Proceedings of the Standing Senate Committee on
Banking, Trade and Commerce
Issue 2 - Evidence - November 27, 2013
OTTAWA, Wednesday, November 27, 2013
The Standing Senate Committee on Banking, Trade and Commerce met this day at 4:15 p.m. to examine the subject matter of those elements contained in Divisions 2, 3, 9, and 13 of Part 3 of Bill C-4, A second Act to implement certain provisions of the budget tabled in the House of Commons on March 21, 2013, and other measures.
Senator Irving Gerstein (Chair) in the chair.
[English]
The Chair: Good afternoon. Today the committee is holding its second meeting as part of our study on the subject matter contained in Divisions 2, 3, 9 and 13 of Part 3 of Bill C-4, A second Act to implement certain provisions of the budget tabled in Parliament on March 21, 2013 and other measures.
Before introducing our witnesses for today, I would like to inform members of the committee that we will proceed in camera following the testimony today to discuss future business of the committee and our draft report.
At this meeting, we will hear from the Institute for Governance of Private and Public Organizations, and I am pleased to introduce Yvan Allaire, Executive Chair of the Board of Directors.
Mr. Allaire, perhaps you could start by telling us about yourself and the institute, for those of us who may not be familiar with your institute. The floor is yours, sir.
[Translation]
Yvan Allaire, Executive Chair of the Board of Directors, Institute of Governance for Private and Public Organizations: Thank you, Mr. Chair. The institute was established in 2005 with financial support from the Jarislowsky Foundation, the École des hautes études commerciales and Concordia University, as well as the Autorité des marchés financiers, the Caisse de dépôt et placements du Québec and other institutions.
We adopt positions on issues of public interest and have published policy papers on executive compensation, the status of women corporate directors and other topics of importance for private and public organizations.
I am here today to address very briefly clauses 160, 161, 162 and 163 of Division 2, Part 3, of the bill before you.
I must say, first of all, that I am confused. I am trying to understand. What problems are we trying to resolve, what situation are we trying to correct by these measures? Why create an opportunity for conflict to ensure that federally regulated institutions continue to be subject to rigorous governance and supervision. I admit I do not see the connection between those two aspects. How could any employees other than those of the Department of Finance contribute to the governance of banks and insurance companies? It would also be inappropriate for employees of the Department of Finance to sit on the boards of financial institutions, and, if they did so, they would be held to such a duty of restraint that they would be virtually useless to the board.
Would those employees appointed to the board of a bank or an insurance company be compensated in the same way as other independent board members? If not, why not, since those corporations would want them to be independent and they would not be representing the government on their boards. If so, does anyone realize that being invited to sit on the board of a major Canadian bank is in fact an invitation to become a multimillionaire? The five big banks pay annual compensation ranging between $110,000 and $185,000, and, since one may and even should take part of that amount in deferred share units, if you consult the circulars of the big banks, you will see that a board member holds units worth approximately $1 million after four years and worth several millions of dollars after 10 years. Does no one see how such a measure might encourage public servants to be indulgent with institutions that might potentially invite them to sit on their boards? This phenomenon was criticized in the United States, particularly in connection with the staff of regulatory agencies who subsequently went to work for institutions that they had been responsible for regulating. This deferred conflict of interest represents a major potential risk to the system that you are trying to circumvent and suppress. One rule of governance is that compensation should not make board members virtually dependent on management.
In conclusion, I do not understand what this measure seeks to accomplish and can see no governance benefit in it. However, it does open a Pandora's box of conflicts of interest and indulgent behaviour by public servants attracted by the prospect of a directorship.
Thank you.
Senator Massicotte: Thank you, Mr. Allaire. I would like to inform my colleagues here that Mr. Allaire has been involved in the business community of Montreal and Canada for several decades. He is very much involved in the growth of several of our Quebec businesses and is a peerless leader as a businessman and in governance in Quebec. Thank you for taking part in our debate.
Based on what I understand from your presentation, you do not believe this measure affords the benefit of flexibility that public servants are seeking. I assume you are confirming that this has not been requested by the industry as such. The response we have received to date is that, if we allowed these people to become directors of those companies, the personnel pool would increase and appeal to a broader range of interests. Do you see no benefit in that? Do you not see the necessity of allowing these people to be available to sit on boards?
