Proceedings of the Standing Senate Committee on
Banking, Trade and Commerce
Issue 4 - Evidence of November 20, 2002
OTTAWA, Wednesday, November 20, 2002
The Standing Senate Committee on Banking, Trade and Commerce met this day at 4:45 p.m. to examine and report upon the present state of the domestic and international financial system (Canadian perspective to the Enron collapse).
Senator E. Leo Kolber (Chairman) in the Chair.
[English]
The Chairman: Good afternoon, ladies and gentlemen. We are here to examine and report upon the present state of the domestic and international financial system, which is perhaps the Canadian perspective of the Enron collapse.
We have as witnesses today, from the Association de protection des épargnants et investisseurs du Québec, Ms. Pellerin, Mr. Cournoyer, Mr. Belzile and Ms. Didier.
Welcome.
[Translation]
Ms. Jocelyne Pellerin, President, Association de protection des épargnants et investisseurs du Québec: The Association de protection des épargnants et investisseurs du Québec (APÉIQ) is pleased to respond to the invitation from the Senate Committee on Banking, Trade and Commerce to express its views on the measures that should be taken to prevent financial scandals like those at Enron from happening here.
Founded in 1995 by Yves Michaud, the Association de protection des épargnants et investisseurs du Québec now has more than 1,300 members. Its fundamental mission is to defend the rights and promote the interests of Quebec investors and shareholders, and indeed those of widely held companies.
To achieve its goals, the APÉIQ had to take legal action so that shareholders would have the right to submit proposals at general meetings of publicly-listed companies. The association also initiated group actions against companies such as Cinar and Nortel, which either stole money from or misled shareholders. It files complaints on a regular basis with regulatory authorities.
The APÉIQ keeps its members informed, ensures that the general public is made aware of problems with corporate governance and maintains a Web site that provides a wealth of information on issues of corporate governance and the defence of shareholders' rights. It is the only French site promoting shareholders' rights in North America.
In our brief to the Senate committee, we set out the main concerns of investors about corporate governance.
Canada has known its share of scandals over the years and we cannot claim that our situation here is more enviable than the one in the United States. The Canadian Council of Chief Executives states that it is up to the private sector to resolve the current crisis. We believe that the situation has deteriorated so far that we are seeing the end of the legitimacy of self-regulation. Governments cannot refuse to take action any longer, while investors lose their meager savings.
A number of steps can be taken to improve corporate governance. We will outline several for the committee's benefit, specifically a code of ethics, the quality of boards of directors and transparency rules.
It is not simply enough for a company to adopt a code of business ethics if no mechanism is implemented to promote staff buy-in to those ethical values, and if no monitoring measures are set up or sanctions imposed on those who fail to abide by the code.
In 2003, the APÉIQ is planning to submit a proposal to certain shareholders calling for the establishment of an ethics committee whose mandate will be to take all the steps necessary to promote a business culture based on the highest ethical standards.
The quality of boards of directors has been criticized because of the latest scandals. We must take a serious look at shareholders' expectations to improve the way boards of directors are run.
Our most recent proposal to increase the representativeness of boards of directors involved cumulative voting. This provision in the CBCA and the Bank Act is designed to enable minority shareholders to concentrate their vote on a particular candidate.
All the banks recommended that their shareholders vote against this proposal. This is a clear illustration of why, despite the legal provisions, it is difficult to move the shareholders' cause forward.
One much talked about subject is the independence of directors. The independence of directors is a problem in itself, but we are also concerned about the independence of all committees that report to the board of directors: the audit committee, the compensation committee and the ethics committee.
Separating the positions of chairman and CEO is a particularly sensitive issue in the business world, as Guylaine Saucier observed to the committee on corporate governance that she chaired last year. We feel that executives' sensibilities cannot and must not be spared when better rules of corporate governance must be adopted for the greater well-being of investors.
In 1999, the APÉIQ presented a proposal to the banks that aims to separate the positions of chairman and CEO. At present, the Royal Bank, the Banque Laurentienne and the National Bank have implemented this principle. In order to enhance corporate governance, the APÉIQ believes that directors and committees reporting to the boards of directors must be made more accountable. Our package of proposals for 2003 includes a proposal that would make it mandatory for committee chairs to present a report to the annual shareholder assemblies. Their abuses and excesses have led us to this conclusion.
