankable?" How do you judge and assess that? That is the critical element. Are they far behind? Yes, this is one reason why we have also seen the venture-fund industry grow to the extent that it has.
Senator Kolber: Are you confusing what a bank does as opposed to what a venture capitalist does? Banks are there to protect the depositor's money. They are not there to take risk; the venture capitalist takes the risk.
Mr. Atkinson: They are certainly there to protect the depositors, but they are also in the risk-management business. They are in the business of granting loans. If it was exclusively from the point of view of protecting depositor's money, just put it in government debt and forget about it.
Senator Kolber: Would you like to see a directive sent to the managers of the major Canadian banks that says, "Do not worry about collateral. See what is between the guy's ears"?
Mr. Atkinson: No. If I even hinted at that, I am wrong. In many instances, it was a collateral-based system. The real question is whether or not you can make loans while understanding the risk of a whole variety of other businesses. In fact, all the banks are now in this, not as venture capitalists, but in some instances almost as quasi-venture capitalists.
Senator Kolber: To a very tiny extent.
Mr. Atkinson: Of course, but the market will fill that void in terms of venture capitalists.
Senator Kolber: We are saying the same thing.
The Chairman: I have always had the impression that Canadian banks effectively rationed the amount of credit that is available in the country by risk rather than by price. You cannot get prime-plus-eight loans in Canada, which you can get in the United States. I have always assumed that that rationing process was a function of the banks being concerned about the flack they would take if it became public knowledge that they were charging prime-plus-eight. If you look at a curve in which increasing risk means increasing the price of the loan, rather than letting that curve stretch upward -- which is the case in the United States -- and you go along with the risk to the point where the price is right -- Canadian banks have effectively cut off the maximum interest rate, thereby cutting off the maximum risk. You were inside a bank and you are now outside it. Is that a fair understanding of what has happened, at least implicitly?
Mr. Atkinson: The degree of variation is smaller in Canada, but it is not zero. For example, in order to qualify for a package of services at a certain price, certain risk criteria must be met, in many instances. If you do not qualify, then you are kicked out of that favourable group and are put into another risk category that will frequently have higher prices. It is just a question of the range. Canada has prime-plus-eight loans for some commercial real estate, some credit card transactions, and for other instances where there is insufficient collateral or where the bank judges that the risk is that much higher. However, there is no question that it is a judgment of risk. Your characterization of it is correct.
Senator Kolber: The United States has 9,000 banks, most of which are small community-based banks, which have probably been in the same family for generations. These banks charge prime-plus-five or six or seven or eight or nine per cent, and no one says anything about it. I do not think you could have the management expertise as widespread as would be necessary to compete with a community-based bank in Canada. That is where our system is either better or worse. I do not have a judgment on it.
The Chairman: Rather than pursue the bank discussion, we would like to hear from Purdy Crawford. I would like to invite you to come back in the fall, probably in November. Thank you very much for coming. This was very helpful.
Please proceed, Mr. Crawford.
Mr. Purdy Crawford, Chairman of IMASCO and Canada Trust: I have filed several copies of the outline comments I have prepared, along with a number of schedules which relate to clippings I started to make when I knew I would be appearing before you today. If any members of this committee would like me to follow up any of the points later in writing, I would be pleased to do so.
I have dealt with the extent of the influence of institutional investors on the Canadian economy. I agree with the study to which Mr. Jeffrey MacIntosh referred. Indeed, financial institutions have tended to create higher-return on assets and equity in Canadian companies as a result of their investments and involvement. However, as I have indicated in the attachment marked "B," some people in the United States do not always agree with that statement. The various articles that I have clipped from U.S. publications debate that point.
How is the influence on corporate boards exercised? The U.S. and Canada take different cultural approaches to this question which reflect our cultural differences in many diverse areas of our respective lives. We are less aggressive and adversarial, not taming the west with a gun, which, perhaps, was more effective than their approach. Even the stories of Lincoln who, as a prairie lawyer travelling the circuit in Illinois, indicate that, even in the 1850s, society in the U.S. was aggressive.
Are we moving in the same direction? Perhaps we are a little, but we are doing it quite differently. The relationship between financial institutions in the U.S. and the companies in which they invest is incredibly aggressive, and it is more adversarial. I am not sure that is desirable.
OMERS guidelines are quite positive. I suggest that we on the other side of these guidelines should occasionally sit down and discuss our views with these organizations when there is no adversarial issue before us. Then, I think, they would be more likely to take our views into the account.
In a recent experience with Dominion Textiles, which was dealing with a takeover bid, I saw how matters are dealt with when a corporation, which is in play, is involved. Of course, it raised the question of whether institutional investors should be represented on boards, and I can certainly present some arguments for and against that.
