Proceedings of the Standing Senate Committee on
Banking, Trade and Commerce
Issue 10 - Evidence
OTTAWA, Thursday, April 13, 2000
The Standing Senate Committee on Banking, Trade and Commerce, to which was referred Bill S-19, to amend the Canada Business Corporations Act and the Canada Cooperatives Act and to amend other Acts in consequence, met this day at 11 a.m. to give consideration to the bill.
Senator David Tkachuk (Deputy Chairman) in the Chair.
[English]
The Deputy Chairman: Honourable senators, I will call the meeting to order. We have with us today representatives from Industry Canada.
Please proceed, Mr. Dupont.
[Translation]
Mr. Serge Dupont, Director General, Corporate Governance Branch, Industry Canada: I am pleased to appear before you today to provide some background for your consideration of Bill S-19, to amend the Canada Business Corporations Act and the Canada Cooperatives Act and to amend other Acts in consequence.
We are accompanied by other colleagues from Industry Canada and from the Department of Justice to provide additional information in response to your questions.
Bill S-19 updates and makes important improvements to two key pieces of legislation relating to market activity. The two acts in question cover corporations and cooperatives incorporated under federal jurisdiction.
There are 155,000 corporations incorporated under the Canada Business Corporations Act, 249 of which were part of the Financial Post 1999 list of the 500 largest companies. The others include tens of thousands of small- and medium-sized companies across the country. Some of the cooperatives incorporated under federal jurisdiction are also among the largest companies in the country. Of the 10 largest Canadian exporters, nine are incorporated under the CBCA, the Canada Business Corporations Act, or the Canada Cooperatives Act.
As the committee knows only too well, the success of corporations and cooperatives is vital for building a dynamic economy, generating investments and creating jobs. To reach these objectives, there is a crucial need to establish appropriate rules for corporate governance and decision-making.
The bill before you contains over 300 amendments geared to the following objectives: widening shareholder participation, increasing global competitiveness, clarifying responsibilities, eliminating duplication and reducing costs.
The bill is based on findings arising out of open and transparent consultation. Beginning in 1994, my colleagues held consultations across the country in order to determine what changes should be made to the CBCA. Consultation documents were distributed to 1,800 stakeholders and posted on the Industry Canada Web site to solicit comments. Consultations were held in nine Canadian cities in order to develop a consensus. Of course, this committee contributed a great deal to that work. It consulted many investors and senior management representatives, and in August 1996, it produced a report entitled Corporate Governance that included 27 recommendations.
Second, at the request of the Minister of Industry, this committee conducted an in-depth study on the issue of joint and several liability as it relates to the release of financial information; the committee has prepared a number of reports, the latest of which was published in September 1998.
[English]
The reports and recommendations of this committee were a crucial component of the policy development phase of the CBCA reform process. Eight of the recommendations in the corporate governance report are implemented in their entirety. For a number of reasons, other recommendations are not reflected in the current bill.
Some are outside the scope of the CBCA. An example is the recommendation that a study be undertaken of the foreign property rule as it pertains to Canadian capital markets. Other recommendations were directed at the private sector and were not intended to be adopted into law. Finally, others were not adopted, or else only partially adopted, on the basis of consultations and consideration carried out further to the committee's report.
In every case, the committee's recommendations were given the utmost consideration. Indeed, every relevant policy proposal was weighed against the recommendations and the content of the corporate governance report.
I should now like to identify briefly some of the specific amendments introduced in this bill under the four themes I set out earlier, starting with shareholder rights.
Corporate laws establish the rights of shareholders to participate in the major decisions of their corporations. The current wording of the CBCA tends to inhibit shareholders exercising these rights. Bill S-19 reduces this burden and promotes wider shareholder participation in decision making.
First, this bill proposes to allow non-registered shareholders to submit proposals. Currently, only registered shareholders can do so. Second, this bill narrows the grounds for refusing a shareholder proposal. A proposal would be allowed if it can be shown to relate significantly to the business or affairs of the corporation. This, too, is intended to address a key criticism about the current act. Third, the bill allows shareholders to communicate between themselves without having to issue a proxy circular. Fourth, shareholders would be allowed to solicit proxies by means of newspaper ads, for example. Finally, provisions in the bill would allow corporations to communicate electronically with shareholders, conduct electronic shareholder meetings and permit electronic voting. All of these changes should open up corporate decision making to a wider constituency.
Another set of amendments in this bill will help enhance the global competitiveness of Canadian corporations. There are two areas of significant change. The first has to do with the residency requirement for directors and the second with directors' liability. The bill proposes to reduce the residency requirement for the board of directors of CBCA corporations from a majority to 25 per cent. The bill also proposes to eliminate, as this committee recommended, the residency requirement for committees of the board. This will provide Canadian corporations with more flexibility as they become global players. It will also encourage global corporations to incorporate and to locate their headquarters in Canada. For those sectors and corporations subject to ownership restrictions, the majority residency requirement would continue to apply.
Bill S-19 seeks as well to encourage appropriate risk taking in a competitive global environment. This is done through the establishment of a due diligence defence for directors. Currently, the act only provides a director with a defence against liability if he or she relies on a report provided by experts, such as a lawyer, an accountant or an engineer. This is what is called the good-faith reliance defence. This committee looked at the issue in 1996 and concluded that existing defences in the CBCA were insufficient to support creativity and calculated risk taking. In extreme circumstances, it could drive boards to resign in order to avoid potential liability. Thus, the committee recommended that the CBCA adopt a due diligence defence. This defence allows the courts to determine that the directors are not liable if they exercise the degree of care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances. That is the proper standard. It is the proper defence. Indeed, the due diligence defence has been adopted in many other statutes, including the Income Tax Act.
[Translation]
A third set of changes in the bill will clarify responsibilities, primarily through the modified proportional responsibility regime developed by this committee.