Mr. Allaire: No, I really do not. That would be to underestimate the reservoir of Canadian competence and, increasingly, the competence of Canadian women who can be appointed to boards. There is a significant and very rich reservoir of competence and experience and I do not see how appointing public servants would improve it.
Furthermore, I foresee major problems in doing that with serving public officials. There is nothing preventing anyone from recruiting public servants once they have left, once they have retired. They wait a year, refrain from dealing with their departments and can then be invited. There is thus a significant pool of people from the public service or elsewhere who retire, who no longer have government duties and who are no longer government employees.
Senator Massicotte: People used to think there was a major benefit to be derived from merging government with private enterprise. In Japan, for example, they felt there was a benefit to be had in doing that, and, as we all know, there have been many conflicts and problems since then. Do you think we would be headed toward a similar situation?
Mr. Allaire: This is contrary to our system, particularly in Canada's financial sector. The Japanese system was structured around the MITI, which took a very interventionist approach to corporate financing. The banks financed businesses, and their people would be appointed to those businesses, to the boards of those businesses. It was a system completely different from ours and even completely different from Japan's present system. I believe this proposed measure is really an open door to conflict of interest and would create a difficult situation for public servants. This is not the subject here, but I am even opposed to having public servants sit on the boards of Crown corporations because it creates the same ambiguity around the roles of director or ministerial representative on those boards, but that is not the topic here.
I do not see how the governance of Canada's chartered banks and insurance companies would be improved by the potential addition of federal or provincial public servants.
Senator Maltais: Mr. Allaire, you head up a research institute. I imagine you have conducted a lot of research in order to come to the conclusion you have reached, that public servants ultimately have no business being on these boards. Is that not the case?
Mr. Allaire: That is the case, based on the general principles of governance, which are the principles of good governance. You can check on those principles anywhere, including with the Canadian Coalition for Good Governance, and you will see that the first principle is to avoid putting people in conflict of interest, and we should avoid those situations as much as possible.
Senator Maltais: You said in your brief that Canada has a good pool of senior public servants — because I believe we are talking about senior public servants here; we are definitely not talking about letter carriers, but rather about highly qualified senior public servants. Does your institute ever recruit qualified public servants to work in the private sector?
Mr. Allaire: They are of course free to accept a private sector position if they wish to do so, if they have retired from the public sector and are now available, since they do have relevant experience. It is the combination of being both a senior public servant and sitting on the board of a bank or an insurance that concerns me.
Senator Maltais: Do you agree with me that other institutes have come to a conclusion contrary to yours?
Mr. Allaire: I do not know of any, but you can refer me to them if you know of some.
Senator Maltais: I am asking you the question. If I knew the answer, I would not ask you the question, sir.
Mr. Allaire: Well, you said there were none. I do not know of any.
Senator Maltais: I am asking you the question. You are the only person in Canada who has come to this conclusion.
Mr. Allaire: I do not believe the question has been raised by anyone else. Have all the organizations concerned with governance in Canada been consulted on this measure? I do not think so, but you should ask each of them and perhaps invite them to come and testify.
Senator Maltais: Have you consulted the Ethics Commissioner?
Mr. Allaire: To do what, to say what?
Senator Maltais: If you conduct research and do not agree because you anticipate a conflict of interest, I imagine you would check with the Ethics Commissioner, it seems to me, when you see a potential conflict of interest somewhere. A serious institute should do that. Have you done that?
Mr. Allaire: We examined the Conflict of Interest Act.
Senator Maltais: I do not want to hear any rhetoric; that was a very simple question. Did you consult the Ethics Commissioner?
Mr. Allaire: The commissioner, no. The Ethics Commissioner's legislation is well known.
Senator Hervieux-Payette: Welcome, Mr. Allaire. Thank you for helping us examine this matter. I would recall, for those who did not attend our last meeting with the minister, that he was not very familiar with these measures and therefore asked an official to explain them to us. We did not get all the answers because all those concerned had been invited but had declined to attend our meetings. I am talking about the banks, insurance companies and cooperative groups.
To your knowledge, are there any OECD countries where public servants are involved in the financial affairs of private companies, in England or elsewhere in Europe, or in Australia, in the same way as in our country?
Mr. Allaire: What happens is that, where the government is a shareholder, as is often the case in France, boards include senior French government officials who represent the French government's interests in the business.
This is a phenomenon that we do not see in Great Britain or the United Kingdom and that is really limited to governments that take equity positions in businesses and thus name people to the boards as they are entitled to do as shareholders. However, businesses in which the government has no financial interest and which have public servants on their board are extremely rare.