The rules of transparency and disclosure are the basis of securities legislation. The subjects of greatest concern to us are insider trading, fees paid to auditors and the compensation of senior executives.
We feel that information about the time frames for revealing capital transactions by insiders is crucial and must be passed on immediately to investors. We propose to compel senior corporate executives to reveal their plans to sell stock in their own company on the stock market not after, but rather before the transaction. We believe a minimum ten-day period is essential.
As proposed by the APÉIQ, the fees paid to outside auditors are now disclosed by all banks, except for the Scotia Bank. As a result of this APÉIQ suggestion, it became evident that the practice of paying much larger fees for consultant work than for outside audits was routine and widespread, hindering auditor independence in the process.
Finally, corporate transparency also requires the disclosure of any form and any source of compensation given to corporate directors. A corollary to this idea involves personal loans. The APÉIQ intends to put forward a new proposal in 2003 to prohibit personal loans to a company's senior executives. Executive compensation has skyrocketed over the past few years.
The compensation strategies of North American companies which, since the mid-1990s, have evolved toward the increased use of stock options in executives' compensation packages, are now being called into question. In the opinion of the APÉIQ, it is imperative to find alternatives to this form of compensation, such as shares that must be held for a minimum period in order to ensure that the interests of executives tally with those of shareholders. That is why the APÉIQ will be presenting a proposal to certain companies in 2003 aimed at putting an end to stock options for senior executives and directors.
Recent problems have less to do with accountancy than with professional accountants. It is the lax approach and dishonesty of accountants more than shortcomings in the standards themselves which have led to some of the recent scandals. It would be erroneous to believe that the problems could be resolved simply by updating accounting standards. This is why the APÉIQ wants the recently established Canadian accountability council to tackle the job quickly and to monitor the auditors of publicly owned companies closely, authoritatively and scrupulously.
The legislation passed by the US last summer, known as the Sarbanes-Oxley Act, will apply to several Canadian companies whose shares are traded on the floor of American stock markets. It is clear that the largest companies on the Toronto Stock Exchange will be subject to more stringent regulations. It is expected that these companies will comply with the same administrative requirements on the Canadian market.
For example, we believe in increased accountability for corporate directors. We are about to table a proposal at shareholders' assemblies, asking that the CEO and chief financial officer of an incorporated company personally certify that the information published in the periodic reports containing financial statements presents fairly in all regards the company's actions, financial situation and operations.
The Canada Business Corporations Act was revised last year. Several provisions in the new legislation are extremely restrictive for shareholders, such as the requirements to hold $2,000 of only one security in order to be entitled to submit a shareholder proposal. This requirement has its limits. Consider the case of Nortel. When your security is falling on the stock exchange, you would have to continue sinking your savings into it to preserve your right to submit a shareholder proposal.
We also want to underline the problem associated with restricted shares. This structure is not in the interests of investors who are in fact shareholders but have few or no voting rights. The rules of corporate democracy say that a share comes with the right to vote. Legislation should provide a time frame for the privilege of holding multiple vote shares.
There is a large section of the financial market which is still not covered by transparency rules, and that is the mutual funds sector. Industry stakeholders should be compelled to demonstrate transparency in their everyday business dealings.
On a closing note, I would like to focus on fiduciary duties. There is more and more talk of good governance so as to urge pension fund managers, institutional investors and fund managers to say publicly when they vote on shareholders' proposals and how. Certain countries have legislated or plan to do so in order to compel managers of these types of funds to make their decisions known during the votes since their principals cannot do so. Furthermore, the principals should have a power of initiative that would enable them to give direction to fund managers.
[English]
Senator Kelleher: Thank you for your presentation and welcome to the committee. In your brief you mention that just enforcing the existing legislation would clean up a large part of the financial markets.
We have had other people tell us that in some respects, there is nothing wrong with some of the legislation that is on the books right now, but it appears that it is not being enforced very well. I gather you must be of the same opinion.
What steps should be taken to more rigorously enforce the legislation that is presently on the books?
[Translation]
Ms. Rachel Didier, Corporate Secretary, APÉIQ: In our brief, we refer to the provision respecting the presentation of proposals by shareholders.
