Proceedings of the Standing Senate Committee on
Banking, Trade and Commerce

Issue 11 - Evidence

OTTAWA, Wednesday, May 3, 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 3:45 p.m. to give consideration to the bill.

Senator E. Leo Kolber (Chairman) in the Chair.

[English]

The Chairman: Our first witnesses are from Democracy Watch and the Citizens' Council on Corporate Issues.

Mr. Duff Conacher, Coordinator, Democracy Watch: Honourable senators, thank you for the opportunity to testify today on this very important piece of legislation amending another much more important piece of legislation, the Canada Business Corporations Act. I am here today as coordinator of Democracy Watch, but I also represent the Corporate Responsibility Coalition, a coalition of 27 citizens organizations representing anti-poverty, consumer, community development, labour, international development, human rights and other social justice concerns, including 16 national groups and 11 groups from six provinces across the country.

My presentation will be very brief today, and we will be submitting a more detailed report to the committee in the next few weeks. I believe honourable senators are in possession of a letter that we sent to the Minister of Industry, John Manley, which summarizes our proposals.

Exactly 330 years ago yesterday, on May 2, 1670, Charles II granted the Hudson's Bay Company its charter over 1.5 million square miles of territory in what is known now as Canada. That was quite a granting of a royal charter. Here we are, 330 years later, and we still see many of the problems with corporations that the Hudson's Bay Company in its early and subsequent years raised.

For example, in 1688 to 1690, despite the company losing money, eight dominant stockholders received, in respective years, 50 per cent dividends, 25 per cent dividends, and then, in 1690, 74 per cent dividends. That is not an unusual scenario that we often still hear about with corporations. The business was investigated, with no results. Again, that is not unusual for an investigation of corporate wrongdoing. Also not unusual, six of the eight dominant stockholders in the company resigned in the next two years and sold their inflated stocks. They included John Churchill, who was then the governor of the Hudson's Bay Company and very tied to the British Parliament.

In 1690, the Hudson's Bay Company petitioned Parliament for an act to confirm its royal charter. Parliament quite wisely passed that act but had it in force for only seven years. Unfortunately, we have gone from that practice to granting corporations charters that last forever. By creating giant corporations that have life and powers far beyond those of citizens, we have created entities that are unaccountable in many ways and that have gone on to have many negative impacts in terms of their activities.

Corporations set up under the Canada Corporations Act are major forces both in Canada and in corporate operations internationally. Citizens, communities, governments, employees, shareholders and other stakeholders are very interested in the record of these businesses, especially in the areas of environmental, social and ethical behaviour, simply because corporate wrongdoings have major negative impacts.

Several surveys in recent years have shown that Canadians are world leaders in their concern about corporate responsibility. Most specifically, we cite in our letter to Minister Manley a survey conducted last year by Environics International in 23 countries and six continents. Canadians ranked only behind Australians in their concern about corporate responsibility.

It was determined that 43 per cent of Canadians said that the primary role of large corporations was not to make profits, pay taxes, provide employment and obey laws but, instead, to set higher ethical standards, go beyond what is required by law, and actively build a better society far all. Only 11 per cent of Canadians said the corporations should focus only on making profits, paying taxes and providing employment.

Clearly, Canadians support corporate responsibility. Unfortunately, Canada is far behind other countries in key areas of corporate responsibility. The level of concern of Canadians, which ranks second highest in the world, has not been met by Canadian governments. Several of the roadblocks to corporate responsibility are in the Canada Business Corporations Act. Others result from a general lack of effective corporate responsibility laws and regulations.

I will not focus on barriers to shareholder proposals, because you will hear in great detail from other witnesses about those barriers. However, I will say that we support entirely, as a coalition, lowering the barriers. We find that the informal draft regulations that have been issued by Industry Canada must be changed because they actually raise the barriers in the following ways.

First, shareholders must own too high a percentage of shares and value of shares and they must prove that the proposal relates significantly to the corporation and pay the costs of any court challenge if the corporation still refuses to circulate the proposal. Corporations should be required to prove that the proposal does not relate to the corporation and should pay the costs, or at least, at a minimum, share the costs of a court challenge.

There are three reasons why lowering barriers to shareholder proposals is not enough to ensure that all CBCA corporations act responsibly. First, shareholders need other barriers lowered before they can hold corporations accountable. This relates mainly to the area of disclosure. We recommend greatly increasing disclosure requirements on compliance with laws. It could easily be set up as a Web site. Each corporation should have to submit their compliance records with a wide variety of laws. That would make it easier for the shareholder to track that information.

The second reason lowering barriers to shareholder proposals is not enough to ensure that corporations act responsibly is that many Canada Business Corporations Act corporations are among the largest corporations in Canada but they are wholly owned subsidiaries of foreign or domestic corporations or they are wholly owned by families. Thus, no shareholder other than the parent company can ever put forward a proposal and so shareholder proposals can never be used to hold these corporations accountable. Here are a few examples: General Motors, Ford, Toyota, Honda, Chrysler, Volkswagen, IBM, Hewlett Packard, Mobil Oil, Amoco Canada, Chevron Canada, Imperial Oil, Husky Oil, McCain Foods, McDonald's Restaurants, Zellers, Cargill, Canadian Pacific Railway, General Electric, Bayer, Merck Frosst, Glaxo Canada, Purolator Courier, 3M Canada and Monsanto Canada. I am sure honourable senators will recognize the names. They are leaders in terms of size in corporate Canada and no shareholder will ever be able to hold them accountable because they are wholly owned by a foreign or domestic company or by a family.

The third reason we need more than just lowering the barriers to shareholder proposals is that relying on shareholders alone to represent and advocate the interests of stakeholders is clearly an insufficient, ad hoc and inefficient way to ensure that corporations act responsibly.

The Canada Business Corporations Act is the citizenship law for corporations in Canada, the largest corporations. Change the rules, raise the standards of citizenship and require them to act responsibly. That is efficient, that is not ad hoc, but comprehensive, and it is effective.

We propose that directors be required to consider non-shareholder stakeholder interests in making decisions. Directors are required now to act solely in the interests of the corporation, which has largely been defined as acting solely in the interests of shareholders. We want that particular provision in the CBCA changed to require directors to consider non-shareholder stakeholder interests and to account publicly for the extent to which they do.

As I mentioned, we want detailed disclosure. Another way to facilitate disclosure of compliance with laws is to provide protection to whistle-blowers. We have ad hoc protection in a few laws. The U.S. has much more extensive protection. The best way to accomplish protection is to put it in the Corporations Act. That will protect all whistle-blowers, all employees of corporations incorporated under the Canada Business Corporations Act.

We also believe that public money should not be given as grants or contracts to corporations that break laws. We agree with the U.S. proposal that, for a specific period of time, any corporation that breaks the law should be prohibited from receiving grants or contracts. The government spends a lot of money and many corporations benefit from that money. If you remove from offenders the right to receive that money, it will be an incentive for those corporations to behave responsibly.

We also believe that, as the Department of Justice proposed a few years ago, corporations should be liable. The barriers to holding corporations accountable for criminal acts of their employees should be lowered. The Department of Justice's previous proposal disappeared in the face of a strong corporate lobby.

We want stakeholders to have the right to initiate a review of a corporation's activities. My colleague will speak more about that.

With all these measures, individual shareholders will still face giant corporations and will be largely on their own. There is a very simple way to solve that -- require all CBCA corporations to include in their mailings to shareholders a one-page lick-and-stick envelope along with the annual report and the proxies for the annual general meeting. That envelope would describe a nation-wide association for individual shareholders. The envelope would contain an invitation to join for a nominal annual membership fee of $20. A shareholder could simply insert their cheque, fold up the envelope and send it back, postage paid, to a group who would then be banded together to provide resources to individual shareholders across the country. That group could help with complaints, help prepare shareholder proposals, and help educate shareholders and Canadians across the country seeking financial planning advice. I hope it is obvious to everyone that Canadians desperately need that kind of advice, given what is going on in the markets and given the level of investment activity by individual Canadians.

Finally, such a group would be able to advocate for shareholder interests in policy-making processes at the provincial and federal levels. The group pays for the flyer so there is no cost to the corporation; there is no cost to the government. Yet shareholders are given a simple and easy method of banding together across the country.

There is no argument against this. In fact, I do not think there is any valid argument against any of the proposals we are making. Corporations may say they are already doing these things -- acting responsibly, protecting whistle-blowers -- in which case they should want these measures enacted in law for all of the bad corporate actors who do not do these things. Corporations always want a level playing field. Let us level the playing field at a higher level of social responsibility. That is why we are proposing these measures beyond shareholder proposals to ensure that Canada's largest corporations act responsibly.