Senator Hervieux-Payette: To your knowledge, does the Government of France have investments in banks and insurance companies in that country? I know about public utilities, but are there any financial institutions?
Mr. Allaire: In financial co-management in which banks are involved in France, yes.
Senator Hervieux-Payette: To my knowledge, the provincial governments were not consulted. Do you think it is possible to permit provincial public servants to sit on the boards of federally regulated banks? Can we pass this kind of legislation by legislating in respect of the employees of another political jurisdiction?
Mr. Allaire: Let us say that it would be surprising, and it would definitely be received with considerable reservation, if provincial public servants were invited and agreed to sit on the boards of banks and insurance companies. That would seem entirely abnormal.
Senator Hervieux-Payette: Corporate ethics has evolved, particularly at publicly traded companies in which the public invests. What organizations ensure that the governance of those businesses is independent? Is it the Toronto Stock Exchange? Is it the securities commission?
Mr. Allaire: In the Canadian system, corporations comply and explain instances of non-compliance. There are rules of governance, based on those of both the Toronto Stock Exchange and the securities commission. In their proxy circulars, businesses take each of the elements of governance and indicate whether they comply with what is being proposed. If they do not comply with those provisions, they must explain why not.
There is also the Canadian Coalition for Good Governance, the institute that represents the major Canadian pension funds, issues policies and ensures that the businesses in which they invest comply with the governance standards and principles the coalition proposes for business.
Businesses are thus under a lot of pressure to abide by governance rules, in addition to being subject to a public evaluation by the Globe and Mail, which ranks them every year based on good governance. They also have to have a proxy manager, ISS or another company, which evaluates their boards and governance every year and recommends that investors support or not support the members of the board and that they vote against board members if they have not implemented impeccable governance or have overpaid their CEOs. They evaluate executive compensation every year. There is a whole system of governance oversight that is quite rigorous. It is quite rigorously established now.
Senator Hervieux-Payette: In future, employees of the Department of Finance will be permitted, under another division, to stop reporting loans they take out at banks. I am trying to see to what extent those employees are being put at risk since the banks do business with that department very regularly and could be granted privileges.
That measure has just been removed. I am told it is an ethical matter and that, if they do it, they will be subject to ethical considerations, but no one will know whether any public servants are involved. Is that unusual? Do you think it was restrictive for federal government employees, those of the Department of Finance in particular, to be required to report loans they took out at institutions they had monitored?
Mr. Allaire: I thought it was quite wise to want to know the size of the loans chartered banks had granted to Department of Finance employees, just as that should also be known for the staff of the Office of the Superintendent of Financial Institutions. If employees of the Office of the Superintendent of Financial Institutions were getting bank loans, I assume information would have to be communicated to the office's management.
Senator Hervieux-Payette: My final comment will be for you and for my colleagues. We have a two-part ethics system at the federal level: we have the Ethics Commissioner, who governs all public service employees, and all government executives are subject to a code of ethics governed by the Treasury Board of Canada. These are not the same intervention mechanisms, and employees, whether departmental bookkeepers or deputy ministers, are not subject to the same ethical governance. They are not subject to the same mechanism.
Do you think the act administered by the Ethics Commissioner should be expanded now that it applies to senior civil servants, in view of the fact that this provision is in place?
Mr. Allaire: To the extent that Parliament wishes to adopt the proposed measures, I think it would be interesting — and I believe that is the gist of the question that was put to me a moment ago — to open the umbrella of the Ethics Commissioner's coverage as wide as possible.
Senator Ringuette: Mr. Allaire, thank you very much for being here and for your contribution. When Mary Dawson, the Ethics Commissioner, appeared before our committee on November 21, I asked her whether she had been consulted before the proposed changes were included in the omnibus budget bill, and she answered that she had not.
So you need not worry if we ask you whether you consulted the Ethics Commissioner. The present government did not do so before making these changes in an omnibus budget bill.
This bill not only permits senior public servants to sit on the boards of financial institutions; it also allows people who currently sit on the boards of federal Crown corporations to sit on boards of financial institutions. We could have someone who sits, for example, on the board of the Canada Mortgage and Housing Corporation, a financial institution that, under the proposed changes, would be governed by no federal conflict of interest rules.