I can assist you on any questions you may have concerning compensation for institutional investors as well as inside information which was touched on in Mr. Atkinson's discussions.
You touched on the use of front-ending buying powers by financial institutions. This is a small element of the total sector. I was involved in a self-regulatory industry study on conflicts of interest when dealing with emerging companies. It did not relate specifically to financial institutions, but it became clear during that study that financial institutions, along with many others, were aggressively buying into emerging companies knowing they would go public almost immediately, and that stock prices would double or triple very quickly. This is all being dealt with by a self-regulatory organization. The regulators are developing rules in this area. This was not a main activity of institutional investors, but certainly two or three were dealing.
OMERS has stated that they might develop a list of questions for non-performing companies. It raises questions such as: Should outside directors be meeting with institutional shareholders; and should that be institutionalized or not?
I disagree with those who say it is necessary to have a short-term focus on performance. I believe that philosophy is held more by the companies that have their moneys in pension funds than it is by the managers of pension funds.
On the question of how institutional investors are governed, I believe that teachers' organizations, OMERS and others, are well governed. There is certainly a governance issue which relates to mutual funds; and Mr. Atkinson indicated how his company was structured, and that certainly helps to deal with part of the governance issue. The other issue however is that the board of the manager, as it is structured at Mr. Atkinson's company, has an obligation to the investors and to the manager. The manager manages the funds of a whole group of mutual funds, but how are they governed?
You will notice two articles marked "E" at the back of my paper which deal with some of those issues in the U.S. From one article, it appears that, in California, CalPERS' board is elected. The other deals with a dispute concerning one of the biggest institutions in the U.S., the college and university pension fund board. Gloria Stromberg conducted a study for the Ontario Securities Commission on how mutual funds themselves, as opposed to the company that manages the funds, are governed. I know that IFIC is developing some policies in conjunction with the regulators. There is a issue as to the system, because the directors of mutual funds are appointed by the manager and the directors are not independent from the manager. How do you change the manager if you do not like him? How can you ensure there is proper disclosure of the cost of operating the fund? It is a credit to our self-regulatory system that it has worked out as well as it has, but this is an area that warrants encouragement from this committee to IFIC, OSC and other regulators in Quebec and across Canada to move forward.
The Chairman: You comment favourably on the OMERS' guidelines. Other guidelines have been written. For example, OSFI has written a code of model behaviour; and PIAC, I believe, has written some guidelines, as has IFIC. What has always troubled me about guidelines is the fact that they are not enforceable. You were part of the Dey committee, am I correct on that?
Mr. Crawford: Yes.
The Chairman: The response of the TSE to the Dey committee was very clever. They recognized that, within a bunch of guidelines, there was only one regulation which specified that there must be a public report on whether or not the guidelines had been adhered to.
Mr. Crawford: That was part of the recommendation of the Dey committee.
The Chairman: That struck me as both diabolical and ingenious at the same time.
Mr. Crawford: You must give Peter Dey the credit for that.
The Chairman: There was only one regulation. My instinct, from sitting on boards, is that guidelines are treated in almost the same way as regulations in the sense that everyone tries to conform to them because of their fear of being embarrassed or because of peer group pressure to conform.
If that lesson of history is correct, what is your view on the question of taking some set of guidelines -- and I am not selecting those from the OSFI, IFIC, PIAC or OMERS -- respecting the governance of institutional investors, and giving them the same element of the power of embarrassment by introducing a regulation which simply states that how a mutual fund performs relative to these guidelines should be made public to the people whose money you are investing?
Mr. Crawford: I agree with that.
The Chairman: Is my analysis of what happened as a result of the Dey report correct?
Mr. Crawford: Yes, precisely. In fact, we should be proud of the fact that it was done so quickly. I thought the stock exchange would hold hearings and this committee would sit for a couple of years. They adopted the Dey guidelines within a few months. It was all done very quickly.
The Chairman: Am I correct that directors have responded? Were these de facto accepted as a new set of rules fairly quickly?
Mr. Crawford: This raised the consciousness of outside directors to their responsibilities. They have always had the clout, if they wanted to exercise it. This gives them an easier process pursuant to which they can exercise their authority.
However, they should remain guidelines. Mr. Atkinson's firm has six outside directors and six independents. All these steps are taken to conform with the guidelines. The reality is: that is not right. Looking after all your constituents, and creating long-term value for your shareholders is the game. As I have said many times -- and this is why they are guidelines -- if you had given Warren Buffett or Henry Ford a set of guidelines like that to live with as a matter of law -- an enormous bureaucracy would have been created. Tremendous risk was involved with those investments. That is why they must be guidelines. Frankly, when I have not complied with the guidelines, I have had no hesitation in explaining why that is so in the proxy statements.