Pursuant to this provision, shareholders would be required to hold on to a security valued at $2,000 for a minimum of six months. The problem this presents (and I use the example of Nortel) is that even if you have owned Nortel shares for at least six months, at the time you present your proposals, the value of the stock may have fallen considerably, in which case Nortel refused to present your proposal in 2002 because your security was valued at less than $2,000.
[English]
Senator Kelleher: I do not think that is what I asked at all.
[Translation]
Mr. Réjean Belzile, Member of the Board of Directors, APÉIQ: Application of the legislation comes under provincial jurisdiction and often, falls to the Securities Commission. Generally speaking, securities commissions lack the resources to conduct inquiries and to ensure that offenders are reprimanded and even fined.
Improvements to the legislation are needed and Ms. Pellerin can provide you with some examples. One problem remains the lack of financial resources which extends even to the RCMP. Fraud cases require substantial resources and skills, something that the regulatory agencies may not necessarily have.
Monitoring agencies may lack the resources and the tenacity needed to prosecute offenders. Right now, this is a fundamental problem. Ms. Pellerin can provide examples of how the existing legislation could be made more stringent in order to eliminate certain problems.
Ms. Pellerin: In short, you are talking about the overall legislation, not only about the provisions respecting shareholder assemblies. Correct?
[English]
Senator Kelleher: I am interested in the fact that there has been a significant amount of criticism of the fact that there is legislation on the books that would prevent a lot of fraud, but it is not being enforced or used, or the penalties are not very severe. This is what you say in your brief. You state that you would also ``describe the pertinence of handing down penal sentences in case of fraud.'' You say that you would like to mention that just enforcing the existing legislation would clean up a large part of the financial markets.
This is what I am asking about.
Mr. Belzile: I answered.
Senator Kelleher: Your answer was fine. You referred yourself to Ms. Pellerin, and I did not think she was answering again.
[Translation]
Mr. Belzile: We are dealing with two different problems. First, in so far as applying the existing legislation is concerned, I indicated that many regulatory agencies lack the necessary resources. There may also be a lack of will or tenacity on the part of the agencies responsible for enforcement.
Secondly, some improvements to the legislation are warranted. We are not saying that the existing regulations are complete and all encompassing. Several changes could be made to improve the way in which financial statements are personally certified by business directors. We believe that this is one of the association's proposals.
[English]
Senator Kelleher: I have one further question. I did not do well on that first one.
The Sarbanes-Oxley legislation in the United States was mentioned in the brief. An argument has developed over that legislation. How do you feel about the principles-based approach versus the rules-based approach of Sarbanes- Oxley? What side have you come down on in that argument?
[Translation]
Mr. Belzile: Personally, I believe that the regulatory process should be based on principles, not on very specific rules. A system that tends to be more rules-based is easier to circumvent. That is why I believe the legislation should apply to general principles. Admittedly, this is my more of a personal opinion than it is the position of the association.
[English]
Senator Kelleher: Does the association have a position on this?
[Translation]
Ms. Pellerin: Even if the regulatory process is based on very specific rules, human nature being what it is, someone will always find a way to circumvent the rules. The association is in favour of a principles-based process because when professionals abide by principles that have been adopted, the public benefits from greater protection.
[English]
Senator Kroft: I would also like to refer to your comments on the Sarbanes-Oxley Act. This is obviously an important point of reference for us in our study.
You make a fairly general statement that what is good for American investors will be good for Canadian investors. Is that how you characterize Sarbanes-Oxley; that if it is good for them it is good for us? Do you have any concerns about the application of any portions of that legislation in the Canadian context?
[Translation]
Ms. Pellerin: With respect to the Sarbanes-Oxley Act, the Association favours the certification of financial statements. As we noted in our brief, we will be submitting proposals to shareholder assemblies asking that company chairmen and chiefs of finance be compelled to certify the company's financial statements. Obviously, we agree that sanctions should be imposed for failure to comply with this requirement. Sanctions could be in the form of fines that violators would be required to pay or even prison terms.
Companies have no choice but to move in this direction and the association will certainly do everything it deems necessary to ensure that all levels of government move in this direction as well. Quebec Bill 107 specifically calls for more stringent penalties and we are very pleased with the initiatives taken by the Government of Quebec.