Mr. Gil Yaron, Director, Citizens' Council on Corporate Issues: Honourable senators, I begin by thanking the committee for this opportunity. This kind of public input in the development of corporate legislation is a first in Canadian history. A review of the parliamentary record discloses that involvement in the creation of corporate legislation in Canada has been restricted to corporate lawyers, accountants and the business community. The unprecedented impact of corporate activity on modern Canadian society demands that the general public have a say in the shaping of the corporation.

Our council is a non-partisan organization concerned with the issue of corporate accountability. We are a member of the Corporate Responsibility Coalition led by Duff Conacher and Democracy Watch. We support their submissions. We have several additional submissions in support of reforming the corporation into a more sustainable and democratic institution. Our submissions have been endorsed by a number of other organizations across Canada including the Saanich chapter of the Council of Canadians, the Labour Environmental Alliance Society of British Columbia, and other organizations in Saskatchewan and Alberta.

It is our position that the corporation should continue to pursue today's marketplace opportunities but without compromising the social and environmental well-being of Canadian society. Bill S-19 contains some positive attempts to strike a balance, but it does not go far enough. The modern Canadian corporation as presently defined under the CBCA is simply not sophisticated enough to safeguard the social, environmental and democratic principles dear to Canadian citizens. It is one thing to argue that the corporation was never intended to fulfil those purposes; however, the size and power of many corporations today and the influence they have on our democratic processes necessitates that they be more responsive institutions.

There is extensive evidence that the current structure of the corporation has not kept pace with society's increasing complexities. The corporation remains virtually unaccountable to our non-economic interests. In the insatiable quest for growth, corporations continue to consume human and natural capital at rates disproportionate to their contributions to Canadian society. It is this imbalance that is causing the growing disparity between the rich and the poor and the environmental degradation of our country.

The general public is becoming increasingly concerned with the impacts of corporate activity. In a recent millennium poll on corporate social responsibility conducted by Environics International, 89 per cent of Canadians stated that they wanted companies to go beyond merely making profits, paying taxes and employing people, to set broader social goals and higher ethical standards by which to live.

No one expresses the inadequacy of the modern corporation better than corporate executives themselves. John De Lorean, long-time executive with General Motors, once commented:

The system has a different morality as a group than the people do as individuals, which permits it to willfully produce ineffective or dangerous products, deal dictatorially and often unfairly with suppliers, pay bribes for business, abrogate the rights of employees by demanding blind loyalty to management or tamper with the democratic process of government through illegal political contributions.

Clive Allen, ex-executive vice-president and chief legal officer of Nortel, a leading Canadian high-tech company, freely admitted:

Nortel and other companies on the list of Canadian players owe no allegiance to Canada... Just because we [Nortel] were born there doesn't mean we'll remain there. Canadians shouldn't feel they own us. The place has to remain attractive for us to remain interested in staying there.

Which Canadian citizen can say the same?

In short, the CBCA and amendments under Bill S-19 allow for the perpetuation of a system that places corporate interests ahead of public interests. The problems caused by corporations, including environmental destruction, social inequality and the circumvention of our democratic processes through corporate political financing, demand that Parliament take bold steps to reform the corporate structure.

We have put three recommendations before honourable senators. Duff Conacher has mentioned one. The first is with respect to director residency and director liability. We are opposed to the present amendments under Bill S-19 with respect to director residency and director liability. We believe that reducing the percentage of directors who must be Canadian residents will ultimately jeopardize the accountability of corporations to local communities. Along with the proposed two-tier liability structure and proportionate liability for directors, it would potentially result in total lack of accountability by non-resident directors for the decisions they make on behalf of the corporation.

Our second recommendation is with respect to limited liability. Limited liability was introduced over 150 years ago to encourage investment in risky ventures. While limited liability has provided a framework for the promotion of new businesses over the past century, it has come at a tremendous cost to society. Corporations and shareholders have used limited liability to evade responsibility for the non-economic consequences of their actions. Parent corporations and shareholders benefit from the gains of corporate activity while evading all liabilities associated with corporate actions, aside from the pure loss of their investments. As Professor Philip Blumberg has stated:

Corporate law and theories of the corporate personality shaped long before to serve the needs of a much different world have become antiquated.

We support and promote the introduction of enterprise liability into Canadian corporate governance. Enterprise theory looks at corporate groupings and assigns liability to all members of the group for the actions of an individual member of the group, regardless of fault. In short, parent and subsidiary corporations in a grouping in an enterprise are to be held liable for the actions of any member of that grouping. This principle has been adopted by American courts and incorporated into many American statutes. However, Canadian courts have expressly refused to adopt this approach, continuing to adhere to the principle of corporate personhood enunciated in the English decision of Salomon v. Salomon & Co. Ltd. over a century ago.

Our third recommendation is with respect to director duties. It is a long-standing principle of Canadian corporate law that directors must act in the best interests of the corporation. We support Duff Conacher's submission that a broader set of duties be ascribed to directors and that in making decisions they take into consideration other shareholder and stakeholder interests.

In addition to the three issues already raised, I should like to touch briefly on the issue of corporate dissolution. All corporate legislation in Canada, federal and provincial, provides for the voluntary dissolution of a corporation by its directors and shareholders. In many instances, provincial legislation also allows for the involuntary dissolution of a corporation by the corporate registrar on administrative grounds. Several provincial statutes and the common law extend to allow for the dissolution of a corporation by the Attorney General or the Lieutenant Governor in Council where the corporation has a notorious record of violations or has clearly acted against the public interest.

As recently as 1947, the chief justice of the British Columbia Supreme Court affirmed this Crown prerogative. This very committee, in its deliberations over the Canadian Corporations Act, the predecessor to the CBCA, in February 1965 acknowledged comments by a representative of the secretary of state that the dissolution provisions of the CCA extended to the dissolution of a corporation where it was "not carrying on in an ethical manner." The representative cited, as examples of such unlawful practice, the practice of medicine and gambling operations.

In conclusion, honourable senators, we urge you to review our full submissions, which are attached to the written brief you have before you. In those submissions, we propose a number of additional changes to specific provisions in Bill S-19. All our recommendations are founded on the solid public policy rationale that our national institutions should serve the interests of Canadians, and not the reverse.

The corporation is the dominant institution of our time. Canada's corporate legislation must work to ensure that the corporation acts to benefit the greater public interest, not merely shareholders and corporate executives. In the treatise The Modern Corporation and Private Property, acknowledged by corporate lawyers as one of the seminal works in the area of corporate law, Adolf Berle and Gardiner Means prophesized the transformation of the corporation as follows:

It is conceivable, -- indeed it seems almost essential if the corporate system is to survive, -- that the control of the great corporations should develop into a purely neutral technocracy, balancing a variety of claims by various groups in the community and assigning to each a portion of the income stream on the basis of public policy rather than private cupidity.

Honourable senators, if we are to create a truly sustainable and equitable world, corporate law must reflect the paramountcy of citizens over statutorily created institutions.

The Chairman: Thank you. Why would you quote John De Lorean, who has such a horrible reputation?

Mr. Yaron: Exactly for that reason. The fact that that gentleman is willing to make a statement like that, in light of his track record, speaks volumes.

The Chairman: You are way over my head.

Senator Angus: Mr. Conacher, you were here on another occasion, at which time I tried to determine whom you represent. I never understood your answer very well. In the interim, I have observed Democracy Watch in action. I will ask you the question again. I am looking at a list of the members of the Corporate Responsibility Coalition. I see that Democracy Watch is a member of that. I see that there are national and provincial members of that Corporate Responsibility Coalition. Could you tell us who are the members of the group on behalf of which you advocate? Whom does Duff Conacher speak for?

Mr. Conacher: Today, I am speaking as the chairperson of the coalition.

Senator Angus: For all the constituent members, not just yourself?

Mr. Conacher: Exactly. Democracy Watch is a citizens advocacy group based in Ottawa. We have members in every jurisdiction in the country, some organizational but mostly individual. We have about 1,000 members in total.

Senator Angus: I assume that they pay an amount to fund your organization.

Mr. Conacher: Yes. We also raise money from a book that we have on bookstore shelves, and we have another book coming out. We get a bit of foundation funding as well.

Senator Angus: Is it fair to conclude that the groups in this coalition all have basically the same issue? We will hear from Yves Michaud tomorrow, who is a popular figure at shareholder meetings around the country.

Mr. Conacher: As well, his group is a member group of the coalition.

Senator Angus: Yes, I see that. You do not all have different slants on the issue. You are all basically looking out for the best interests, not of shareholders per se, but of citizens at large.