I want to comment on the 20-per-cent rule. There is no question that, with the use of derivatives and index funds, the 20-per-cent rule has, at least for those more sophisticated, pretty well gone by the board. If you are responsible for a pension fund's performance and you have 70 per cent of your assets in equities, if you do not have over half of that outside of Canada, you are crazy. You have the whole world to invest in.
The only problem is that the less mature markets are more inefficient. Therefore, the stock picker can do a better job there than he can in the more efficient market. If you want to go into certain markets, it is better to pick a good stock picker than to do it through an index.
I believe you are right, senator.
The Chairman: All members of this committee are in favour of the elimination of the 20-per-cent rule. It reminds those of us who used to live in Nova Scotia of the time when cable T.V. could not carry U.S. channels. Our argument in Nova Scotia was that that was not a constraint in Quebec and Ontario because, in those days, if you had an outside aerial and were living within 125 miles of the border, you could pick up U.S. channels. I use that as an analogy in the sense that the 20-per-cent rule constrains only the individual, smaller investor. It does not constrain the substantial investor. In fact, if individuals are really clever, they can get around the rule by investing 20-per-cent offshore and then investing their remaining 80 per cent in a fund that is 80/20 and deemed to be a Canadian fund. In that way they can get up to 36 per cent. It is playing games with a rule.
Mr. Crawford: I am sure the manager of every teachers' fund knows how much equity is invested directly or indirectly outside of Canada, and I am also sure that it is a big portion.
The Chairman: They explained to us how they adhere to the letter of the law but manage to remain absolutely outside the spirit of the law.
You raise the question of whether outside directors should meet with large institutional investors. What do you see as the pros and cons of that?
Mr. Crawford: My general approach has been that, when something major is taking place, you should decide who the spokesman for the company is, and whether that is the CEO or the CFO, there should be a uniform approach. Outside involvement can result in more confusion than good.
However, it is important for outside directors to know what the institutional investors or other investors think of the management of the company, and they should get disclosure from management. They should get copies of the any analyst's reports on the company. If you institutionalize, through a lead director or a Chairman, a process for meeting that does not threaten anyone, and it was not done on an ad hoc basis, then I would never suggest that it be written into law, but it would be worth considering as an additional guideline.
The Chairman: Will institutional investors be candid in those kinds of formats or, to get back to the cultural difference between Canadians and Americans, will their comments be so cloaked in "niceness" that it may be difficult to understand what people are saying?
Mr. Crawford: In cases where I have met with institutional investors as an independent director, they have been pretty candid. I mention the Dominion Textile case which was a proposed takeover. We knew the company was in play. We had to get the maximum value for the shareholders, but we had to convince five or six major institutions to stand still while we got more value, and to make sure they did not prematurely accept the lower price.
The independent committee of the board usually met with somebody from management, but not always, and with all the major institutional shareholders, about six in number. They wanted to know what was happening. Some of them acknowledged that they would become insiders and that they would govern themselves accordingly. We talked to them differently than we would have had they not made that decision. However, they were all very frank about the company's poor performance and we had to convince them that our game was to get shareholder value. They ultimately realized we were on the level, were not trying to snow them, and we ended up getting about $3 a share more than the original offer.
The Chairman: I understand why you do not want this to be made law, but you do recommend that meetings be held occasionally with independent directors and major institutional investors in the company; is that so?
Mr. Crawford: Yes.
The Chairman: In section 3 of your presentation which is headed: "How Institutional Investors Are Governed," particularly with respect to mutual funds, you comment on the IFIC guidelines. One of the problems with independent directors or trustees of a mutual fund relates to the current Canadian legal structure and how you indemnify and protect directors. It is a liability problem.
Recently, some U.S. states, notably Delaware and Massachusetts moved to create a concept of a business trust which is designed to create a situation in which, while it continues to be technically a trust, it can have directors or trustees who have the same relationship to the trust and protection afforded to directors of a corporation. Has any thought been given to that type of legislation in Canada?
Mr. Crawford: You probably read late last week that Vanguard is moving its funds to Delaware for that reason, among others.
The Chairman: Where did you see that article?
Mr. Crawford: In either The New York Sunday Times or The Wall Street Journal. Vanguard is the world's leader in index funds. They had to hold meetings of their numerous funds and, as a result, the market was able to find out how much the Vanguard managers owned in the various funds. Had that decision not been made, that information would not have been available in Canada or in the U.S.
In any event, I think that could be done in Canada without legislation.
The Chairman: I am not a lawyer, but a number of my colleagues are. Can you enlarge on why you think that could be done without getting me lost into a legal argument?