At present, directors, managers, auditors and others preparing financial information required under the CBCA are subject to joint and several liability in the case of financial losses resulting from an error, omission or inaccuracy in the financial information.
As a result, anyone can be sued and held responsible for the entire loss, regardless of that person's degree of responsibility.
This committee concluded that the current system could negatively effect the availability of financial services and the proper functioning of capital markets. The amendments proposed in the bill take into account the fact that corporate governance could be improved by requiring that responsibility be proportional to the degree of responsibility. The bill would amend the two acts by integrating a modified proportional responsibility regime as recommended by the committee.
Finally, the bill will eliminate duplication with provincial securities legislation.
Certain amendments will remove the obligation to report insider trading and eliminate the provisions on take-over bids.
Moreover, the amendments will reduce costs and clarify the wording of the legislation by removing the provisions on financial assistance and specifying that going-private transactions are permitted. Finally, a series of technical changes will eliminate ambiguities, inconsistencies and anachronisms.
[English]
In conclusion, Mr. Chairman, the bill will help to insure that CBCA corporations and CCA cooperatives remain in the forefront of corporate governance in Canada and, indeed, globally. The government started off with two good pieces of legislation, the CBCA and the CCA. These proposals will make them better.
You have before you, honourable senators, a bill that will stimulate shareholder participation in corporate decision making, one which will equip our corporations with the governance framework to compete with the best in the world. It is a bill that will clarify responsibility and eliminate unnecessary duplication and reduce costs. As the bottom line, this bill will encourage investment, innovation, risk taking, economic growth, and job creation in Canada.
I again wish to thank all members of the committee for the interest and knowledge that they have contributed to the development of this reform. I would be pleased to answer any of your questions.
Senator Kelleher: We had prepared for us a comparison of the recommendations that the Senate proposed in its report with the Industry Canada position. I would like to base my questions on that particular document.
The first area I should like to ask you about is our recommendation that the CBCA be amended to provide that the act will be repealed within 10 years unless reviewed and re-enacted by Parliament. Industry Canada has said that it does not think that is necessary; that the competitiveness of corporations will likely ensure the continued improvement of corporate laws, and that it does not really need a fixed review period for its continuing modernization. I have had a little experience with government in my day. I find that difficult to accept, frankly. For example, the EDC bill has to come before us every five years or so. Regardless of what you say, it does not give me an awful lot of confidence when I know this bill has not been amended since 1975. When I look at past practice and what you are saying, it does not provide me with a significant amount of confidence.
Sometimes, the only way to get government moving is to put something in a bill that requires them to move. I am wondering why you cannot do that. I am having trouble accepting your answer.
Mr. Dupont: First, I would like to clarify one point. I believe the CBCA was last modified in 1994, although I stand to be corrected on that. I will grant you that the amendments were essentially technical in nature. However, it was opened six years ago, as well as at different times between 1975 and now. It is just that this is the most substantive reform of the bill based on a more extensive consultation process.
The recommendation asked for 10 years. Surely I, as an official, cannot provide any kind of assurance that the bill would be reopened within that period of time. It is simply a judgment. Given the importance of these matters and given the fact that the world is moving at a very fast pace, 10 years seemed to be something that would normally be accommodated within the practices. The ongoing process would continue, in fact, for consultations with stakeholders.
At the end of the day, it is a judgment call as to whether this is in the bill or is considered to be part of what would be expected practice. I cannot obviously provide a definitive statement as to whether that would be the case, in the absence of the provision.
Senator Kelleher: I will not argue with you. Obviously, we agree to disagree on that.
We asked that a study be undertaken on the issues of corporate governance as they relate to Crown corporations. It was our view that the general principles of corporate governance should apply to Crown corporations. You people say, "Issue is outside the scope of the CBCA." I have some difficulty with that issue as well. In the answer, you say that Crown corporations are different, that each one has its own provisions specific to that for which the Crown corporation has been set up. However, Crown corporations are set up by the Crown and the people who run those departments. I have never known them to be overly democratic in drawing up a regime under which they will act. The less democratic it can be, the happier they are. That may sound a little harsh, but that has been my experience in dealing with Crown corporations, and I used to have several under my ministerial control at one point. They are certainly not in line with the democratic provisions of the CBCA. You will not get a Crown corporation willing to bring itself under the principles or provisions of the CBCA.
Why would a study hurt? Would it not be helpful to see whether we are right? Perhaps we are wrong. If we are, I am sure a study would determine that. Why do you say it is outside your scope? This is part of your department. You are prepared to modernize the CBCA. Why not take a look at Crown corporations and see whether or not there is a need there? I know the people from the Crown corporations will not be happy, but that is to be expected. Why should they be happy about it? Why can you not do a study? Why is it outside your scope?
Mr. Dupont: With regard to Crown corporations, the authority with respect to the governance is in different places in government, depending. The Crown corporation is part and parcel with the responsible department. The Treasury Board Secretariat, as you know, and the Treasury Board also have some overall responsibility vis-à-vis Crown corporations. The regime of Crown corporations is set out to a considerable extent in the Financial Administration Act. Part X of that act in fact references to some degree the CBCA. For instance, I just explained the due diligence defence, incorporating that into the CBCA. That is already provided for in Part X of the FAA. Part X of the FAA also establishes some of the obligations of Crown corporations -- for instance, special examinations every five years and so forth.
I am not saying that there is no purpose for a study; in fact, I understand the public policy forum has looked at this issue. I am sure the Treasury Board Secretariat is doing ongoing work on this particular issue. It is not one, frankly, upon which Industry Canada has focused, nor one that is within the confines of this particular legislation. That is not to say that it is not an issue.
Senator Kelleher: I do not want you to think that my lack of response is acceptance of your answer.
Mr. Dupont: I do not.
Senator Kelleher: I want us to be clear on that.