Another issue is the independence of auditors.
[English]
Senator Kroft: I would like to ask you another question about Sarbanes-Oxley, because you seem to have endorsed the legislation generally. There is some concern that the provisions of Sarbanes-Oxley would be rather onerous for smaller companies. The so-called, does one-size-fit-all argument; what are your views on that?
[Translation]
Mr. Belzile: Undoubtedly, applying the U.S. legislation part and parcel to smaller companies would be a very costly endeavour. This argument is often put forward by Canada. Smal companies could, in my view, be opened up. We have, however, made representations to the majority of companies. That is our job. In the past five years, we have submitted a total of 820 proposals, most coming in the form of proposals submitted at shareholder assemblies.
The U.S. legialtion provides for considerably harsher penalties for violators. Companies, whether small or large, should be subject to the legislation and held to the same principles of honesty. We also agree that Canadian officials should increase the amount of fines imposed on companies found to be in contravention of the law.
We hear a great deal about additional costs to businesses that are being asked to improve their internal management system and to personally certify their financial statements. However, this should be considered money well spent, in light of the scandals in the United States.
[English]
Senator Kroft: What about having outside directors for smaller companies? There are a number of rules that govern the requirement for outside directors.
[Translation]
Mr. Belzile: In the case of a widely held corporation, some shareholders are outside the inner circle of owners and it is normal to have independent directors. The company can operate just as, if not more, efficiently, with the help of independent, outside administrators, even if it is a smaller company. If all companies adopt this approach, I cannot see that it would necessarily entail any exorbitant costs.
Senator Angus: Welcome to the committee. We send our regards to Mr. Michaud.
You note in your brief that you are the only shareholder protection association in Quebec and in Canada, and that you are supported mainly by contributions from your members. You also state that ``we must look hither and thither to carry on our activities, whereas we should be given sufficient resources to investigate and defend often complex matters.''
Where do your funds come from, aside from members' dues? In your view, should you be receiving federal or provincial government funding?
Ms. Pellerin: Yes, I certainly feel that the federal government, whether Industry Canada or some other department, could be assisting shareholder associations. We are not alone.
Senator Angus: You stated that you were the only association of this kind. Are you saying that there are others?
Ms. Pellerin: Others that act as we do? We are truly the only association that submit proposals at shareholder assemblies. The same is true of group actions. We initiated a group action against Cinar and Nortel. We also file complaints with the Securities Commission over insider trading transactions. We are truly the only association to be involved in this field.
Senator Angus: Have you requested any funding?
Mr. Belzile: I have been with the association since its inception and I have made some requests of the consumer affairs department in conjunction with certain programs. We have not received any subsidies of any kind. We were told that there was no extra funds available to allocate to new causes.
Senator Angus: You were told there was no federal funding available?
Mr. Belzile: Yes, that is what we were told at the time.
Senator Angus: Did you ask the Quebec government for financial assistance?
Mr. Belzile: Yes, we did.
Senator Angus: Mr. Landry loves topics such as this.
Mr. Belzile: We provide a public service of sorts because our sole mission is to work for shareholders. Since its inception, the association has had problems finding a permanent source of funding that would enable it to undertake more in depth studies. Our staff consists of a single part-time administrative assistant. All of the people seated at this table are volunteers. The association has no permanent staff, save for this administrative assistant.
The association has promoted a number of causes since its establishment in 1995. In the area of corporate governance, we have shown a certain amount of leadership and unfortunately, despite the presence of Mr. Michaud, who as acted as a spokesperson and fundraiser, we continue to experience chronic funding problems.
Senator Angus: Frequent witnesses before this committee include organizations like Democracy Watch. Are you familiar with this organization?
Mr. Belzile: Yes.
Senator Angus: Do you think that organization should also receive some funding?
Ms. Pellerin: I would prefer to focus on our association's needs.
Mr. Belzile: The choice is theirs to make.
Mr. Cournoyer: Senator Angus, I think we can all agree that in recent years, we have witnessed an astounding increase in the authority of business directors, at the expense of small shareholders. Mr. Jarislowski told you that small shareholders were often overlooked. He probably knows what he is talking about.
Senator Angus: He represents small shareholders.