Mr. Crawford: We have various types of mutual funds. Some are corporate funds set up in a corporate vehicle which must have directors. Some funds have outside directors, others have in-house directors. We also have trusts which have governors or trustees. I do not see, as a matter of our trust law, why you could not create a similar structure which would provide indemnity for the trustees or the directors of the trust.
The Chairman: Putting aside for the moment the issue of whether we can do it with or without a law, is moving in that direction conceptually the way to deal with some of the issues you raised?
Mr. Crawford: I think it is. I do want to be fair about this. The regulators in Canada and IFIC are moving to deal with some of the issues related to how a fund is managed. Should there be boards or trustees required? If so, to whom are they responsible?
In the U.S. the trustees or directors have the right to change the manager. They have the ultimate clout. That is not the case in Canada. The trust or the document that creates the fund in effect takes that power away from the directors, at least in most cases.
Senator Oliver: There is a lot of wisdom in what you have had to say today. We will read the record to make sure we understood all of your points.
Could you help us define a few phrases?
Earlier we were trying to define a "sophisticated" investor. What is an "independent" director? Recently, CalPERS tried to define what they meant by an "independent" director. What advice can you give us when trying to define an "independent" director in the context of this debate?
Mr. Crawford: "Independent" would mean that, one, you are not an officer or employee of the company or issuer; and, two, that you do not perform major consultant major services for the company. This is actually set forth in the Dey report and the TSE Guidelines. There was a mistake in the original draft Dey report which Power Corp. quickly brought to our attention. You cannot say that a representative of a major shareholder is not independent, after all, they are the shareholder. It was made clear -- and the OMERS guidelines make it clear -- that that is the case.
It is not difficult to deal with independence in the broad sense. The board must make judgments as to whether, for example, a law firm that bills an issuer $100,000 a year and has a partner on that board who may or may not do any of the legal work for that issue, is independent. Those are judgments the board must make.
Senator Oliver: Would you say that lawyer would be independent if he did not do any of the work?
Mr. Crawford: In the example I gave, the billing would constitute .5 per cent of the firm's billings, and the lawyer would not do any work for the company. The board would rule that he is independent. The same situation applies at the Royal Bank involving a well-known lawyer who the Royal Bank has ruled is independent.
Senator Oliver: Can you give us some assistance, in the context of institutional investor governance, about the separation of the chairman and CEO, and other traditional aspects of corporate governance?
Mr. Crawford: I note that this committee recommended that the job should be separated, but only as a guideline, not as a law. Frankly, I am not sure I agree with that. It depends on how you define the scope of the work of the chairman as opposed to the president and CEO.
The Chairman: You are not sure it should be a guideline; or you think it should be a law?
Mr. Crawford: I do not think it should be a guideline. There should be a means for outside directors to meet independently, through a lead director or by some other means.
If we take David Layton and Donald Thain's description of the role of the chairman into consideration, how can the chairman remain independent? Independence would soon be lost. This committee suggested, that after being a director for 15 years, independence would be lost. If the chairman were to have the role that David Layton recommends, he would no longer be the chairman -- he would be a co-CEO or something.
A good, strong director is essential. It is important to have a process whereby the board can meet independently of management. It is important to have a process to review the performance of the CEO. Our failure at Dominion Textile came from the need to get value for the shareholders by having the company taken over. This is because we were not tough enough, over a long period of time, in dealing with the calibre of the management. It is as simple as that. If you do not do a good job, you will be taken over. The market-place will look after that.
Senator Kolber: It is key for the board to meet without any management. As to whether there should be a separation of the positions of CEO and chair, each company would be judged differently. It would be almost impossible to have that separation in the banks, for example. The learning curve will take up everyone's time.
Mr. Crawford: That is the other issue. If you bring in an outside chair who has no start-up knowledge, it will take him or her some time to be able to deal with the issues of the company, and to represent the board.
In some cases, the ideal situation might be to have an outside chair, and to have him or her be a spokesperson for the board. In another case, it might be better to have a lead director. It is, however, fundamental that the board meets to discuss these issues without any management representatives. When that happens, it is amazing what comes out. People may have concerns, but do not want to raise them, or may not want to call up a fellow director. Without the presence of management, people will put issues such as these on the table. Things will happen.
Senator Oliver: Are you suggesting that management representatives should not be present for that meeting?
Mr. Crawford: That is correct. It is dangerous to do that if you do not have a process for doing it, however. To exclude management in the middle of a difficulty would create all kinds of concerns. If, however, you have a regular process for your meetings, and you follow that process, you will not create concerns.
Senator Kolber: One of the Canadian banks brought in an outsider, hoping to train him to become chair. I will not mention the name of the bank. The guys at the bank set out to destroy him. It was simple; they gave him a whole bunch of credit files to take over every night. He went berserk and quit. It is a true story, and a good example of what could happen.