How do we amend the bill to rule out these kinds of situations? We could cite the example of BDC, which is a quasi- financial institution at the federal level, or the Caisse agricole, which is also a Crown corporation that is essentially a quasi-financial institution. We would have members sitting on the boards of Crown corporations. The fact that these kinds of changes appear in an omnibus budget bill that gives us virtually no leverage to remove those aspects is completely absurd. Either the Minister of Finance was asked to grant these kinds of privileges where a senior public servant wanted to be part of a financial institution, or vice versa.
Earlier we talked about senior public servants, but there is also the whole issue of people who may sit on the boards of Crown corporations, as in the examples I cited to you.
Mr. Allaire: Yes, or agents. In actual fact, if a board member or officer of a Crown corporation sat on the board of a chartered bank, that person would constantly or very often be called upon to report his or her conflicts of interest in accordance with the rules specific to the governance of the chartered bank and in accordance with those specific to the Crown corporation on whose board that person sits and of which he or she is an officer every time the board addressed subjects involving either institution. That is why, when I was a member of the board of the Caisse de dépôt et placement du Québec, we avoided having people from other financial institutions because they all too often had to leave the meeting because we discussed issues in which they might be in conflict.
With regard to the recruiting institution, chartered banks are serious when they recruit board members. They are very much concerned about not having their recruits leave meetings because they are in conflict of interest. Consequently, they try to avoid that. You are right: we could have situations of that kind.
Senator Ringuette: It is all well and good to leave the room when a subject is discussed, but there are no restrictions on discussions that take place outside the room.
On November 21, when the elements of Bill C-4 were presented to us, Mr. Rudin, Assistant Deputy Minister, Financial Sector Policy Branch, Department of Finance, appeared together with 11 colleagues. So a dozen experts from the Financial Sector Policy Branch of the Department of Finance told us that Canada's financial sector was having problems finding experts to sit on their boards.
We already had 12 potential new board members sitting there. I have been in politics for 26 years and I have never seen a situation so absurd.
[English]
The Chair: Senator, could I ask you to ask a question so that we don't run out of your time?
[Translation]
Senator Ringuette: What do you think you should do when you are sitting opposite 12 Finance Department employees responsible for the financial sector who come and demand the opportunity to sit on the boards of our financial institutions?
Mr. Allaire: As I said in my speaking notes, it would be unseemly for Department of Finance officials to sit on the boards of chartered banks or insurance companies. That would put them in an untenable situation, and I have always thought that, if you think about public servants, you naturally think about public servants from other departments who might sit on the boards of chartered banks and would somewhat reduce the risk of conflict. However, it seems inappropriate and surprising even to consider the possibility that officials from the federal Department of Finance might sit on the boards of Canadian chartered banks.
Senator Massicotte: What do you think about the fact that government employees sit, as they do in France, on the boards of state-owned corporations and here on the boards of the Bank of Canada or BDC? Is it in Canada's interests to permit that? What is your take on that?
Mr. Allaire: That is a more complex question since the government is obviously the shareholder and it sometimes wishes to be represented directly on the board.
I am quite opposed to that. I was opposed to it when I was at the Caisse de dépôt, but, as a result of a revision in this area, Quebec's Deputy Minister of Finance now sits on the board of the Caisse de dépôt du Québec. I was opposed to it because it puts the deputy minister in an odd position. He is simultaneously a member of the board that must deliberate and vote on matters, and everyone views him as the representative of the minister who is not in the room, but he is there. It is a very ambiguous role for a person who is close to the minister and who sits on the board of a corporation. I believe it is unhealthy, but not everyone shares that view. I believe it is an unhealthy situation, but others have different thoughts on the matter. I can understand how that person can provide us with a direct link between the government and the board. It is a mistake. The minister should be informed by the board's chair about what the board is doing about governance issues and by the president of the corporation, the chief executive officer, about operating matters. I think that receiving advice from a deputy minister or a senior employee creates an ambiguous situation.
Senator Maltais: I also put questions to the Ethics Commissioner, who, first of all, acts as Ethics Commissioner to enforce ethics legislation. She is not the person who has to deal with the act and say what it should include. She is appointed to enforce the existing act. Unless I am mistaken, that is her job.
I asked her the question and I am putting it to you as well: Do you think there is a conflict of interest in having a senior employee of the Minister of Finance sit on the board of the Fonds de solidarité? And her answer was no. What do you think?