Let us look at 10, 11 and 12 on page 4 of the comparison study. This all relates to the personal liability of directors.
You people seem to really like the phrase, "Issue is outside the scope of the CBCA." That may sound very good, but it does not sound very good to me. You are pushing the issue aside. One reason we recommended amendments to these particular sections in the act is that we have been disturbed with the continuing trend over the years of everyone and their neighbour putting new liability on directors. The environmental people say, "Here, let's make the directors responsible." Under the Fisheries Act, they say, "Let's make the directors responsible." Every ministry seems to like to add to directors' liability provisions.
I commend you people for recognizing this problem and for trying to do something about it, but I do not think you are going far enough. You are saying that it is outside your scope and that you cannot touch these other ministries. Well, you can. I can use as an example Minister Collenette's recent legislation dealing with airlines whereby many other acts will be amended to conform with what he will be doing. Therefore, it is within your scope to do so.
From my past experience, I know that you will have a big fight with the other ministries. No one likes to give up their power to impose obligations.
It bothers me that we will have, in some cases, two kinds of liability imposed on us. We will now have a lesser one because we have due diligence, thanks to your department. With respect to other departments, we will still have a much higher liability. Did you have any discussion, for example, with these other departments? Did you even look to see?
I recall reading something somewhere -- and I am not sure where; perhaps you can enlighten me. I thought I read somewhere that there are 120 or 129 some acts that impose various forms of liabilities on directors. Am I correct on that number?
Mr. Lee Gill, Corporate Law Policy Directorate, Industry Canada: There are many acts across Canada that impose liabilities on directors. At the federal level, there are some 60, I believe. Many of those are duplicated in various forms at the provincial level.
Several years ago, we studied the issue of directors' liability. In fact, I headed up a task force on that starting in 1994. We examined the issue thoroughly. We agree that there are many issues out there. There were some problems with the CBCA in particular, and some changes have been made in that regard, with the adoption or proposed adoption of due diligence.
Some federal statutes impose a higher standard at this point. One is the Labour Code. They have an absolute liability. That was discussed in 1994-95 in the task force I referred to. HRDC, which is now responsible for that, was not willing at that time to change that standard.
Senator Oliver: HRDC does not like high standards.
Senator Kelleher: I do not think your comment was appreciated.
Mr. Gill: In general, the comment that we received from most departments was that the due diligence defence that is available under most acts, such as the Income Tax Act and the Environmental Protection Act, is one that is appropriate and generally acceptable. It holds directors to an appropriate standard.
It gives them an appropriate test, and it gives them an appropriate defence that they can use before a court to show that they followed through on what they should have done in a manner that is acceptable to the court and in a manner in which they can set up appropriate tactics to provide themselves with an adequate defence in carrying out the duties that they are required to do.
That is why we propose that in this bill, in particular.
To go beyond that within this bill and attempt to change all of those 60 some other federal acts is a significant undertaking. We did study that. Most of them do not have an issue. It is not something that we felt we were able to do in 1994 and 1995 under the Canada Business Corporations Act and, subsequent to this proposal, in the corporate governance report. In discussions that I personally had with some departments, we did not feel that we were able to change their legislation, or suggest changes in their legislation, without a major undertaking at the federal level.
Senator Kelleher: I assumed that was your problem. That was in 1994 and 1995, and I commend you for that. However, did you try again, before you came forward with these amendments, to see if you could not get a few other departments to go along with you, to have an even standard, by which I mean due diligence?
Mr. Gill: Most acts do have the due diligence defence. The one in particular that does not is the Labour Code. I did discuss that with my colleagues there, and they were not keen on changing that for the reasons that they have under their code to insist that there is an absolute liability there.
Senator Oliver: Mr. Chairman, my question relates to clause 137. I shall direct it to Ms Kirby. I have received a significant amount of mail from a wide variety of citizens groups, shareholder groups and other groups from across Canada on this issue. Many of them wanted to meet with us before we started these hearings, and some may even wish to appear. The most current case to which their issues relate is the so-called Talisman-Sudan issue. One of the documents I received in my office was from a group called Democracy Watch. In your presentation today, you said that, in relation to clause 137, this bill narrows the grounds for refusing a shareholder proposal. I have read the proposal and I have read the original act. My problem is that, in my opinion, it really does not do much narrowing at all. It does not go nearly as far as it should to resolving the issue in favour of shareholders.
I am aware of the Varity Corporation and Jesuit Fathers case, and what that case held. I realize that the Ontario Court of Appeal dismissed the appeal. Your background paper said that the scope for rejection by the management of a corporation comes into play when it relates significantly to the affairs of the corporation. I guess it is the word "significantly" and giving that control to management that is the problem. Senior management can say, "Well, we have looked at this and we do not think that it fits the new criteria and so we are going to throw it out." Basically, it gives no rights to shareholders.
Why have you limited it so much? Why have you not gone further, to give full credence to the rights of shareholders?
Ms Coleen Kirby, Manager, Policy Section, Corporations Directorate, Industry Canada: When we did the original consultations, we heard from shareholders that they wanted as few limits as possible on their ability to put in proposals. We also heard from corporations that they needed the ability to control the number of proposals that were submitted. It is fairly expensive for a corporation to have to add proposals to the circular and mail the circular out. If you are sending out 5,000 to 10,000 copies of something, adding a couple of pages does get expensive.
Senator Oliver: Not really.
Ms Kirby: In coming to a decision, we tried to reach a compromise between the two sides, because there was no clear consensus on either side. With the Talisman case, it was originally rejected in 1998 by Talisman, not because it related to social issues but because it was submitted by beneficial shareholders, not registered shareholders. That has since changed. We have changed the bill, to ensure that beneficial shareholders can make submissions, and the beneficial shareholders now have enough registered shareholder support that the issue is on the agenda for the Talisman annual meeting to be held in May.