Mr. Conacher: That is right.

Senator Angus: I agree with many of the things you have both said. Without appearing to be pejorative, it is motherhood. As I was growing up, I was taught to be a good citizen and, even though I am an individual, to be a good corporate citizen. If you have been fortunate enough to get a good education and been blessed with certain privileges, you should try to give back a little bit. I think that is fairly commonly taught in our schools and parents try to imbue that in their children.

I have observed that largely across this country corporations are responsible citizens. I have not noticed the abuses that you folks seem to be trying to highlight. One thing that struck me when Mr. Yaron was speaking was his indication that a company should not be allowed to leave the country if it wants. We live in an age of globalization. Canada tries to attract corporate offices here, not only to create employment and to finance the development of some of our resources but, indeed, to conduct research and to enhance the economy of Canada. Personally, I think that is a good thing. However, if the climate is not one that is attractive to them, I do not question their right to leave. Am I right in saying that you folks seem to think that they are stuck here if they do come here?

Mr. Yaron: The issue is whether we will require those companies to be accountable while they are operating in this country. In terms of their ability to just up and leave, one has to ask whether or not that is ethical behaviour. I refer specifically to resource companies. Look at what forestry companies are doing in British Columbia and what mining companies are doing up in the Arctic and throughout the northern portions of most provinces. Our position is that that is not ethical behaviour and that these corporations need to be held accountable. They cannot simply walk in, be here when it suits them and then leave. We certainly do not allow citizens to do that.

Mr. Conacher: Senator, you say that we want to have an attractive climate for those corporations. Beyond that, we want to have an attractive climate, using the word in another sense, for Canadians as well.

Senator Angus: I do not question that at all. You say that we hold citizens accountable. As a citizen, I am free to come and go from Canada as I choose. No one has a hook on me. I do not think any of us are accountable in the sense to which you refer. As Canadian citizens, we have rules of the game here in Canada. We have an ordered society. Parliament makes laws that, hopefully, reflect the larger consensus of the populace. We have to obey the laws or else be sent to jail. There are also laws for corporations. The word "accountability" gives me a big problem. Perhaps it is just a matter of semantics, which is why I want to be sure that I understand.

Mr. Conacher: Regarding corporations acting irresponsibly, I brought along a few headlines. One refers to a warning put out by the OSC. It talks about the increase in security crimes. They call for a full-time RCMP fraud squad to police the markets.

Senator Angus: We have laws against doing that.

Mr. Conacher: Yes, we do, but are they policed? They are saying that they need a full-time RCMP squad. The RCMP also recognizes that. They still do not have the resources.

Senator Angus: Perhaps we are on the same page. I am against crime. Offences that tend to corrupt morals are not my bag.

Mr. Conacher: The problem is that there are so many gaps, whether they be in the rules, the rights and responsibilities, or in the enforcement of those rules, rights and responsibilities. The best way to level the playing field is to put it into the CBCA instead of having an ad hoc mishmash of things. Senator Kelleher raised this when the Industry Canada officials were here. It is more efficient to put something in the CBCA than to have a mishmash of rules in labour, environment, et cetera. We have a few acts that protect corporate whistle-blowers. If that were put into this act, then all corporate whistle-blowers would be protected. Why are they just protected for labour issues, Competition Bureau issues and a few other issues? Why are they not protected for every violation of the law?

The CBCA is the citizenship law for corporations in Canada. All we are saying is that the standards should be raised.

Senator Angus: Now I understand better. My modest experience in the corporate environment has indicated that this business of being held accountable, to use your parlance in the way I interpret you to be defining it, means that corporations get diverted from their main business. Perhaps that main business is to develop a new cure for cancer. Yet, they are bugged at their annual meetings and confronted with this business of being accountable when they are already obviously accountable to their shareholders who are the ones who invest in their company.

Mr. Conacher: Shareholders only.

Mr. Yaron: I agree with Mr. Conacher. However, I go further than that and suggest that corporations are not accountable like citizens are accountable. I do speak of accountability in a different way. As a citizen of Canada you are not able to transplant yourself into another jurisdiction and live there outside Canada.

Senator Angus: Why not? We have been talking about the brain drain right here in this committee for two and a half years.

Mr. Yaron: If you can get yourself a green card to work in the U.S. or in Europe and you meet the qualifications, then you can go.

Senator Angus: They are here headhunting us every day of the week. If you do not know that, then you are dreaming in colour.

Mr. Yaron: With respect, it is highly skilled individuals who are being headhunted. The majority of Canadians cannot do that. If you are a nurse, a physiotherapist or whatever the United States happens to need at any given point in time, then you have a ticket to go down there. Otherwise, you do not. Canadian corporations, in contrast, can simply up and leave and incorporate anywhere they please at any time. That causes incredible problems for us in terms of holding them accountable. The whole corporate restructuring and the complex interconnection of subsidiaries and parent corporations with limited liability shields all parents and subsidiaries from the actions of others.

When you are in a car accident, sir, you are accountable for your actions. When you pull out a handgun and shoot someone, you are accountable. When a parent corporation assists a subsidiary in an activity in this country, that parent corporation is not held liable. The recent incident with tobacco companies in British Columbia proves my point. The judge in that B.C. Supreme Court decision stated that he would not extend reach outside the B.C. jurisdiction to find parent subsidiaries that were located elsewhere liable for the actions of the subsidiaries operating in B.C. They are not accountable.

Senator Angus: I will not pursue this matter further. We could have a fairly interesting sociological discussion on these issues. The bottom line is that I do not think you will find too many members of this committee who disagree that companies should obey the law and that the laws should be appropriate to protect Canada at large and our Canadian way of life. I have a problem with reading in or implying and having a whole lot of other standards and laws that are not articulated, to which companies are supposed to be accountable. That is why I prefaced my question the way I did.

I have the sense that there is a terrible abhorrence of companies, yet we do live in a market-based economy. With regard to limited liability, you say the rules are 100 years old and outdated. You will not have anyone investing in companies or taking risks and doing the things that the corporate capitalistic system is about. If you do not like that system, that is another discussion we can have.

There are elements of the corporate way that may not necessarily be your bag. However, if we want to have people invest and if we want to have vehicles to raise capital to develop new products, such as the biotechnological ones we spoke about a few moments ago, then we have to remember that side of the coin, too. We have to talk about accountability in a favourable environment.

Mr. Conacher: The problem is that it is too easy for corporations to externalize their costs and just reap the benefits. We want them to be required to take into account the stakeholders so that they do not impose all those costs on the stakeholders in pursuit of what are sometimes wonderful things. You have to take into account other stakeholders beyond just pursuing a higher profit. That is all we are saying.

Senator Angus: Do you mean that there should be social responsibility committees, which many boards now have, probably as a result of your good work?

Mr. Conacher: A shareholder can sue a company if the company does not maximize shareholder interest. That is one of the biggest problems.

Senator Angus: It happens every day.

Mr. Conacher: That is the problem. The Toronto Stock Exchange said in a report that it is legitimate for directors to recognize stakeholder interests; but the law defines it as illegitimate. That is the biggest problem. If we were to change that, have more disclosure, have whistle-blower protection, and do something for individual shareholders, then we would have a much more level playing field for all corporations. We would also have levelled the playing field somewhat between corporations and citizens. We would then have a better society.

The Chairman: Try not to keep repeating yourself.

Senator Furey: My question is for Mr. Yaron. It concerns your statements on directors' duties. I take it that you are not in favour of the proposed amendment away from good faith reliance to due diligence.

In your comments, you indicated that you would like to see our jurisdiction adopt some of the legislative changes are that presently in other jurisdictions, such as the United States, and I do not say that I disagree with you. However, that is not really a standard. That is actually a legislated regime.

For example, you spoke about considering a host of matters, not the least of which would be the best interests of employees. Then you stated that the standard that applies to individuals in their daily lives should extend to directors and officers of Canadian corporations. I realize it is fairly clear language, but what do you mean by that? You touched on it, but what standards in an individual's daily life do you take or pluck out to apply to someone in a corporate boardroom?

Mr. Yaron: I would hope that every good, responsible citizen in this country takes into account the effects of their actions on the people around them and in their communities, that they do not do something that harms another person, that they do not do anything that takes advantage of other people.

Senator Furey: Would you formalize that as a standard for people in corporate boardrooms or would it be based on the honour system? Would you say that everyone will be good because now they will apply the standard they live by to any corporate decisions they might make?

Mr. Yaron: I would formalize it.

Senator Furey: How would you formalize it?