Mr. Crawford: There is one other point I should like to make. If an institution has major holdings in a company, the issue is whether or not to bring in board members from that institution. I know that that is being debated at Teachers'. I am on the investment committee of CN, and people they have gone on the boards. It has happened in some cases.
As a director of Maple Leaf Foods, I know that the best thing is to have teachers represented on the board. As I said in my brief, it is one thing to sit back and throw spit-balls if you are not on the board, but it is quite another thing to be there and to make the actual decisions.
I know that there are pros and cons, but if you have a really big holding -- whether it is 10 per cent or not -- you do not have the liquidity to deal with it. I would think that having institutions put their people on the board would add to the value of corporate governance in large holdings.
The Chairman: You referred to major holdings. Teachers' has a large chunk of Maple Leaf Foods -- something like 40 per cent.
Mr. Crawford: They have 45 per cent of the equity, and about 22 per cent of the votes.
The Chairman: At what point does an investment become large enough? I do not need a precise number, but I do not know if we are talking about 10 per cent, 40 per cent, or 5 per cent.
Mr. Crawford: Major holdings could be anything upwards of 5 per cent. It depends on the company. In the Royal Bank, it is not a big deal to own 5 per cent, but it could be in some companies.
The Chairman: You are suggesting a sizeable block.
Mr. Crawford: If people want to have an influence, it is better to have that influence at the table. You will know what is happening. If people are exercising their influence in one way or another, you do not take a major action without talking to them.
The Chairman: This is true whether they are on the board or not?
Mr. Crawford: Yes.
The Chairman: What you are saying, then, is that they should be fully educated with respect to the background of a particular transaction if they are on the board.
Mr. Crawford: If they are not on board, and you go to see them, you have to explain to them that, while you want their advice, they must realize that they will become insiders once they have the information.
The Chairman: In doing that, have you ever been told that the person or group did not want to become an insider, and therefore was not prepared to talk to you?
Mr. Crawford: Yes. In Dominion Textile, we deal with five institutions. Of those, three major ones were quite happy to acknowledge that they were insiders, but two were not. We had to deal with them in a different fashion. Without getting into detail, we were saying that those two groups must have confidence in the board. The only game in town is to get better value for our shareholders.
[Translation]
Senator Hervieux-Payette: In Quebec, we are familiar with the Caisse de dépôt et placement. I have been concerned about something for some time now. Directors who sit on the boards of competing companies, for example, three directors of three telephone companies and three officials from the Caisse de dépôt, all are involved in the same pension fund. We see the same thing happen in the food industry.
What can be done to ensure healthy competition when directors on the boards of competing companies in the same sector all invest in the same fund? Obviously, each director wants optimum performance and does his best to ensure that his company is heading in the right direction with a competent management team.
As a representative of IMASCO, would you appreciate being financed by the Caisse de dépôt to the point where an official of the caisse sits on your company's Board of Directors and officials from the same financial institution sit on competing boards and have access to the same information that you have? Do you think there are adequate safeguards in place as far as information is concerned to ensure the competitiveness and integrity of the system? Or should the fact of being a major investor in the company, and therefore of having someone on the board of directors, preclude investing funds in several different companies operating in the same sector? In your opinion, does this create some ethical problems? I think it does, perhaps because of the problems I experienced in the telephone and food sectors. It bothered me that Métro, Provigo and Steinberg each had someone from the caisse de dépôt sitting on their respective boards of directors, that everyone shared the same information and that these people saw each other everyday. In view of the fact that a growing number of companies have significant investment holdings, what would you recommend to ensure the competitiveness and integrity of the system?
[English]
Mr. Crawford: Your point is well taken, senator. There is no question that a major institution can have large investments in many companies in Canada -- including in companies that are in competition with each other. If the practice of having major investors represented on the board were to be adopted, and if those representatives were in competition with one another, that would obviously raise an issue of confidential information. It would be cause for concern.
If institutions decide that they will have representatives on boards, they have two choices. They will either have to decide that they will not have representatives on boards where they have major investments in the competition, or, more appropriately in today's society, they will have to develop some sort of Chinese wall to deal with that issue. There is no question that your point is well taken, and it should be part of the record.
Senator Hervieux-Payette: Perhaps I am taking advantage of the fact that you know the Canada-U.S. situation. One of my pet projects over my many years in politics has been the employees' stock ownership plan. My idea for this plan came from the type that was introduced earlier in the United States, but ours would probably have a better fiscal framework. Many more employees in the United States have a stake in their companies. By the same token, they have been initiated into the stock market. Therefore, they may be a little bit more knowledgeable when it comes to institutional investors, and in a better position to understand what is going on in the market.