What we have tried to do is come up with a compromise between any proposal being submitted and the corporation being able to reject everything. The issue comes down to this: If a particular proposal is related to the business of the corporation, it should be considered at the annual meeting.
If you look at the wording in both Ontario and U.S. law, we have come very much in line with that kind of wording, in that the proposal needs to relate in a significant way to the business of the corporation.
Senator Oliver: I am a trial lawyer, and one of the things I deal with is burdens of proof. What I would like to know from you is this: What proof will the person moving a proposal have to adduce in order to meet this new test? Can you provide us with some examples?
Ms Kirby: In the U.S., they have actually defined "significant" to relate to 5 per cent of the profit or gross assets of the company. From the Ontario wording, I am not aware of a specific case that has gone to court over a strict interpretation of the word "significant".
Our idea is that it would relate to how the business is being conducted. The example I usually use is that if someone wants to discuss clear-cutting with MacMillan Bloedel, that is obviously related to their business. If someone wants to discuss clear-cutting with BCE, that is obviously not related to their business. Therefore, the decision should relate to whether or not it is connected to the business that the corporation is carrying on.
Senator Oliver: When I read all of the presentations, e-mails, letters and documents that we have received from shareholders who feel aggrieved by the way these amendments have been drafted, the one thing they say is: How does your new amendment reduce the scope of rejecting proposals on the part of management?
Ms Kirby: It reduces the scope, in that, previously, corporations could simply say, "Well, that is a social issue, therefore we reject it; we will not accept it for our annual meeting." Now, even if it is a social issue, if it is connected to how the corporation carries on business, there is a connection and there is a need for the corporation to accept the proposal.
In the Talisman case, there is no question. Since a significant portion of Talisman's business is what is going on in Sudan, a proposal related to Talisman could not be rejected just because it deals with a social or religious question because there is a connection with the business of the corporation itself.
Senator Oliver: Mind you, in the Talisman case, there were a group of bona fide shareholders in New York who had a substantial interest. That is one of the reasons that it was heard.
Ms Kirby: That is what happened this year. They got the registered shareholders involved. The problem when it was rejected last year for the 1999 annual meeting was that it was only beneficial shareholders who were submitting the proposal. That was the basis of the rejection, not because it had to do with social issues.
Senator Oliver: I have a question about boards of directors and the limits you have imposed on them. What I do not understand is that if you do not have to have that many Canadians on your committees and you do not have to have that many Canadians on your board, what data exists to indicate that there will be more corporations coming to do business in Canada? I do not follow the relationship. If the control is going, how will we get more United States and European business coming to Canada? What is the relationship between the two, and do you have data to support that?
Mr. Dupont: There are no data on that matter. We would be dealing with what-ifs, and so forth, and it is very difficult to establish that this would have happened had the law been different.
It is a simple proposition that CBCA, as it stands, does not allow for incorporation of a business that would want to have a board with strong international representation. You simply cannot do it under the CBCA at the moment.
Let us assume that a Quebec-based software firm wanted to merge with a France-based software firm, and wanted to have a 50-50 board but they would like to have an American and someone from the U.K. on the board. They would look at the CBCA and discover that the CBCA does not accommodate that structure. Therefore, they would need to look somewhere else in order to incorporate, possibly under one of the provincial laws, because a number of provinces and the three territories do not have restrictions on the board; or they would need to look to another jurisdiction to incorporate.
This was simply allowing the CBCA, essentially, to accommodate those situations where a corporation, giving itself a global scope by wanting to have a global board, could incorporate under our federal law.
Senator Oliver: Three out of 12 directors is pretty small.
Mr. Dupont: The question, again, is that, where a corporation wishes to have access to export markets, wishes to build investments and alliances with foreign partners, or simply is looking for specific skills and so forth, it is an issue of giving them that flexibility. In a survey by Caldwell Partners of large Canadian corporations, they found, on average, that 80 per cent of directors of Canadian corporations reside in Canada. Therefore, the 50 per cent is not necessarily a binding limit. Most corporations find it in their good business interests to have very strong majority Canadian representation on their board. Where a corporation is looking abroad and needs additional contacts, networks, or whatnot, we believe that it is important for the CBCA to be facilitative in this regard, and the three Canadian directors still provide some Canadian input into the board in decision making.
Senator Oliver: Do you agree that major decisions of Canadian corporations are often formulated in committee and not at the board level? If that is correct, and you have a requirement that there is no need to have any Canadians on committees, are you not taking even more power away from Canadian business people unnecessarily?
Mr. Dupont: On that issue, I would say a couple of things. Ultimately, the board is always accountable for decisions. Second, one of the recommendations of this committee was to eliminate the residency requirements for the committees of the board. I will grant you that the proposals in this bill go further because they address the overall board. In regard to the committee, basically we adopted this committee's recommendation.
[Translation]
Senator Hervieux-Payette: That question is surprising and I wonder where it comes from and who lobbied for it. Like my colleague, I think it is important for committees to have Canadian representatives. All financial issues, the foreign ownership dividend vote is decided by the Board, et cetera. If we have 80 per cent, why change the rule to have a majority? You can put a Japanese, English, French, Chinese or American citizen, in any case, major corporations have nine, 11 or 13 directors. There are plenty of positions to be able to appoint foreigners. I do not see how it would improve Canada's competitiveness if there were no Canadian residents to oversee Canadians' interests in the operations.
It is already hard enough to protect the interests of shareholders of companies led by Canadians with boards of directors made up of Canadians. I would like to have a better explanation of globalization. That term covers nearly all philosophies. Where is this coming from?
With respect to provincial legislation taking precedence, if that gives an advantage to the provincial laws, so much the better! We do not even have evidence that provincial legislation has had a greater impact or been more successful in generating investments. I want to know the real cause and if there is none, I do not see the need for this clause.