Mr. Yaron: I would use mandatory language rather than discretionary language. That would simply outline that directors must act not only in the best interests of the corporation but also in the best interests of the other interests that we deem to be important to protect.

As far as due diligence versus good faith and such items, we have managed to set standards as long as corporate legislation has been in existence. I do not see why we could not change that and raise the standard. How we word it is up for discussion. I have not drafted anything here to submit to you, but if we managed to do it before, I do not see why it would not be possible to do it again.

Senator Kroft: I am intimidated as I never have been before by a witness, because we have been told that there is no valid argument against any of the proposals you are making. Thus, I am reluctant to make any arguments, so I will ask questions.

The issue of shareholder proposals or the ability of shareholders to bring issues to annual general meetings and to hold companies to account is really the process you are talking about. I should like some description of how broadly you would define that.

I think the legislation attempts and this committee is thinking of attempting to have those things related to the purposes and the pursuits of the business in order that the meetings of the company do not just become a forum for whatever cause might broadly be a cause of any group. Such meetings have tended to be used simply as theatre with the vaguest of connections. How do you apply some discipline that allows people to pursue legitimate concerns and pursuits without hijacking the forum of the company? Companies go to a great deal of trouble to present to their shareholders and to the public what it is they are doing in the course of a year. Do you feel there are excesses there? Do you feel these are all proper, all fair game? Are there any rules? I do not see that. I see the suggestion here that a company can be held accountable for almost anything, whether it has much to do with their business or not. Am I misreading that?

Mr. Conacher: We believe that the U.S. standard where they say it has to be related to the business is fine. However, a number of causes are enumerated and then it just says "any other similar cause." Essentially, anything that is cause-related can be rejected. It is so easy for the corporation to reject it, knowing that they have enormous resources to go to court and delay. Often we are talking about small shareholders who have a legitimate concern, as was recognized in the case brought by Yves Michaud against the banks.

Thus, we suggest you should remove the mention of causes, retain a standard that says it has to relate to the business, and put the onus on the corporation to prove that it does not relate to the business. Then you have levelled the playing field and given individual shareholders a leg up.

Adding the proposed language that says it must be significantly related to the business and leaving it to the shareholders to pay the costs of going to court if the corporation rejects the proposal is not levelling the playing field at all. That is actually a step backwards.

Senator Kroft: My experience tells me that unless you use language like "significantly related" or "meaningfully related," those who feel they have a cause will argue that it is remotely related or marginally related. I think you need some discipline in what is appropriate. The absence of language and simply the shift of onus to say that a cause is not related is insufficient.

Mr. Conacher: In the U.S., the standard is to be related to. That is in the heart of capitalism. We do not see companies going under or being driven in all sorts of directions.

Senator Kroft: I confess to not being an expert in the jurisprudence, however, I am sure that "related," if it has not already been, will be defined. There are implications.

Mr. Conacher: "Reasonably related" is more open to shareholders than "significantly related." That is a big term that would be left to the courts. They could say that it has to deal with half the company's business or it is not significantly related. That would shut out many shareholders who have quite legitimate concerns.

If you wish to define that more clearly, we would welcome that. However, define it in a way that opens things up as opposed to closing them down, which this does. I am sure you will hear much more from both the Social Investment Organization and the Taskforce on the Churches and Corporate Responsibility.

Senator Kroft: I should like to challenge you with one specific question. This committee has struggled with the question of the reduction of the residency of directors down to 25 per cent from a majority. The argument for doing what has been recommended here is that it is consistent with international corporate practice and regulatory systems in a competitive, globalized world and that it is a trade-off: if we want people to come and do business here as we want our people to go and do business elsewhere, we need this kind of openness and window to the world. That is a debatable point and it has been debated by various people. What are your views on that subject? Do you see any merit in the open door argument?

Mr. Conacher: The coalition does not have a position on that. Mr. Yaron's group is particularly concerned. From a personal perspective, that it is something you must watch because absentee directors can be like absentee landlords. Many people have had bad experiences with landlords who are elsewhere, who are not there seeing what is happening day to day. That can be a barrier to them acting in the interests of the business and its location.

Mr. Yaron: I appreciate the concerns about maintaining an environment that is open to business in Canada, but that concern is far outweighed by the detrimental impacts of having an absentee board of a company operating in this country, especially with the size and impact of corporate activity today.

Senator Kroft: It is better not to have a company here at all than to have it here with 25 per cent?

Mr. Yaron: Yes.

Senator Kroft: That would be a hard choice.

Mr. Yaron: I would argue that our fear as a society that businesses will just flee this country if we change the rules is unsubstantiated. We have a lot to offer in this country. Companies need our resources and our expertise. The maintenance of a 50 per cent director residency requirement will not send corporations running to Delaware. They will stay here and they will keep operating here.

The Chairman: Did I understand you correctly that, if some shareholder has a grievance or a matter that must be righted and if he takes it to the company, the burden of proof is on the company to say they did not do it?

Mr. Conacher: If the shareholder puts forward a proposal, that proposal can be rejected by the corporation on the grounds under section 137. Then the shareholder must go to court and pay the cost of that court action and carry the burden of proving that the proposal meets the criteria in section 137.

The Chairman: The burden is on the shareholder?

Mr. Conacher: Yes. That is why we are saying you should reverse that onus and remove the barriers.

The Chairman: Are you saying that the onus should be on company?

Mr. Conacher: The onus should be on the company to prove that the proposal is not related to the company.

The Chairman: Is that not backwards compared to general law? I do not want to get into that.

Mr. Conacher: It is not backwards in terms of equity.

The Chairman: It has been 40 years since I got my law degree, so I may be wrong.

Senator Angus: That was in Quebec and they do not recognize equity.

Senator Meighen: Senator Kroft asked many of my questions on section 137, but I would probe a little farther. Mr. Conacher, did I understand you to say that, in the United States, there is no qualification of the term "relevance" or "relevancy"?

Mr. Conacher: It has been interpreted, yes, but they do not have a list of causes as grounds for rejection. Relation to the company or to the activity of the corporation is cited.

Senator Meighen: There is no word such as "significantly" or "reasonably" or "closely"?

Mr. Conacher: As far as I know, it is just based on the effect on share value. I understand that is how it is being interpreted.

Senator Meighen: You lost me. Relevancy is based on share value?

Mr. Conacher: Yes. If it relates to 5 per cent of the assets or activities of a corporation, then it is deemed to be relevant and it cannot be rejected.

Senator Meighen: You do refer to asset value?

Mr. Conacher: Yes.

Senator Meighen: Do you put your stamp of approval on that?

Mr. Conacher: Based on the U.S. experience, that method is more open and it seems to be a step forward. I would defer to those who have much more experience and from whom you will hear next, the Taskforce on the Churches and Corporate Responsibility. That is why I spoke so briefly on that issue. The next witnesses have more experience taking forward shareholder proposals and also being in contact with groups around the world who are doing the same things, mainly through church investments. I would defer to them in terms of the actual specifics. We very much believe that the U.S. standard is lower than that which is being proposed in Bill S-19.

Senator Meighen: Anyone of goodwill, as Senator Angus said earlier -- and presumably that is most of us -- would be looking to establish a regime whereby issues of relevance could and should be raised. I doubt that many of us would want, as Senator Kroft alluded, to turn the meeting of shareholders into a platform solely for the expression of a variety of particular interests. Otherwise, when do you deal with the business of the corporation, as opposed to the business of some shareholders?

Mr. Conacher: If it relates to the corporation, then it deals with the business of the corporation.

Senator Meighen: Our discussion really revolves around the degree to which a shareholder proposal should relate to the corporation before it can reach the floor.

Mr. Conacher: We believe that what is proposed raises that barrier as opposed to lowering it.

Senator Meighen: I am not sure I understand that. I would think it would help, although it may not go as far as you would like. My reading is that the proposed amendment to clause 137 would make it easier, although not as easy as you would like, for shareholder proposals to be heard.

Senator Oliver: That is what the department said, too.

Senator Meighen: Do you disagree?

Mr. Conacher: Yes. All the different causes are still in there. Why not just have it as related to the business? Why should the subject matter at all?

Senator Meighen: That may be better, but I still think the proposed amendment is better than what we have. I am not sure it is as good as what you are suggesting.

Mr. Conacher: It is hard to tell. This one is defined as "significantly related." The courts will decide, but you have our interpretation.

Senator Meighen: I do not know whether we touched on the proposed requirement that the group that raises the proposal should be the beneficial or registered owner of outstanding voting shares with a fair market value of $2,000 or 1 per cent of the total number of outstanding shares. Do you have any particular quarrel with that, given that, as I understand it, shareholders can pool their holdings to meet those requirements?