With globalization, and things such as the 20-per-cent rule, it is important to have an educated public. Do you feel that Canada has done enough to promote that, or should we be a bit more aggressive? In your experience, is this an important issue -- especially now that we are in a knowledge-based industry, where salaries have a big importance in terms of keeping employees in Canada? Having a stake in a growing company will help to keep these brains in our country.
Mr. Crawford: It is important and helpful to get employee ownership down to a fairly deep level in a company. It is a two-edged sword, of course. I am now involved in a company in the U.S. that has the type of plan to which you refer. It was a great, exciting thing as the market price went from $18 to $70. It is less exciting these days, as yesterday it closed at $55. You can get a lot of disgruntled employees. It is something about which you have to be careful.
This is something that can be found today in the money purchase pension plans, where an employee can control his own investments to some extent. The employer can set up different funds in which the employee can invest. I am in favour of laws to encourage ownership of stock by employees in companies.
Senator Meighen: Do you have an opinion as to whether the boards ought to be made up of lay people or of investing experts? OMERS seems to take the view that they should be lay people with a commitment to the job, and with some sophistication, knowledge and interest, but that they should not necessarily be people with an investment background. Do you have a view on that?
Mr. Crawford: I was involved as legal counsel in setting up the market fund when OMERS was first started. It had, and still has, I think, a lay board, in the sense that the members represent municipalities and other groups around the province whose money OMERS manages. They also had an investment policy committee, however, that advised the board. It was more professional, and the members had more sophisticated investment backgrounds. They were not experts on municipalities, but rather experts on investing or economic considerations. I am not sure how OMERS is structured today, or how the Teachers' board is structured today.
Personally, I feel that it is important to have a sophisticated group -- whether it is called an advisory committee, or some other term -- to advise the board, particularly if the board lacks that sophistication. This is not a criticism. There are some very wise people on the boards, and if they are there long enough, they will develop their own sophistication in this area. They do tend, in OMERS at least, to come and go quite a bit, depending on the status of the municipality which they represent. An investment advisory committee which lacked significant power of its own could be very helpful in advising the board.
This is one of the criticisms of CalPERS mentioned in the article about college funds in the U.S. to which I referred you. There is no control over CalPERS because the members of the board are elected. There is nothing wrong with that, it is a great process, but it does not necessarily result in a board whose members have sophisticated investment experience. I think you need some sophisticated people.
Senator Meighen: What is your view of the requirement that directors of corporations own shares?
Mr. Crawford: I think that they should be required to do so. The board should have a certain amount of diversity -- males, females, professionals, engineers, lawyers, businessmen, MBAs -- each board member has different strengths. Directors should be required to own shares.
I am, however, troubled by some of the U.S. requirements which place required ownership at a very high level. How can a university professor buy that many shares unless he or she is in a business school, and makes a lot of money from outside consulting? I am very much in favour of aligning the interests of the director with the interests of the shareholder. I am therefore a very strong believer in owning shares.
Senator Meighen: What about options in lieu of honoraria?
Mr. Crawford: I am not opposed to options for directors. As I mention in my brief, the institutions have been narrow in their approach. The Dey committee basically said that there is nothing wrong with options as long as you value them, and provided that the total compensation for the board is reasonable.
How do you value options? When they are issued, they may be worth 30 per cent or 40 per cent of the underlying market value, which is what would be shown as remuneration. If the total remuneration in cash and options is reasonable, I do not have a problem with it. I do have a problem with people who still feel that options do not have any value because they are issued at market, and that therefore a big bundle of options can be issued to directors, and it does not matter. That is outdated thinking, and we have left it behind.
Senator Kolber: Are you a Warren Buffett disciple?
Mr. Crawford: Yes. I have been for about 20 years, actually.
Senator Kolber: Is there not a big tax problem for a professor who is given options and values as remuneration? He must pay tax on what he does not get.
Mr. Crawford: Yes, possibly. I am not a tax expert.
Senator Kolber: If it is remuneration, it does not matter whether he gets it or not -- he still must pay tax on it.
Senator Meighen: You referred a number of times to various papers; I did not have them.
The Chairman: Mr. Crawford gave us a limited number of copies. We will circulate those shortly. Some of the articles he gave us will be very helpful.
Senator Meighen: In the second to last paragraph of your paper you state: "The institutional investor has another agenda (social) other than performance." Were you referring to the labour sponsored funds to which Mr. Atkinson referred?
Mr. Crawford: It could be labour sponsored funds.
Senator Meighen: Could it be anyone with another agenda?
Mr. Crawford: An agenda other than performance, yes. You saw a bit of it with teachers.
The Chairman: Yes, and Maple Leaf Foods.
Mr. Crawford: Mr. Lamoureux quite properly rejected a different approach. Nevertheless, he is responsible to a board. If they did not agree with him, they could change that.