Mr. Dupont: There is no doubt that this can be debated and disputed. It seems simple that Canadian companies should want a majority of Canadian directors on their boards. That said, when companies based in Canada want to extend their operations outside our borders and set up networks as a result, they can add directors to their board, but at the same time they are increasing the size of their board. They can basically decide that they are not making any gains in efficiency or decision-making because the board is becoming too big.
Where there is a potential merger or transactions with international partners, the issue of representation on the board comes up. We felt that it was important to allow incorporation under federal jurisdiction when nonresidents might account for over 50 per cent.
Senator Hervieux-Payette: Do you have an example to give us, if there are three provinces, has that had an impact?
Mr. Dupont: The four Atlantic provinces, Quebec and the three territories have no residency criterion. It was found that many companies incorporated in those jurisdictions. I am not saying that investment would necessarily have gone there rather than to the United States or Japan. There is no doubt that the companies felt that they had an advantage under the legislation in certain cases. They decided to incorporate under provincial rather than federal legislation.
[English]
Senator Kroft: To some extent, I will be picking up themes that both the earlier questioners have raised. My preoccupation in the current corporate environment in Canada is meeting the challenges of globalization and of existing on the North American continent with the power of American companies, so that issues of governance, I think, are critical. I was about to say that I am somewhat constrained, although my conduct will demonstrate that I am not constrained. I will take refuge in the fact that recommendations made by this committee were made before I was a member of the committee. The fact that a provision appears in the act because this committee recommended it, we all should thank you for the consideration and the respect that that shows for this committee. Notwithstanding all of the foregoing, and perhaps because we are dealing with a rapidly moving situation, the world is changing very quickly, even from the time that some of this was addressed by the committee.
First of all, I have struggled with the 25 per cent provision in all sorts of conversations and various other fora where it has been relevant. I find it a very difficult issue. I understand that there are powerful arguments on both sides. Instinctively, the case that we should maintain a majority control is an attractive one because this is a Canadian company, therefore, Canadians, by law, should control. On the other hand, I have been involved in situations where the prospect was such that, if there were not a change in the bottom line, there would be a change in direction of some corporate governance, head office, and so on, and that argument has some weight, too. The dilemma is a real one. Whether 25 per cent is the right number, or whether 35 per cent or 40 per cent could have greater impact, or whether it should be kept at 50 per cent, I do not know. However, it is a problem. I realize the government, in proposing this legislation, needed to come down with a view. I do share the view of my colleagues, and I guess not the view of the earlier representations of this committee, about committees. There is a logical non sequitur for me there.
What will happen, unfortunately too often, is that audit, strategic planning, human resource and other critical committees of boards, unconstrained by any provisions, will bring, over time in particular, influence to bear in the long-term evolution of the management of the company. I am not looking for one cataclysmic event at which a committee will make a critical decision. A human resource committee is one that may not leap to your attention to start with, because it is not making the kinds of up-front headline decisions, but it is establishing policies that very often have a cultural and national context. To have audit committees with no requirement for a national majority seems very odd. While I can live with the restriction of membership on the board, I find the issue of committee membership really allowing something to happen over time that will be an erosion, perhaps, of any degree of Canadian input.
I have another point that also relates to governance. Again, I appear to be a rogue in terms of the position of this committee. I have strong feelings on the subject of the separation of the non-executive chairman and the chief executive officer. Those feelings were shared by this committee. However, the information I have in front of me is that there was nevertheless a recommendation that it not be incorporated into the body of the act. Is that correct?
Mr. Dupont: Yes.
Senator Kroft: Could you explain what negative there could be to requiring a separation? In terms of my analysis and my direct experience, it seems that all the principles of empowering the shareholder flow through, and the representation of that -- in fact, its very practical application -- is having a non-executive chairman. I do not understand why a line is drawn at that point when it appears that much of what you are doing is of a philosophical nature. That then gets caught up in the context of from where your directors are drawn. It is a governance issue.
Why would you not insist on the separation of those two functions?
Mr. Gill: There are a number of arguments as to why those should be separated. They were brought out by this committee. They were brought out by the review that was done for the Toronto Stock Exchange a number of years ago. They have been brought out more recently in a powerful book on the power of boards by two professors at the University of Western Ontario in which they argue that their preference is for that to happen. However, as they point out in that textbook and as was recommended by the committee, in a number of cases there are strong arguments that, perhaps, it is not necessary to have these two functions totally separated. There are differences in sizes of corporations. There are differences in the operations of the way corporations work in different sectors. A number of reports have been done that suggest that the link is not as strong as some suggest.
Senator Kroft: Rather than the general reference, which I appreciate, but in the interests of time, could you perhaps indicate what specific representations there may have been on behalf of the status as it appears in the proposed legislation?
Mr. Gill: Do you mean representations for this separation?
Senator Kroft: I mean representations from industry groups, companies or other interest groups.
Mr. Gill: To my knowledge, nobody asked us to introduce anything where these functions would be separated, or where it would be required to be separate.
Senator Oliver: The banks like the status quo, but they brought in the concept of the lead director.
Mr. Gill: This was not brought up during consultations. It was not that we did not open the floor to suggestions, we did; however, it was not requested, to my knowledge.
Senator Hervieux-Payette: Was it negatived or was there no comment?
Mr. Gill: Silence would be the appropriate term, I guess.
Senator Kroft: I know of few corporate boards for which this is not a major subject of preoccupation. I find it astonishing that there was no representation made on any side of this issue. I am not questioning you. It is just that every day we are amazed by new things, and this is my amazement for this morning.
I have one more question, also in the context of governance. Could one of the witnesses direct me to a place in the proposed legislation where there is a definition of the function of a board of directors of a corporation? I would presume with that would be a statement of clarification of the responsibility of directors.
[Translation]
Ms Lyne Tassé, Senior Project Leader, Corporate Law Policy, Industry Canada: The duties of directors are listed in Section 122 of the current Act.