Mr. Conacher: It is not too bad, although again I think it is a bit too high. We will see from practice, but that is my prediction. It is not an easy thing to do.

Senator Meighen: This is my final comment and it is not a question. Remember that all the corporations under the CBCA are not of the size of Nortel; they do not have the resources of Nortel. In all of your examples, you have mentioned giant corporations with vast resources. Most companies do not have those vast resources. Some shareholders have greater resources than their company. The playing field can change that way. I do not think the battle should always be portrayed as occurring between a Goliath corporation and a David shareholder.

Mr. Conacher: Point taken. Often the smaller companies are not publicly traded. Those shares are often closely held. In that sense, we want to level the playing field for citizens by raising the standards and requiring that stakeholders are considered when corporate decisions are made.

Senator Kroft: Would you agree that many publicly traded corporations are not profitable?

Mr. Conacher: Yes.

Senator Oliver: I wish to ask for an explanation of a few lines that I read in your paper that astound me, if they mean what I believe they do.

They read:

Given the responsibilities of corporations in our society, stronger conditions must be placed on who is eligible to be a director in order to protect the interests of employees, third parties, shareholders and other directors of the corporation. At a minimum, we recommend that individuals convicted of white-collar crimes or regulatory violations should be prohibited from incorporating a corporation or from being a director of a corporation for a minimum of five years from the date of conviction.

Are you recommending that, if someone violated a regulation under a lands and forests act, for example, they should not be allowed to incorporate a company?

Mr. Yaron: Yes, senator.

Mr. Conacher: Just to clarify, the coalition does not have a position on that issue.

Senator Oliver: I am sure I do not understand this correctly.

Mr. Yaron: Individuals are not allowed to violate regulatory or statutory provisions. Sanctions exist to deter that. Some kind of penalty is imposed, be it incarceration or a fine.

Senator Oliver: A person who did not pay a fine on time for breaching a regulation should not be allowed to be a director?

Mr. Yaron: We may not wish to make it quite as broad as it is framed in our submission. However, the general principle is that the holding of a directorship in a corporation requires that a person have a certain amount of responsibility. I believe that someone who has committed a criminal act or violated legislation should be prohibited from holding that position of responsibility.

Senator Tkachuk: They are now.

Mr. Yaron: How so?

Senator Tkachuk: If you have a criminal record, you cannot be on the board of directors of a public company, although you may be on the board of a private company. They do a police check. That regulation currently exists.

Mr. Yaron: Fair enough, but it should apply even to private corporations.

Senator Tkachuk: A painter who wanted to set up a federal company to do painting could not do so, even if he had fulfilled his sentence?

Mr. Yaron: We had some difficulty framing the example we used here. You may want to say for a minimum period or the term of incarceration. You may want to frame it differently. The point we would like to make is that the director eligibility requirements under the CBCA are insufficient. They are essentially useless and meaningless. They only say that if you are crazy or you are a child you cannot run a corporation. That simply is not a high enough standard.

The Chairman: I find much of this mystifying. A private corporation is just an extension of the individual. The individual chooses that to limit his liability.

Senator Fitzpatrick: My question is supplementary to that of Senator Oliver. I understand criminal act, but I am not so sure on violation of regulation. For example, filing an incorrect insider report is a violation of a regulation, but it may be done in error. Are you suggesting that if someone makes a mistake like that, they would not be allowed to incorporate a company?

Mr. Yaron: Again, there is definitely room for discussion here. There are certain instances in which we may feel that the violation is sufficient to warrant the sanction. It may require a certain number of violations over a period of time. I do not wish to be too specific at this point in terms of what exact threshold to impose.

Senator Hervieux-Payette: It is my impression that mutual funds and pension funds represent the overwhelming number of investors. You say that you speak on behalf of shareholders. What percentage of people does that represent? How many individuals buy shares individually? My impression is that it is not more than 10 per cent of shareholders, and all the other shareholders are grouped in mutual funds or pension funds. I am under the impression that the number of people managing their own portfolios is constantly declining. Do you know what percentage of people would be part of your club?

Mr. Conacher: It would not be our club.

Senator Hervieux-Payette: Your association.

Mr. Conacher: No, it would be their association, formed by shareholders, run by shareholders, and funded by shareholders. We only want the corporations to be required to distribute this flyer, and it should also go to mutual fund unit holders. That is our proposal. You are still an individual shareholder when you are buying into a mutual fund. We think it should go to all the individual investors out there.

I know that the federal government cannot require mutual fund companies to do that, but we will also be pursuing this with the Ontario Securities Commission.

Senator Hervieux-Payette: Do you know how many people invest on their own in big companies?

Mr. Conacher: Everyone who owns a unit of a mutual fund is on their own.

The Chairman: Mr. Conacher, you are not answering the question.

Mr. Conacher: I agree that the number is around 10 per cent to 20 per cent, although that is probably increasing with day trading. It fluctuates every day. However, we want this flyer to be distributed to mutual fund owners as well because people need education. The Canadian Bankers Association did a very extensive survey a few years ago. The majority of Canadians said that they wanted independent information. They did not want information from the sellers because they recognize that the sellers of financial services have an interest in consumers buying their products over those of their competitors. There are 1,000 mutual funds. It is extraordinarily difficult for the individual investor to be well informed. Therefore, we want the flyer to be distributed through corporate shareholder mailings but also through mutual fund mailings, which we know we must pursue provincially.

The Chairman: Thank you, gentlemen.

Senators, our next witness is from the Social Investment Organization.

Mr. Eugene Ellmen, Executive Director, Social Investment Organization: Mr. Chairman, thank you very much for giving the Social Investment Organization an opportunity to make its views known to you. I will first give a bit of background concerning the Social Investment Organization and then get into the heart of my comments, which deal with the shareholder provisions in section 137 of the current act.

The Social Investment Organization is the national non-profit umbrella association for socially responsible investment in Canada. We represent what are called the ethical or socially responsible mutual funds. Labour funds are members of our organization. We have something in the order of 20 to 25 financial advisers, investment counsellors and money managers who are members of our organization. We have approximately 200 ordinary investors who invest their money in ways that express their values.

The institutions that are members of our organization manage money on behalf of approximately 200,000 Canadians. Our mandate is to advance the cause of socially responsible investment, to raise the level of public awareness, to deal with the media and with outside non-governmental organizations and, from time to time, to make submissions like this in front of public bodies.

What we are particularly concerned about in the Canada Business Corporations Act involves what we call shareholder advocacy, which is the use by shareholders of their influence as investors in a company to try to bring about some positive social or environmental change in that company. The Social Investment Organization feels strongly that there is no trade-off between social and environmental responsibility and long-term viability. There is a growing body of evidence to support that view.

Michael Jantzi Research Associates, one of our members, recently launched an index of 60 socially responsible companies in Canada. It is called the Jantzi Social Index. This index has been operating only since the beginning of the year. Thus, it does not have a live track record. However, the index did backdate the data on those 60 companies to 1994. On an annualized basis, they showed an increase of 18.9 per cent. If you were to look at the TSE 100 you would see it is up a little over 18 per cent, while the TSE 300 is up by about 17.4 per cent. That is similar to other indexes in the United States, which indicates that there is a growing consensus and a growing body of knowledge that suggests that companies that pay attention to their communities, look after their employees and stay out of international human rights disputes are the companies that will perform well for shareholders over the long term.

The key to making companies socially responsible is the role played by socially responsible shareholders. I mean shareholders of goodwill who have interests in these kinds of social issues and environmental sustainability and who help bring a voice to the other stakeholders in corporations, to the other shareholders and to corporate management.

We have a number of concerns, which are outlined in our brief. As well, we outlined them in a brief that was given to Minister Manley. Our primary concern is with section 137, which Mr. Conacher spoke about earlier. That section states that management can exclude shareholder proposals if they are filed primarily for the purpose of promoting general economic, political, racial, religious, social or similar causes.

The most prominent, timely example of that is Talisman Energy, a company that today is having their annual general meeting in Calgary. Last year they used this provision in the act, along with another technical provision, to deny the right of certain religious shareholders to file a proposal that called upon the company to undertake an audit of its operations in Sudan. It took a year for the issue to hit the press, after which it became a headache for that company. The president of the company has said that the controversy around Sudan has lowered the share price of the company by approximately 20 per cent.

That is good support for our contention that, if shareholders had the ability to bring these kinds of issues to corporate management through the annual meeting process, some of the controversies that will eventually prove to be a headache for these companies could be mitigated or resolved altogether.