Mr. Cournoyer: Yes, and I wish I had enough money for him to become interested in my investment portfolio. Under the circumstances, it is important for governments to restore some balance to this equation and to help small shareholders champion their interests and views in the management of large corporations. Today, even institutional investors have become quite passive. Imagine how an individual investor must feel. Rarely does anyone listen to his views, he is poorly represented on boards of directors and corporate administrators always hold enough votes to ram their proposals through. Last year, I attended the annual meeting of CIBC shareholders and when the time came to appoint an auditor, the Chairman said: I do not know if we even need to bother to vote, those seated up here on the stage hold 96 per cent of the votes. Bravo for democracy!
Under the circumstances, aside from governments, I do not know who might be able to help us restore some sense of balance.
Senator Angus: I understand and I have a great deal of sympathy for minority shareholders. Some senators even lost money that they had invested in Cinar, Nortel and all of the other companies you mentioned. I have several questions concerning group or class action, particularly in the Cinar case which I believe was settled yesterday.
I read in this morning's newspapers that a settlement had been ordered in the Cinar case. In the same newspaper, I read some articles about small shareholders who were not named in the group action. Some shareholders will receive a large settlement, while others will receive nothing at all. How is that fair?
Ms. Pellerin: That is not entirely correct. As far as Cinar is concerned, yesterday, a New York judge ruled in a preliminary trial phase in favour of a proposed settlement between Cinar and shareholder representatives. The joint American-Canadian class action suit covers all shareholders.
Senator Angus: Even those shareholders not specifically named in the suit?
Ms. Pellerin: Yes, it covers all shareholders.
Senator Angus: How does it all work?
Ms. Pellerin: Last November 5, Cinar shareholders opposed to the terms of the settlement could go to court, ask to be excluded and indicate that they wished to make representations concerning the settlement and specific terms with which they disagreed.
Senator Angus: And how were they made aware of the settlement provisions?
Ms. Pellerin: A notice was printed in the newspapers. The settlement had to be approved by the courts, since it involved both the United States and Canada. Two courts, one American and one Canadian, ruled in favour of the terms and a public, legal notice containing details of the proposed settlement was subsequently printed in the newspapers. All of the information was available on our attorneys' Web site. We also posted the information on the APÉIQ' Web site, for information purposes.
The APÉIQ took steps to ensure that a claims administrator was available in Montreal to take calls from all Canadians, whether Quebecers or Ontarians.
Senator Angus: Even those not formally named in the suit?
Ms. Pellerin: Yes, anyone could call for information. One person was responsible for fielding all requests and I was told that many such requests came in every day.
Senator Angus: And this is one of the services that your association provides to small shareholders?
Ms. Pellerin: Yes. Imagine what would happen if there was no group action. Initiating legal proceedings is a costly, time consuming and highly complex process. However, an association such as ours can launch a class action suit and make it easier to defend and represent shareholders from unscrupulous business directors.
Senator Angus: Thank you very much for that detailed response. Since the situation is not yet perfect, would you at least concede that some progress has been made in the past five, or even ten years, in the field of corporate governance?
Ms. Belzile: Yes, that is true for some large corporations.
Senator Angus: Particularly in Canada?
Mr. Belzile: Since the release of the Day report in 1995, we have witnessed a growing awareness of the situation and some improvements. However, much remains to be accomplished. I think we stand to progress more quickly because of the recent spate of scandals. We have been doing everything that is being proposed in the documents since 1997 and 1998. We were told that our efforts were pointless. For instance, we called for the position of CEO and chairman of the board of directors to be separate. We were told that we were tilting at windmills but now, our critics have changed their tune and business directors pretty much agree with our position. People were relatively slow to change their mind set, but in light of all the scandals, the pace of change has quickened over the past six months or so. A new awareness has dawned and in that respect, I am optimistic that the situation will improve.
Senator Angus: Perhaps you wasted some time focusing on the big banks instead of on corporations like Cinar where two or three married couples were the principal shareholders and just like that, small shareholders were left with nothing. However, banks are bigger and quite frankly, bank directors have a fair amount of experience.
Mr. Belzile: Let me quickly review the events that transpired. It is true that in terms of poor corporate governance, banks are not at the top of the list. That spot would be held by companies lacking transparency and having highly complex operations. In the case of financial institutions, sound management is important. Our choice was also dictated by our lack of resources. In order to present proposals to various companies, you need to be a shareholder and hence, to have the money to purchase shares. We cannot afford to buy shares in 100 different companies. We need people to defend these proposals.