It is a bit analogous to the airport authorities. You think that airports are being privatized -- but they are not being privatized, they are being turned over to an authority. There are all kinds of social agendas amongst the directors of the airport authorities.
The Chairman: That opens up a can of worms that I do not intend to pursue.
Mr. Crawford: It gave me a chance to bring up one of my pet peeves.
The Chairman: Mr. Crawford, thank you very much for coming here this morning. Thank you also for the collection of clippings and the attachments to your document. It is all very helpful to us.
We agreed that we would not resolve the issue of Bill C-28 today, but Senator Tkachuk wants to make a comment. Later, we will have a witness from Australia, who is the academic who wrote the report of the Wallis inquiry. We will then move on to Bill C-28. In order to give us time to think about the Bill C-28 issue, however, Senator Tkachuk wished to raised something at this time.
Senator Tkachuk: Senator Simard raised the issue of having the minister appearing before the committee on Bill C-28. I want to make it known that we feel that a minister should appear before the committee on this bill. I raise this point now because, if we are to meet tonight, it will allow time for the government to send either the minister or the parliamentary secretary to our meeting. It hardly seems legitimate for us to consider a bill of this importance without having a minister appear at least once before members of this committee.
The Chairman: My response last week was that I understood the principle of having the minister appear on a bill. In fact, I made two observations.
First, I like the idea of a minister appearing before a committee, following a budget in the same way that the director of the Bank of Canada does. I do not know why we have not done that, but it is well worth pursuing, and it is a procedure which I would favour.
Second, there is a second bill before the Senate, Bill C-36, which deals with the 1998 budget. Senator Tkachuk and I are trying to have that brought before the Finance Committee. At this point, it is not clear whether this committee or the Finance Committee will be assigned that bill. I will try to resolve that issue. Since that is a current budget bill, I indicated that I would strongly support the notion that the minister should appear on that bill.
With respect to Bill C-28, my concern is that it deals with budgets that are two and three years old. I do not like that for other reasons. It has nothing to do with the minister, but rather with the process. Therefore, it would seem to be a debate with the current Minister of Finance over the current budget and current policy, not over budgets and policies that are two and three years old, and which are already in effect. That was the position that I took on Thursday.
I have not yet had an opportunity to discuss the issue with either the government or my colleagues. I am happy to explore that question, however, and I will report back on it tonight. That is how things stand at the present time.
Senator Tkachuk: Let us not get into a big debate on this today. I agree that the minister should appear on the question of the budget, which concerns the broad general policies and principles of the government as they proceed for the upcoming year. At the same time, certain bills such as Bill C-28 and Bill C-36 put meat on the table for a lot of the broad principles that the minister and the government are trying to implement.
Those principles should be discussed in some detail with the minister responsible for the bill, and not with the bureaucrats who are there to administer it. The bureaucrats are not the government; they simply administer what we pass.
The Chairman: We will discuss that later. Any other comments?
Senator Kolber: If we continue to call the minister too often, either he will not show up, or he will decide that we are crying wolf.
I have taken the trouble of going through Bill C-28, and I have had our tax people go through it. This is a very technical bill. I am not sure that the minister would know how to answer questions on it. I think that it would be a waste of his time, and of ours. If you have questions on it, they should be answered by a someone like a deputy minister. I would not be in favour of bringing the minister in on this matter. To put it bluntly, I think that we would be using up brownie points.
Senator Stewart: I understand the notion that in responsible governments it is the minister who is responsible. Perhaps I am not sufficiently deferential to ministers, because I often think we waste our time when we have them as witnesses. I suspect that the bureaucrats will give more accurate and more helpful information in many instances. I tend to agree with Senator Kolber on that point.
There is a broader matter about which I have often thought since I came to the Senate. That is to say, the Senate does not seem to look at the budget at any point. The National Finance Committee may well look at the Estimates -- specifically the Supplementary Estimates that tend to be detailed -- but with the Main Estimates the lines are very big. At no place in our process do we pull together the expenditure program of the government, however -- the fiscal policy of the government on the one hand, and the tax policy on the other hand. It would be useful to have this done. On the one hand, I am not sure this is the right committee. On the other hand, I do not know whether we have the personnel in any other committee that could do it better.
I agree with Senator Kolber on the immediate question. However, we in this committee, in cooperation with our colleagues, should look at this whole question of the government's fiscal policies.
The Chairman: That is why I raised the question. I think that we have the germ of a good idea, and that we should figure out a way to implement it.
Let me make one other comment as to why I am in favour of having the minister appear on Bill C-36, but not on Bill C-28.
It is partly for the technical reason which Senator Stewart and Senator Kolber raised. It is also partly due to the fact that there are matters in Bill C-36 which have been the subject of considerable media coverage, as well as debate in the other place. Bill C-28 was not examined at length in the other place, however. It was quite straightforward because of its technical nature. That is why I would urge the minister to appear on Bill C-36.