Bill S-19 states, in part, that management generally has an obligation to file shareholder proposals, unless there are certain exemptions. One of the exemptions is that it clearly appears that the primary purpose of the proposal is to promote general economic, political, racial, religious, social or similar causes, unless the person who submits the proposal demonstrates that the proposal relates in a significant way to the business or affairs of the corporation. The government maintains that this gives extra protection to shareholders because it forces the company to carry the proposal unless it is an insignificant one. The problem is that if you are a small shareholder -- and there have been many examples of small religious orders, such as groups of nuns -- and you wish to bring a proposal of substantial interest to the company and the company uses this loophole to interpret the proposal, then the management is effectively given a veto over that proposal. I say that because it will force that shareholder to defend in a court of law whether the proposal would substantially affect the business or affairs of the corporation. We believe that that clause should simply be struck from the bill.

We agree that there should be provisions in the act to protect companies against frivolous or crank proposals. We think that appropriate time and shareholding requirements -- and we have called for 1 per cent or $1,000 or a term requirement of one year -- are sufficient protection to ensure that it is serious shareholders and not just publicity seekers who are filing these shareholder proposals.

The U.S. regulations do not contain that kind of religious, moral, social language. There is a relevance test used by the U.S. Securities and Exchange Commission -- the 5 per cent relevance test that we discussed earlier. However, the SEC interprets that test very widely.

I was talking a few days ago with Tim Smith of the Interfaith Center on Corporate Responsibility in the United States, which is similar to the task force here in Canada. He said that in the current proxy season 50 companies challenged shareholder proposals that came forward to the SEC, and the SEC omitted only four of them. The SEC is taking that relevance rule, interpreting it quite widely and permitting shareholders leeway to bring these issues forward to annual meetings.

Senator Poulin: Thank you for being here. Can you talk to us a little more about the Social Investment Organization and whom you represent?

Mr. Ellmen: We represent some of the socially responsible mutual funds. Ethical Funds Inc. is an institutional member of our organization. Desjardins Trust in Quebec is an institutional member. They have a number of socially screened mutual funds. VanCity and some other credit unions are members of our organization. As I said, we have some professional members as well. Those are financial advisers that either sell mutual funds or are stockbrokers. In that category, we also include some portfolio managers. Those are people who manage money on behalf of institutions. We also represent approximately 200 individual ordinary investors.

Senator Poulin: In your research, have you been able to identify any trend with the organizations, either small or big, in terms of community involvement? There seems to be a trend, and I am sure you have research to prove this, of more social responsibility on behalf of business, be it with charities, health, education, the environment, the visual arts, or heritage. Do you have any research on that matter?

Mr. Ellmen: Do you mean whether corporations are becoming more responsible?

Senator Poulin: Yes.

Mr. Ellmen: There seems to be a difference of opinion. Perhaps my colleagues from the task force could talk about this as well. They just released a study earlier this week. It was a sample of eight corporations and measured those corporations against some international benchmarks that have been established. Basically, six out of the eight have failed to measure up to these basic international benchmarks. Therefore, there is certainly a lot of rhetoric about social responsibility out there, but in terms of real social performance, I think the jury is still out on that.

Senator Meighen: By way of clarification, did I understand you to say that, yes, you did support, as the previous witnesses did, the shifting of the burden from the shareholder to the corporation to demonstrate the relevancy or lack thereof of the proposal?

Mr. Ellmen: Another provision in our brief, which I did not put in my presentation, is that we would also like to see a low-cost administrative tribunal established to administer these disputes. If a corporation does want to contest it, then it can send it to that tribunal. In Canada now, with our fragmented security system, there is no corresponding body to the SEC. We are not suggesting that an SEC should be established in Canada, but some sort of administrative tribunal to provide a quick, low-cost dispute adjudication mechanism would be needed for this. In that case, we are fine with the parties sharing costs.

Senator Meighen: On whom should the burden should be? The corporation or the shareholder?

Mr. Ellmen: The corporation. The shareholder would file; the corporation would reject; it would go to the administrative tribunal. The corporation would need to show why it does not significantly affect the business of the corporation.

Senator Meighen: That being so, what is your comment in terms of the test of $2,000 or 1 per cent of the total number of outstanding shares?

Mr. Ellmen: Our brief calls for $1,000, but I do not think our members would have a problem with $2,000.

Senator Meighen: Do you support the ability of shareholders to pool?

Mr. Ellmen: Yes. We are against economic barriers to access. We do not consider $1,000 or $2,000 an economic barrier.

Senator Meighen: Do you have any concern that the pooling and the relatively low threshold would lead to a large number of proposals being debated at annual meetings to the extent that they would go on for an inordinate length of time?

Mr. Ellmen: If you look at the experience in the United States, where there is a much more open shareholder process, you just do not find that. Last year, there were 232 socially responsible or environmental shareholder proposals that reached annual general meetings in the United States out of I do not know how many publicly listed companies there are -- there must be thousands. To my mind, 232 is not an inordinate number or a number that is swamping corporations.

It still involves a great deal of work to pass the filing requirements, to do the research, to meet the deadlines and to frame your proposal, and it is not something that the crank investors are really interested in.

Senator Meighen: I am just trying to decide whether the SEC threshold of 5 per cent of the assets is higher than the one proposed.

Mr. Ellmen: My understanding of what that means is that when the SEC applies a rule as to the relevancy test of the proposal, it must affect at least 5 per cent of the corporation.

Senator Meighen: Assets.

Mr. Ellmen: My understanding is that it is revenues, but I could be stood for correction on that. The SEC in practice is interpreting this quite generously. Proposals generally have quite large ethical and environmental consequences for a company, so I think the SEC is erring on the side of the shareholders on this.

Senator Kroft: My first question is on this business of 5 per cent. I am really stuck with the measure. It is easy to talk about cigarettes because that industry is susceptible to this kind of comment. If they were marketing their product and targeting the six-and-under age group, that is a conduct that would not clear your screen.

Mr. Ellmen: Right.

Senator Kroft: That is not measurable by an asset base or sale base. That is just something they do. These conduct elements would seem to me to represent a large portion of the offending kinds of issues. How are they measured?

Mr. Ellmen: I think that is the reason that the SEC generally is not relying very heavily on this 5 per cent relevance test. They generally look at a proposal, and if it does seem to be a reasonable question that involves a substantial part of the business of the corporation, they let it stand.

Senator Kroft: That is fine. I have been interested for a long time in the ethical funds or socially responsible funds. Do you have clear enough definitions so that funds can be categorized so that the comparative investment success of a defined fund can be set off against conventional funds? I am curious as to what the investment performance is like.

Mr. Ellmen: I just looked at the March 31 numbers because I am doing a presentation tomorrow night on this. We have a fairly simple definition of what is included in our list of socially responsible funds.

It is generally any fund that contains social criteria or environmental sustainability as part of its investment selection process, and that is written into the prospectus so that managers cannot just say that they use these kinds of measures. It has to be written into the prospectus so that it is publicly available to the investing public.

If you use that test, then under our definition there are approximately 30 funds, including labour funds, that use social audit criteria. Out of these, if you look at the funds that have a five-year track record, some of them are quite new. Quite a number were just brought on in the recent RSP season. However, if you look at the ones with the five-year track record, three quarters of those have managed to meet the average performance of their conventional funds in their categories, or exceeded them. It appears that over the long term, therefore, the funds that are on our list are quite decent performers.

Senator Wilson: I have two questions. First, the new B.C. company legislation includes a minimum shareholder requirement and minimum time holding but no social responsibility exclusion clause. The Ontario business corporations legislation has the general corporate responsibility exclusion but no minimum shareholding or time frame. The Alberta business corporation legislation includes a social responsibility exclusion but no minimum share holding or time holding.

I would hate to see the Canadian legislation substantially more conservative than key provincial corporation statutes, but, that being said, if you had to make the choice between the corporate social responsibility exclusion or a minimum holding time requirement, which would you go for?

Mr. Ellmen: We are okay with the minimum time holding requirement. The recommendation we have in our brief is a year. If investors hold their shares for a year, they have the right to file a shareholder proposal.

We do believe that most of the socially responsible shareholders we represent are serious shareholders, and some of them are even mutual funds that definitely are in the business of investment in a serious way and have a long-term investment horizon.

We do not have a problem with serious investors having a minimum one-year term requirement in order to make a shareholder resolution.

Senator Wilson: You would go for that, but hope for the exclusion of the other, then?

Mr. Ellmen: We think it is essential. Mr. Conacher called it a cause-related wording. I am not sure that I like that way of describing it, but social, moral and religious -- the 137(5)(b) clause, which we would like to see struck from the act.