Senator Angus: And subsidies as well.
Mr. Belzile: There are only six of us and we are all volunteers. If we had some staff, things would go more smoothly. If we had money to purchase shares and people to represent us, our job would be easier. For example, the cost of traveling to Vancouver is $2,500, or 10 per cent of our overall budget. When you make this kind of criticism, all we can say in our defence is this: Give us the resources and we will focus on a larger number of companies. I also want to emphasize that in addition to making proposals to banks, we also made five separate proposals last year to a number of large corporations. Our efforts are limited because our resources are limited. However, if we had the wherewithal to go forward, we could focus on more, and maybe even on all, corporations.
Ms. Pellerin: That explains in part the fact that our actions are limited to submitting proposals to shareholder assemblies. Enhancing the act's provisions would be greatly beneficial in terms of increasing the protection afforded to shareholders and investors. If we have to visit every single shareholder assembly to a get a single proposal adopted, we will never be done with it. All visiting these assemblies does is give us an opportunity to explain to shareholders the problems associate with tax shelters in banks.
Senator Angus: In your brief, you underscore the fact that large Canadian corporations are now subject to the Sarbanes-Oxley Act. We have problems here in Canada with the TSE Index and we would also like to see the proposals tabled to shareholder assemblies apply to companies other than those subject to this legislation.
Mr. Belzile: So would we, believe me.
[English]
Senator Oliver: I am interested in multiple voting shares. I have your presentation in English, and I think something has been lost in the translation. I do not understand it.
I know that with multiple voting shares you can have 4 per cent or 5 per cent of the shares, but have 100 per cent voting control. You give examples of that in your brief — Subway, Teck Magna and others. You next say:
Legislation should provide a timeframe for the privilege of holding multiple vote shares.
I do not understand what that means.
You then say:
A five-year period could, for example, be granted to entrepreneurs to allow for company start-ups.
I do not understand either sentence. Could you please explain what that means? What kind of legislation would you want; would it be federal legislation; and what would it say?
[Translation]
Mr. Belzile: That could be achieved by amending the Canada Business Corporations Act. Companies not in a start up phase could maintain the multiple vote share system for a period of five years. This process is often used because it involves company founders. The legislation could then make provision for revising a company's by-laws to do away with the aberration that is multiple vote shares.
[English]
Senator Oliver: If you are a family corporation, the family has voting control and has had for 50 years, why, at the end of five years, should you be forced by legislation to give up control?
[Translation]
Mr. Belzile: This proposal concerns publicly traded companies. Even if financing is being sought by family corporations, shareholders should still have the same rights.
Senator Angus: They should have a choice.
Mr. Belzile: Shareholders feel that they are entitled to the same rights, regardless of the size or type of corporation involved. Obviously, if one family continues to own 60 per cent of the company's shares even after taking the company public, it is normal for that family to maintain control and to still hold 60 per cent of all voting rights.
The aberration, as we see it, is when a family corporation holds 80 per cent of all voting rights, even though it owns only 10 per cent of the company's stock after taking the company public through multiple share issues.
[English]
Senator Oliver: Why would we want to do it retroactively? Why would we not grandfather anyone who has these multiple voting shares now and perhaps pass a law to change it in the future? Why would you ever want to make it retroactive?
[Translation]
Mr. Belzile: We are not asking that it be retroactive.
[English]
Senator Oliver: Even five years is not ample time for a family corporation.
[Translation]
Mr. Belzile: The legislation could stipulate that initially, new corporations could adopt a multiple vote share system, but that after five years, if they go public with a share issue, the corporation's by-laws would have to be revised to eliminate this practice.
[English]
Senator Oliver: You would agree with grandfathering any existing company with multiple voting shares? You are not talking about passing legislation to change or alter that?
[Translation]
Mr. Belzile: At the very least, in the case of new corporations that go public, a specific time frame should be in place for doing away with multiple vote shares.
[English]
Senator David Tkachuk (Deputy Chairman) in the Chair.
The Deputy Chairman: As there are no other questions, we thank you very much for your appearance today.
The committee adjourned.