[English]
Mr. Dupont: It would not be in the bill because it has not been modified. That means we have to go to the text of the actual act to give you a sense of it.
Senator Kroft: I am looking for a statement as to what are the responsibilities of a board of directors. Does it not appear in the legislation anywhere? It is the critical governing element of a company. I am not criticizing you; perhaps the deficiency is in the previous legislation. However, does the legislation set out, other than what one can extract from case law, the responsibility of the board of directors?
Mr. Dupont: Perhaps I could ask Mr. Paul Martel to speak to this issue. He has been one of our legal advisors on this file. He is a professor at the University of Quebec at Montreal. He may be able to provide some indications for you.
Mr. Paul Martel, Legal Counsel, Fasken Martineau DuMoulin: Is your question, senator, where in the bill are the liabilities of the board of directors?
Senator Kroft: No, I am referring to the responsibilities. We have a board of directors that has the ultimate power of everything: Do we nowhere define its responsibility?
Mr. Martel: Clause 122 sets out their duties. When you express their duties, that is where their responsibility lies. They must fulfil that duty. When they do not is when they can be sued.
There are also different cases of different statutory publications and liabilities related to that. We are just speaking about their main duties. What has been done in clause 122 is to simply express in general terms what has been established by the jurisprudence for about the last 150 years.
Senator Kroft: I know most of that jurisprudence.
In other jurisdictions, the OECD or places where we are doing a current review of corporate relationships, has there been any attempt to define the responsibility of a board of directors in terms of its powers and limitations of powers? I look at the responsibility of the board of directors as almost in the negative -- if they fail to do this or if they fail to do that.
Frankly, this has not been a life-long preoccupation, but as I have sat and thought about this, I have said, "Okay. We are dealing with boards of directors. What is the job description of a board of directors?"
Mr. Martin: The job is described at clause 102, and it says that the job of the director is to manage the business and to supervise, which is now added, the management of the business. The duty of the directors, in doing their job, is to act in the best interests of the corporation and to act diligently and prudently.
Senator Oliver: And enhance shareholder value.
Mr. Martin: That comes only in specific cases, when there is a take-over bid or cases such as that. Mainly, they are supposed to act in the general interests of the corporation, and that means the long-term interests of the shareholders.
Senator Kroft: They manage, and now supervise.
Mr. Martin: Yes. This is to recognize that there is now a lot of delegation within big corporations. You do not ask directors to directly manage everything themselves.
Senator Kroft: That is the change in this provision.
Mr. Martin: That is their job description, yes, but it simply reflects what is happening in reality.
Senator Furey: My question or query relates to a director's liability. I certainly am in favour of the movement from a good faith reliance defence to a due diligence defence. I think it is a move in the right direction.
When we define due diligence, we say it is the degree of care, diligence and skill that a reasonably prudent person would have exercised in comparable circumstances. My concern is that we then toss it to the courts to generate a roomful of jurisprudence to try to determine what exactly that will mean for directors. The purpose behind this, looking at Senator Kirby's statement, is to attempt to reduce liability chill. However, if we end up with jurisprudence that is a hodgepodge all across the country, more than likely we will end up increasing liability chill as opposed to reducing it.
I am wondering, rather than tossing this so quickly to the court system, if there is some way that we can be more specific. Have you given any thought to some way in which you could be more specific in an attempt to keep it within the confines of the legislation, as much as possible, rather than relying on jurisprudence?
Mr. Gill: We heard from stakeholders that they felt that the basic obligations of the directors under a due diligence defence had been fairly well defined in legislation. Some examples given during consultations were the Bata case and the environmental case where directors were held responsible and liable for having done certain things. In the decision, the judge gave a list of the things directors should do in order to protect themselves from liability. Those types of decisions come out from the courts and are used by the courts as examples. The feeling that stakeholders demonstrated to us was that they have been developed and would provide an adequate defence and a clear direction for directors in terms of what they should do and must do.
Another thing expressed to us was that, compared to ten years ago, or even five years ago, for example, there is a lot of education going on in corporate boardrooms across Canada in terms of what is expected of directors. How do you meet due diligence? There are many educational forums that are held in the major cities across the country, and I get those invitations on a regular basis.
I am not sure that that issue will be a problem. I do not think we need to define specifically what we mean by that in the proposed legislation.
Senator Furey: You are quite confident that the courts will immediately jump on the difference between good faith reliance and due diligence and bring home exactly what you want, without going the extra step of putting in the legislation some of those things that you have stated have already been decided and could be helpful.
Mr. Gill: The problem with putting it in the legislation is that, once you put it in the legislation, it becomes rather difficult to adopt a certain flexibility that you need in certain cases. That is one of the advantages of the court system. By not defining it, flexibility is provided for a particular case or for a certain industry or a certain type of condition where an appropriate defence could be defined by the court itself.
Senator Furey: The matter is a concern for me. I tend to think the possibility exists that, rather than reducing liability chill, when the courts get at this they may well increase it.
The Deputy Chairman: I should like to ask a question in regard to regulations. It seems to me that there will be a tremendous amount of regulations rather than amendments. The regulations themselves are not tabled in Parliament. Why was that decision taken?
Mr. Dupont: The process that will be followed for the regulations is the normal process, consistent with the government's regulatory policy, perhaps with one exception. I am not sure it is an absolute precedent, but it certainly was a provision in this case that the regulations are already available for scrutiny by parties, indeed, by this committee, and are already there for the purposes of transparency and so forth. Clearly, the policy remains that regulations or draft regulations are put forward for formal consultation. Once there is enabling legislation for those regulations, and, therefore, once the bill is proclaimed, the formal consultations take place. Subsequently, regulations may be adopted. The act and the regulations come into force at the same time. Certainly we are prepared to discuss and explain to you the contents of these regulations. The committee is obviously fully empowered to comment on the regulations. They are there for broad consultation and input at this time.