Mr. Allaire: I do not believe this is an ethical question, but rather a question of frequency. There is a potential conflict between that employee's role as a director of a corporation and his or her role as a senior employee in a department. If it is determined that that frequency is very low, it may be considered, but there is still the very real possibility that being appointed to those boards, which are monetarily very generous, will put that person at risk.
Senator Maltais: Is the compensation that these people receive set out in the bill? They do not work for nothing.
Mr. Allaire: I asked the question in my introduction. If they sit as independent members, why would they not be paid like other independent members? If they are not independent, then there is an issue.
Senator Maltais: These are senior officials. When they are employed by the government, they usually cannot be paid twice. That is something we see in the private sector, but rarely in the public sector.
Mr. Allaire: These people cannot be said to be there on behalf of the government because it is the government that would appoint them.
[English]
Senator Hervieux-Payette: We discussed the fact that maybe we could have a Department of Agriculture, Health and others.
[Translation]
What is important to know is that, when you are a senior official, you are generally subject to specific rules, and I wonder how we will manage the agenda of these people. How many board meetings are generally held? How many committees do those businesses have? There is generally a rule.
Mr. Allaire: Yes, we estimate that being a board member involves an average of 300 hours a year, and that is not enough when you are talking about a major bank where issues are very complex and documentation for each board meeting is complex and lengthy.
That is extremely demanding for someone who has a full-time job. It represents a considerable time commitment. If private sector CEOs want to accept an appointment to the board of a bank, they must request their board's permission, and boards are very reluctant to grant that kind of permission given the time that must be invested in the business, time that those individuals will not be able to devote to their own business. Boards grant permission only in cases where they believe the CEO will learn useful things for his or her own business by being a member of the board of another company.
Senator Hervieux-Payette: Is the Fonds de solidarité a taxable organization?
Mr. Allaire: It is an organization that is not taxable at the usual rate.
Senator Maltais: But deductible.
Senator Rivard: Senator Ringuette referred to the last meeting, which was attended by 12 potentially promising candidates for the boards of insurance companies or financial institutions. When you achieve that level of competence, you rise to the level of very senior employees. These are people with established abilities. They did not get there by chance. There may be political appointments from time to time, but if they are political, the competence goes with it. I am trying to understand whether taxpayers could view it as a conflict if a senior government employee were a member of a board of a bank or an insurance company.
Insurance companies and banks generally have 20 to 30 members on their boards. What could an assistant deputy minister or senior official do to create a situation in which the country's interests would be poorly served?
Mr. Allaire: Well, I do not know whether the country's interests would be poorly served, but there are two factors. First, there are talent, resources and relevant experience, but, in Quebec, most of the deputy ministers of finance who are there, who left the public service, are members of corporate boards, but were appointed after leaving their roles and duties as deputy ministers, assistant deputy ministers or other positions. That is normal.
They are part of the talent, of the pool of talent from which people can be recruited. Now with respect to the public interest, do we allow employees of those departments, who have sensitive roles to play in relation to those businesses, to sit on boards? If you say no, these will be people whose experience is far removed from the financial sector, since we are talking about the financial sector. I say perhaps, but then the value added is not that great. We are not at all talking about people whose experience and expertise would add considerable value. If they come from finance, then yes.
[English]
The Chair: Mr. Allaire, that concludes our questions. On behalf of the Senate Banking Committee, I would like to express our great appreciation for your appearance before us today, giving us a most informative presentation. Thank you very much.
You have a question?
Senator Ringuette: Yes.
The Chair: Please go ahead.
Senator Ringuette: I would like us to invite the Canadian Bankers Association. They're usually not shy about appearing before the Senate Banking Committee. I would like us to invite the Office of the Superintendent of Financial Institutions and the responsible person from the Financial Consumer Agency. In other words, many different government organizations are affected by the legislation and the changes we are looking at. I think they should appear in front of us to try to justify these changes.
The Chair: Thank you very much. Certainly that would be considered by steering.
I am pleased to advise you that the Canadian Bankers Association, who turned us down twice — and I must express our great appreciation to the deputy chair of the committee, Senator Hervieux-Payette, who was successful, literally as we have been sitting here, to get confirmation — will be able to appear before us by video conference tomorrow at 10:30.
As to others, steering will take a look at it, but the Canadian Bankers Association will be here and I thank you for that suggestion. Again, I would like to express my appreciation to the deputy chair for her great efforts.
With that, I would like to have a motion, please that we move in camera. Thank you; so moved.
(The committee continued in camera.)