Senator Wilson: I should like your comments on the recent court decision, Michaud v. Banque Nationale, in which the National Bank sought to refuse a proposal made under the Bank Act on grounds identical to the those fund in the CBCA. The court concluded that, while Michaud only owned one share, he had a real interest in the management of the bank, and it went in his favour. What is your comment on that.

Mr. Ellmen: We found that quite interesting, actually. Even though it is a single share, he still has an interest in the corporation. That gives us further support that even relatively small shareholders, if the minimum shareholding, for example, is $1,000 or $2,000, have a substantial interest in the corporation.

The Chairman: Do you foresee any problem in all this kind of talk fostering a cottage industry like they have in the United States, where there are all kinds of shareholder activist groups who are simply there because the guys who are running them are being well paid? You may remember Evelyn Y. Davis and the Gilbert brothers. Those were people from my day. It can turn into one really rotten circus. Is that a danger here?

Mr. Ellmen: If there are enough socially responsible investors out there, if some of the mutual funds really start becoming active shareholders, to my mind that would be a fine thing. That would mean that their corporate management would be made more accountable for all the social and environmental issues out there that right now they are not responsible for.

The Chairman: Maybe it is the generation gap, but I have sat on boards for years and years and I have obviously not learned an awful lot, because I must say I find difficulty with your kind of submission, not because it is right or wrong; I just don't frankly understand it. What I gather from it is that you do not think that governments are capable of doing the right job and you want the individual shareholders to replace that?

Mr. Ellmen: No, we do not take the position that government is off the hook because of shareholder activity.

The Chairman: No, but you tell me the hook they are on is not good enough?

Mr. Ellmen: Various of our members take different positions on government regulations. Some feel strongly that there should be much stronger regulations in many areas of the economy. Other members take a more laissez-faire approach. What does unify us is that, as shareholders, we feel we are stewards over that shareholding and over that investment that we have in the corporation, and as stewards we want the right to be able to talk to other shareholders about the issues that concern us and to bring those issues to the attention of management.

The Chairman: Would you give me one example of something for which a shareholder would come to a meeting and say, "You guys have botched this thing up and I want it changed." Give me one quick example and tell me how that would work, that somehow the government could not look after it, or the existing legislation does not address that.

Mr. Ellmen: I will give you a good example. Last year, in the U.S., a number of shareholders came forward to the Home Depot annual meeting and basically asked for Home Depot to start phasing out its use of old growth lumber in its stores. The proposal failed. It only got about 10 or 11 per cent of the vote. However, it sufficiently embarrassed the company and the shareholders made a sufficient impression on corporate management -- and as well there was the threat of a consumer boycott in the background. I would not say shareholders did the whole thing, but working in conjunction with consumer groups and other groups of goodwill, the company eventually decided to phase out old growth timber and they are in the process of carrying only sustainable lumber in their stores.

The Chairman: Thank you very much. That was interesting.

Honourable senators, our next witnesses, from the Taskforce on the Churches and Corporate Responsibility, are Mr. William R. Davis and Father Richard Soo, S.J.

Welcome, gentlemen. Will each of you be making a statement or will it be a joint statement?

Father Richard Soo, S.J., Taskforce on the Churches and Corporate Responsibility: Mr. Chairman, I will start and then my colleague will join in.

The Chairman: In any case, you have ten minutes between the two of you.

Fr. Soo: Honourable senators, we appreciate the opportunity to appear before you once again.

The Taskforce on the Churches and Corporate Responsibility coordinates church-shareholder dealings with corporations. The churches were pioneers in Canada in the responsible shareholder movement. We have been at it for 25 years. Today we wish to address the problem that clause 137(5)(b) represents to shareholders' rights.

Industry Canada indicates that it desires to expand responsible shareholdership. We are in total agreement with that stated goal. In its news release of March 21, Industry Canada promised that the legislative amendments would expand shareholder rights by giving shareholders improved means to communicate, make proposals and participate in decision-making.

Although Industry Canada's proposed amendments have tried, in many different sections, to make many improvements in this regard, our position is that they have omitted dealing with the one crucial section that negates any significant exercise of the shareholder proposal.

In clause 137(5)(a) the shareholder is given the right to submit a proposal. It goes on to detail the circumstances in which a corporation can refuse to circulate the proposal. Our position is that these exemptions are reasonable with the exemption of 5(b), which is the subject of our submissions today.

Specifically, pursuant to subclause 5(b), management can refuse to circulate proposals if it appears -- and I might add "appears to management" -- that the proposal is submitted, among other things, primarily for the purpose of promoting general economic, political, racial, social or similar causes. The churches have no quarrel with excluding proposals regarding personal claims or grievances. What is problematic for us, and for Canadians in general, is that 5(b) permits management to arbitrarily exclude all shareholder proposals and thereby annuls the very shareholder rights provided by this act, the very shareholder rights that Industry Canada is trying to promote and expand.

There are two problems with this: the substantive aspect and the functional aspect. With regard to the substantive aspect, the nature of the grounds are so all-encompassing and broad that management has carte blanche permission to exclude any shareholder proposal it does not like. No matter how relevant, no matter how it is worded, and no matter how legitimate to the company's business, it will summarily exclude them and send a letter citing subclause 5(b) without giving any real reason for the exclusion.

To do business anywhere in the world involves a company in some aspect of general economic, political, or social cause. How a company handles these matters and how it deals with the stakeholders has a direct impact on the profitability of the business and therefore is a legitimate business concern. Therefore, it is our position that there are matters that fall both within the legitimate business concern of a company and that directly touch upon the corporation's actions and/or omissions in its economic, political, or social context.

The problem with regard to function is basically a question of process. The section sets up a system in which management alone decides whether any proposal falls within the exclusionary grounds. Management is both judge and jury. Worse, it is like letting the fox guard the chicken coop, because it sets up a tremendous conflict of interest for management. Shareholder proposals are intended to communicate to management the will of the owners, particularly where management and owners might differ on company operations. Subclause 5(b) enables managers to estop owners from expressing their will.

According to the proposed amendments, the only recourse of shareholders is to the courts. Recourse to the courts is clearly beyond the means of ordinary individual shareholders. In fact, it is beyond the means of the churches as institutions. This leads to the promotion of high-handedness and arbitrary actions on the part of management and greater degrees of frustration on the part of the shareholders.

Our position is that the courts should serve only as the last resort for shareholders after exhausting all other means. It should not be the only means to respond to management oppression.

The Chairman: Does your group have any belief in the discipline of the marketplace? I have not heard anyone mention it this afternoon. In other words, if you are not happy with what the company is doing, you could sell the shares.

Fr. Soo: That is in the law and in the practice.

The Chairman: It is not in the law.

Fr. Soo: From our point of view, that is not an issue of shareholder responsibility. That is always an option, but as owners we feel that we have a responsibility to express our will to management. We have the power to elect other directors if we do not believe that the present directors are doing a good job, and to direct the company in general policies. We do not want to take over management from the directors.

The proposed amendments leave the act with contradictory provisions. On the one hand, it says that we can have the shareholder proposals; on the other hand, it sets up a system in which any and all proposals could be vitiated. Furthermore, it creates a huge realm of discretionary power that enables management to ignore and silence shareholders in the very process intended by the act, specifically intended, as a forum for the legitimate business of shareholders. Without the removal of 5(b), all the good intentions of Industry Canada for shareholder communications would be nullified.

Mr. William R. Davis, Taskforce on the Churches and Corporate Responsibility: I wish to expand on the aspect that Industry Canada stated the intention of improving the mechanism for proposals and then offered wording that seems to subvert that goal.

I read a paper that Mary Walsh, who was at the time the corporate director of Industry Canada, delivered at the Corporate Directors' Summit sponsored by Insight Information Inc. In her paper "Shareholders vs. Management" she offered the following quote from the ruling in the Michaud case:

The expertise of these managers does not authorize them to ignore the opinions of shareholders. A shareholder who makes himself known should not be seen as adversary or an intruder.

In my opinion the judge has correctly identified the problem as an attitudinal one.

Ms Walsh went on in that paper to identify some of the pros and cons in the particular clause that we are focusing on. She concluded that the consensus pointed to a reworking of the exclusionary language.

We believe that the draft we have seen has left the language essentially unchanged, except for the addition of the words, which you have heard before, "...unless the person who submits the proposal demonstrates that the proposal relates in a significant way to the business or the affairs of the corporation." We think that tilts the balance further towards exclusion. I do not think that is what Industry Canada is trying to do, but that is in effect what that wording does.

Once management has made a decision to reject a proposal, it is unlikely that the proposer can persuade them that it is significant. As Father Soo has said, they are both judge and jury.