The Deputy Chairman: Surely you are not telling me that Parliament is just another lobby group.
Mr. Dupont: No.
The Deputy Chairman: The point is, would the regulations not be tabled in Parliament? When we consider regulations in the normal course, we consult with business and interest groups, everyone who has an axe to grind. If parliamentarians have concerns, they can raise them, and if they do not to do so within a certain period the regulations can proceed in the usual process.
Mr. Dupont: Senator, to the extent that a formal tabling in Parliament were required, I would have to reserve on that. As an official, I would gather that the chair of the special committee that oversees the government's regulatory policy would like to be consulted on this. If that were the desire of the committee, then we would transmit that request to the minister, for him to approach the chair of the special committee.
The Deputy Chairman: I understand that it is a political decision. Let me just ask you: If this political decision were taken, to table it in Parliament, that would not be a problem for Parliament, nor would it be a great burden; correct?
Mr. Dupont: I am saying that that is a matter of the government's regulatory policy, which is not something that Industry Canada sets, in and of itself.
Senator Oliver: I believe I heard the witness provide an undertaking to bring the regulations before the committee. Will you accept that undertaking?
Mr. Dupont: The regulations are certainly available to the committee. We actually brought the text of the regulations this morning. We would be more than happy to distribute them today to all members of the committee.
[Translation]
Senator Hervieux-Payette: I want to come back to the issue of globalization. When you change the rules for meetings, held in other countries, I suppose that if the majority of shareholders are outside Canada, the directors will hold the meeting there and run a Canadian company outside Canada.
The company might never set foot in Canada and not reach the 25 per cent except for the directors. Are you thinking only of companies whose shareholders are all foreigners or cases where there were both Canadian and foreign shareholders? If all the investment and all the shareholders are outside Canada and operating within Canada, all they would have to do is have 25 per cent of the directors and there would be no other Canadian requirements. I was wondering whether the intention was to have this apply to companies that are wholly owned outside Canada or whether it would apply to all companies in Canada.
The companies that you have exempted, like Petro-Canada, could hold their annual general meeting in the Bahamas, have their 75 per cent of foreign directors and make all decisions regarding a Canadian company outside the country, while still having Canadian shareholders.
Mr. Dupont: The law will apply uniformly to all companies incorporated under the Act, regardless of who their shareholders are, with the exception that you mentioned, where Parliament or the government, for various reasons, has decided to establish participation criteria. You mentioned Petro-Canada and the whole telecommunications sector, et cetera. In addition to those sectors where there has already been an expressed will regarding participation that assumes a will to make decisions, the bill aims at giving more flexibility concerning the location of meetings, of files, and how the board of directors participates in committees.
Senator Hervieux-Payette: Are you assuming that shareholders will have to take the plane to attend the annual general meeting at their own cost?
Mr. Dupont: There may in fact be rules that apply regarding the consent required from shareholders to allow a meeting to take place outside Canada. I do not believe I have that information at my disposal right now.
Senator Hervieux-Payette: In the revision of the Act, there was mention of the costs of sending out shareholders' proposals. A number of documents have stated that it will not be possible to vote through the Internet. I am wondering whether regulations should not be developed to allow that later on and the legislation could be amended down the road. I do not see why annual reports or invitations to meetings could not be sent over the Internet.
This is the time of year when we receive all these expensive documents, with the forms allowing us to vote or give our approval. Everyone knows that shareholders receiving these forms do not want to sign them because they know they have no influence on the company. Obligations are given that actually have no meaning. Those that have some influence on behalf of shareholders are the pension funds and mutual funds that have considerable voting power and can influence the future of the company.
In a democratic spirit, when we receive correspondence from companies, we receive a form that asks whether we want to receive the quarterly reports. People say yes. Why could I not write that I would like to receive the documentation over the Internet and have the opportunity to vote through the Internet but that I do not want to receive the annual reports and all the correspondence through the mail? All that costs hundreds of thousands of dollars. It is a total waste of money. It gives no power to individual shareholders. Why not modernize the system by enabling leading-edge companies to allow shareholders to have access by video conferencing and to be able to vote and take part in shareholders' meetings without having to be there in person? I am talking about Canadian corporations holding their meetings in Canada. That would enable people in Montreal, Toronto, Vancouver and Calgary to take part in the annual shareholders' meetings and ask questions. It seems to me that that is not in the bill, unless I have not seen the clauses that would make that legal.
Mr. Dupont: In fact, the Act allows for all these transactions to take place by electronic means, including the Internet. It covers communication between the company and its shareholders, with the consent of those concerned. People can continue to receive print documents. It also covers electronic shareholders' meetings and electronic votes. All that has been included in the bill and, once again, in an enabling, rather than imperative, form. I believe you will find that in the presentation you are looking through.
Senator Hervieux-Payette: I saw that it was not allowed in the case of shareholders' votes. It was possible to receive documentation but not to exercise one's voting rights electronically. I read that.
Mr. Dupont: I will go through the version that you have.
Ms Tassé: The new regime for electronic communications would allow for all communications, including written information and voting, to take place electronically, over the Internet, if certain conditions were met.
Senator Hervieux-Payette: On page 12, it says it.
[English]
However, it permits only paper-based communications, which are older.
[Translation]
Mr. Dupont: That is what it says in the current legislation. The bill would allow this to be done electronically as well. It is actually not very explicit. It could have been specified that shareholders can communicate with the company electronically. It was only a summary of the present situation and the response presented in the bill.
[English]
The Deputy Chairman: When you mentioned the policy and regulations, is that a government policy or is that a departmental policy?
Mr. Dupont: No, I meant the policy that would be established under the chairmanship of Mr. Grey, as chair of the special committee of council that oversees all regulatory policy.
The Deputy Chairman: My understanding is that under the Firearms Act there is a provision requiring government to table regulations in both houses.