I am a little concerned about the point raised by Senator Kolber, however. That that is to say, if we can only get the Minister of Finance on a limited number of issues, I would prefer to hear him on issues which are truly debatable public policy questions, rather than on issues which I regard as basically technical.
Senator Kolber: Budget speeches start off with broad generalities which are followed by policies and lovely statements about how well we are doing. In the last three minutes of the speech, we hear of about 20 tax changes, which is what we are all waiting to hear. We are not really interested in the first part of the speech.
Bill C-28 has gone back three years in order to try to correct stupidities.
There is a desire for legislation which would create an independent tax collection agency, something which many countries have. In April of 1998, the Auditor General said that he encourages Revenue Canada and the Departments of Finance and Justice to work together to clarify ambiguities in the Income Tax Act. He went on to say that the three departments have identified over 400 ambiguities and anomalies in the Income Tax Act that need to be addressed. In fact, that is what Bill C-28 is mostly about.
Senator Tkachuk: Over the last six months, due to the unfortunate absence of a senator from the Senate, we have been listening to debate over our own relevance. I do not buy into the theory that ministers grace us by their presence.
The Chairman: I agree with you on that.
Senator Tkachuk: When a piece of legislation is introduced, new laws for the citizens of the country are being introduced, as well as new behaviours for them to exercise. The government has a responsibility to come here and defend that legislation. If the minister is of the view that the Senate is simply something with which other people can deal, and that we are not representatives of the people, then he does not have to come here. However, we do not have to do anything -- and if we do nothing, the legislation will die on the vine.
It is not a question of him gracing us with his presence. The fact is that if he does not appear here, we do not have to deal with the legislation. We can exercise our influence.
I have been here for five years and, as a new senator, I was shocked that ministers did not appear here. I had always taken it for granted that they would appear here. I believe that if they do not show up, we should not deal with the bill.
Senator Simard is very interested in this bill. He made a terrific speech on it with regard to some of the problems that he saw, especially with regard to the CHST transfer points, and how that affects some of the Maritime provinces.
It is up to the minister himself. The minister can either deal with us as the second chamber, or he can consider us irrelevant and not show up. We would like the minister to come, and we will see what happens.
The Chairman: I will find out this afternoon whether he will appear.
Senator Stewart: I do not think we should bind ourselves to the notion that we do not pass a bill unless we have heard from a minister. The result will be that we will waste a lot of our time. As I said earlier, I have not been impressed over the years by the helpfulness of ministers' appearances, regardless of the political stripe of government.
My view is that we hear from the officials and, if we are not satisfied after having heard them, we ask for the minister, with specific questions in mind. However, let us not tie ourselves to a notion that no bill passes unless a minister has appeared. I like the word "appear" because it implies that they could disappear.
Senator Tkachuk: Just to clarify, I meant that if we as a committee request that a minister come, it should be a matter of form, and not a big debate.
Senator Stewart: I agree that, if the committee wants to hear a minister, then the minister should be expected to appear, and disappear quickly.
Senator Hervieux-Payette: I am co-chair of the Standing Senate Committee on the Scrutiny of Regulations. In that committee, we correct civil servants on mistakes that they have made, and on regulations that are not in conformity with the law. Outside of the finance ministry, what review has been done in terms of expert advice on Bill C-28? Has our own advisor reviewed that, independent of the government?
I believe that a committee should normally have its own expert review it, and tell us whether or not it is in conformity. I do not need to have it today, but I think that it should be done before we vote.
The Chairman: Mr. Goldstein did give us a briefing document, but there was a more detailed discussion at the end of the meeting between Senators Angus, Simard and myself. It touched on the fact that tax bills are so technical that no one can understand them. It was then pointed out that in the 1960s and 1970s, this committee had independent counsel -- tax lawyers -- who took us through the bills. That was the first time I had heard that, but I have subsequently confirmed that it is correct.
We agreed that over the summer we would work with Department of Finance officials to get a detailed understanding of the technical sides of tax bills, whether it means getting detailed briefings from them, or whether it means hiring our own independent counsel. We did agree, to respond to the point, senator, that we will have a different process by the time tax bills hit us next year.
Senator Hervieux-Payette: I favour having an independent advisor to the committee. I personally know someone who has done it for this committee for 10 years.
The Chairman: Senator Tkachuk and I will meet with Department of Finance officials over the summer, and we will set out a process for next year.
Senator Kelleher: Where are we with respect to discussing the proposal for a joint committee between the Senate and the House of Commons?
The Chairman: At your request, we will do that in camera tonight, after we deal with Bill C-28.
The committee adjourned.