We do not understand what gives rise to the fear that there will be a flood of inappropriate proposals, as I heard directed to previous presenters. In the aftermath of the rulings around the Bank Act, there have been quite a few proposals at banks' annual meetings. They have come from two sources: Robert Verdun, an activist shareholder, and Mr. Yves Michaud's organization, l'APEIQ.

Several of these proposals have garnered significant support and have resulted in changes in the governance of the banks. If someone feels that the number of proposals is excessive, or the number of interventions on the floor of the meeting is excessive, there are remedies, such as limiting the number of proposals from each person, limiting the number of interventions at the floor of a meeting.

However, it is very clear, if you attend those meetings, that shareholders found these proposals worth their attention and management benefited from addressing them and the annual meeting did not turn into a circus. The discussions at the bank's meetings have been responsible, polite and relevant. The bank's annual meetings are not a bad model of what others might be if shareholder democracy were allowed to flourish.

Our recommendation is to drop the exclusionary clause, except perhaps that portion dealing with personal grievances, and, if some inappropriate proposal slips through, trust the common sense of the shareholders. They will vote it down and they will do it decisively.

I want to tell you something about competitiveness in the Canadian context. The task force sent each of you a copy of a letter from the Christian Brothers to the Minister of Industry expressing the view that foreign investors will avoid investing money in Canada if our legislation denies them rights that they take for granted in other countries. Please do not underestimate the importance of that perspective. As investment has become less sensitive to international boundaries, many countries are facing pressure to open their governance practices to be more shareholder friendly, and change is being forced upon security regulation, and the rights of the owners are being respected and protected.

I want to go back now to those exclusionary adjectives. If you cannot bring yourselves to drop the exclusionary clause altogether, then at least set up an independent body to arbitrate. Management can hardly be the arbiter between itself and the owners. What management thinks of and rules out because it is "political" may for shareholders be the crucial factor influencing their decision of whether or not to retain their investment. Management can claim that the company takes no position in racial matters, or general economic or social causes, but shareholders recognize that every decision has implications that touch upon all of these areas.

The globalization of business makes it a player in social matters, in decisions that impact people around the globe and next door. Let us not imagine that there can be a compartmentalization of that which is pure business and that which is political or religious or social. It would be wrong to limit religion to what one does at church or synagogue or mosque. Racial matters are more than buying a table at the brotherhood banquet. Business is not just what you do at the office any more than family is what you do on the weekend, and community is more than just the contribution that the company makes to the United Way. We are talking about an integrated whole.

Business is an integrated whole and I think the art of management is keeping the needs of all stakeholders equitably balanced. That is what good management is about. I would submit that well-managed companies recognize the importance of meeting the expectations of all stakeholders. They are proactive, not reactive. There is an irony here. The companies that will get a shareholder proposal will be the reactive ones; they are the ones that are given the right to exclude, and they are the ones most likely to compartmentalize these things.

We could go on to offer some of the benefits that I feel have grown from an extensive use of shareholder proposals, if some of you are sceptical, but I will conclude with the plea that you simply drop that exclusionary clause 137(5)(b).

Senator Tkachuk: As Senator Meighen pointed out earlier on another presentation, not all companies are large companies. There are small companies that are public and large companies that are public. When you say the words "shareholder" and "stakeholder" it seems you use them interchangeably throughout your presentation. Shareholders are owners and stakeholders are the people they affect. Moreover, it is rather subjective as to whom they affect or what responsibility they have as compared to what responsibility government has.

Perhaps you could clarify that, because you used the term "stakeholder" on a number of occasions when I thought it should be "shareholder." For example, let us take Wal-Mart or Zellers. Can you give me an example of what you mean when you talk about social, economic and all those issues? That confused me.

Mr. Davis: "Stakeholder" is a broader term. A shareholder is a stakeholder; employees are stakeholders; the communities in which you are operating are stakeholders, and so are the suppliers and employees. There is a wide range of stakeholders and, if you do not look after all the stakeholders, if you reward one excessively over another, it gets out of balance and you pay a price. That is a theory. I don't think that is a new or unusual thought. That has been around business schools for quite some time. Sometimes the word used is "public."

Senator Tkachuk: I am trying to focus on issues that you want to see brought to the table. I wish to have some examples. Let us take the example of Wal-Mart or Zellers. Would the issue be profitability of a corporation? Is that prohibited now? Or would it be the shareholder's particular interest in the company? They have pension funds and all these other things What kind of issues are we getting at exactly? Are they political issues? I believe they are.

Mr. Davis: That is what I am trying to say. The definition of "political" depends on whether you are trying to defend something.

Senator Tkachuk: Give me some examples of where that could be used, where it is not being used now.

Mr. Davis: I will not give you a Wal-Mart example. I am not very interested in Wal-Mart.

Senator Tkachuk: It will affect Wal-Mart because this will be universal legislation. Let us use Wal-Mart, Zellers or The Bay. We can use them and you can give me some examples.

Mr. Davis: Our approach would be to talk to Wal-Mart first before we bring a shareholder proposal, but let us assume that a group is interested in the environment and asked that Wal-Mart join the group of those companies who are publishing environmental reports. Wal-Mart says they are not interested in that, so as a shareholder we bring a proposal and say we would submit that this company should be producing environmental reports the same as many other corporations. Then you find out the will of the shareholders. We would have a sensible debate about that on the floor of the meeting. Wal-Mart has, I presume, some possible opportunities to be environmentally responsible. An environmental report would put many things on the table that perhaps they had not thought about at that point. Is that helpful?

Senator Tkachuk: It is in a way, if you were a Weyerhaeuser producing pulp or an oil company and you were dealing with environmental issues, but this opens it all up to political issues. How would that be relevant to Zellers?

Mr. Davis: They do a large amount of sourcing; therefore, they might want to institute procedures in terms of sourcing codes for environmentally friendly products. We could go into the human rights area, if you wish to talk about sourcing. What suppliers do they deal with? Many companies are looking seriously at how they impact the environment, and it is not just the obvious ones such as forest companies or oil companies. The banks have quite substantial environmental policies.

Senator Tkachuk: To get back to the chairman's point, if you were an owner of a public company, the reason there is liquidity is so that if you do not like what they do you can get out. You can ask other creatures in the community to enforce certain environmental rules or whatever. A corporation follows the same laws as any other human being. Thus, if they are being as environmentally responsible as I am or as Senator Fitzpatrick is, then they cannot break those laws.

You want them to do more. You think there should be a higher social responsibility on them just because they are a company rather than a fellow human being who is living in a house and working in a plumbing company, for example.

Mr. Davis: I think it is a big mistake to equate obeying the law to being socially responsible. We all obey the law. You start with obeying the law as a given. That is no great credit to anyone. Your responsibility as a corporate citizen is much greater than simply obeying the law. That starts as a given.

The question is whether the shareholder has the option of doing what used to be called the Bay Street walk, or the Wall Street walk. Yes, you always have the option of selling your shares. However, increasingly, with the growth in pension and public sector funds, it is no longer an easy matter to dump your shares. The Canadian market is not that broad. Even U.S. investors are finding that, with such substantial positions in companies, simply selling because there is one aspect of the corporation that bothers you is just not feasible. A corporation is a multi-faceted thing. There are many things you may like about a corporation. If you want to change one factor or have a discussion about that, then let us go through the discussion and put the issue on the table before we walk away from it.

We are engaged in the Talisman situation right now. The easy thing with Talisman would be to walk away before we have given them the chance to put a response on the table.

Fr. Soo: I have no quarrel with people selling their shares and going to another company. However, the law also gives owners this option of a shareholder proposal. It is an option of directing the general policy of the company or at least expressing your opinion.

Senator Tkachuk: The reason we elect board members is to govern for us.

Fr. Soo: That is another means. There is the one means of shareholder proposals: owners get to tell the company, "This is our will." There are other means, such as electing another set of directors, if we do not like the present set of directors. Another means is to sell our shares.

There is no clear and fast abyss between social concerns in its broadest concept and profitability. It might very well be that other companies that are more environmentally conscious are more competitive. If my company is not, perhaps I would like it to be, which would be better for both the environment and for my investment. It might well be that I do not want my company involved in the civil war in Sudan because it is risky and, at any moment, the oil fields could be blown up; then what would happen to my investment?

It is not just one or the other. As Mr. Davis says, it is an integral whole. Owners must look at that, and the law gives us a chance to do that, except for this one odd clause that muzzles us.

The Chairman: Thank you very much, gentlemen. We wish you good luck in your endeavours.

The committee adjourned.