Mr. Dupont: That was included in a specific act. I would imagine at that time that the special committee of council would have been consulted on that particular provision. I do not know the facts of the case.
The Deputy Chairman: So it could have been included in this bill as well.
Mr. Dupont: I have no reason to suggest that it could not have been.
The Deputy Chairman: And it still could be.
Mr. Dupont: Same answer.
Senator Kelleher: I wanted to continue along the same vein. You will be happy to know I have come to almost the end of my questions.
I refer to 26 and 27 on page 9 of that document to which I was previously referring. It is a simple question. What is your rationale for saying that what we recommended is outside your scope?
In other words: Why can you not do that? I am not saying that you must agree with that, but I would like to know what your rationale is or was for not agreeing with this.
Mr. Gill: With respect to 26, the Canada Business Corporations Act defines and provides rules and regulations with regard to the governance of corporations that are incorporated under the act and how they operate. Now, 26 we viewed as a general suggestion that information be gathered with respect to institutional investors and markets in general. Those sorts of provisions are not something that pertain directly to the governance, per se, of a corporation incorporated under the act. It is a huge issue of investors and mutual funds and this sort of thing, which typically has not been governed at the federal level.
Senator Kelleher: We are not saying at this point that you should do it. Our concern when we were doing these studies was that there seemed to be a significant amount of influence exercised by corporate shareholders, of the Caisse, for example, in Quebec, and of mutual funds, and they seemed to have special privileges, in that they speak quietly to the president or chairman and they get information, quite frankly, that the average shareholder does not get.
We are concerned about these areas. We felt that someone doing some studies here might bring to the fore more clearly these problems. It is difficult to say that you must do something without a study having been carried out to test what you think. Then, perhaps, if it does show that these concerns are serious and real, then one might want to consider amendments to the act to address these concerns.
This is why we wanted some studies done. We think there are problems here. We have a real problem in Canada because, as you know, the market is very thin and it is getting very difficult for large pension funds not to exceed the 10 per cent limit. Many of the people about whom we are concerned are members of pension funds. They obviously have legitimate concerns. They may be exercising powers beyond what is legally their scope as compared to other shareholders. That was the background of our concern. That is why we felt some studies would be useful.
Mr. Gill: In my discussion with my colleagues in the Department of Finance during the last couple of years, I had been led to believe that this issue was being studied, indeed, to some extent by this committee and by themselves. They had set up a task force to, in fact, study institutional investors in that area. At the time that we were developing these proposals, that had not been fully been played out.
Senator Kelleher: The reason being that we found out that there is no database from which to conduct these studies. The Senate committee is exactly what the name implies; it is a Senate committee. In order to carry out studies, you need databases.
We were hoping that you might be nice fellows and do a study. We are trying you on for size. We want to know why you think we are a little out on this. That is all.
Perhaps you do not put it in those terms. That is just my interpretation.
Mr. Gill: Not at all. We thought the recommendation was, indeed, great, and the Department of Finance and yourselves were looking at this issue. To the extent that data was available, it would come forward.
Senator Kelleher: There is nothing. That is the problem. That is why, I recall, we made that recommendation. I do not want to belabour the point, but you have invoked your favourite phrase here: the issue is outside the scope. I just thought I would tickle your memory as to why you keep using that.
Mr. Gill: We have not gathered data on the role of institutional investors and how they deal with corporations across Canada. At the time, my colleagues at the Department of Finance expressed the fact that they were looking into and examining this issue. We do not have any data collection of this nature that occurs at all within our directive. We thought that their study would bring out whatever is available. If they found that nothing is available, it would be difficult for us to go further than that. I would have to go back to them and ask if we can initiate a study for the future.
Senator Kelleher: Perhaps you could do that. The Department of finance has told us over the years that they are looking into the question of lowering taxes as well. Given their past record in that area, I do not have much faith when that department says that they will look into this and address it.
I leave that with you.
Mr. Dupont: If I may add, senator, it is clear, from looking at the matrix, and with regard to the response and the priority effort placed by Industry Canada, that it was amending the CBCA on the basis of the committee's recommendations. That is where the resource effort was allocated.
The matrix, I will be quite candid, is reporting on measuring the CBCA bill vis-à-vis the committee's recommendations. I would grant you that it does not necessarily appear as a comprehensive response to the recommendations of the committee.
Senator Kelleher: Not really, no.
Mr. Dupont: But it is a reflection of the fact that this department decided to focus its efforts and resources on the CBCA part of the response to the recommendations. That is the reflection of what you see in the matrix, imperfect and incomplete, I would agree, but in regard to the CBCA, showing the consideration that was given to the committee's views.
Senator Furey: Subclause 102.1, regarding unanimous shareholders' agreements, makes what appears to be an innocuous change. When you look at it closer, does it impact on the standard of care of directors? Does it change it significantly or at all, in your opinion?
Mr. Dupont: That is on the unanimous shareholder agreement provision?
Senator Furey: Yes, where we go from managing a business to supervising the management of a business.
Mr. Dupont: That is something different. Perhaps I would ask Mr. Martin to return to the table.
Mr. Martin: Clause 102, the change that is put there simply adds for supervisor management, as you can see. The purpose of this was simply to reflect, as it has already been done in Ontario, the fact that directors do not directly manage large corporations; rather, the directors have people manage the corporations and they, in turn, supervise those people. It does not change their duties. In fact, it allows them to do what they always have been doing. Technically, it was not official that they could do it, so that perhaps someone could have blamed them, "Well, you did not do it yourselves." In that aspect, perhaps there is a change.
The Deputy Chairman: I just want to let the witnesses know that I will be consulting with the chairman. Be prepared to return one more time -- we have many members of the committee who are missing today -- before returning even with the minister. I will consult with the chairman and I am sure the clerk will let you know in plenty of time.
Thank you very much.
The committee adjourned.