THE STANDING SENATE COMMITTEE ON BANKING, TRADE AND COMMERCE
OTTAWA, Wednesday, December 13, 2017
The Standing Senate Committee on Banking, Trade and Commerce, to which was referred Bill C-25, An Act to amend the Canada Business Corporations Act, the Canada Cooperatives Act, the Canada Not-for-profit Corporations Act, and the Competition Act, met this day at 4:15 p.m. to give clause-by-clause consideration to the bill.
Senator Carolyn Stewart Olsen (Deputy Chair) in the chair.
The Deputy Chair: Good afternoon and welcome, colleagues, invited guests and members of the general public who are following today’s proceedings of the Standing Senate Committee on Banking, Trade and Commerce, either here in the room or listening via the Web. My name is Carolyn Stewart Olsen. I’m deputy chair of the committee, filling in for Senator Black, the chair, who is regrettably not able to be here today.
We are continuing our examination of Bill C-25, An Act to amend the Canada Business Corporations Act, the Canada Cooperatives Act, the Canada Not-for-profit Corporations Act, and the Competition Act. The bill was referred to our committee on November 23, 2017. As honourable senators know, we’ve held four meetings and heard from a variety of witnesses on this proposed legislation. In addition, we possess written submissions.
I’m pleased to welcome in the first part of our meeting today, from the Ontario Teachers Pension Plan Board, Paul Schneider, Head of Corporate Governance, Public Equities.
Thank you, Mr. Schneider, for being here today. Please begin with your opening remarks, after which we will go to a question-and-answer session.
Paul Schneider, Head of Corporate Governance, Public Equities, Ontario Teachers' Pension Plan Board: Thank you, Madam Chair and committee members, for the opportunity to speak to you about Ontario Teachers’ support for the passage of Bill C-25. My comments will be limited to Part 1 and more specifically to amendments to the CBCA that address the election of directors and diversity.
Ontario Teachers’ is Canada’s largest single-profession pension plan, managing over $180 billion of assets that provide retirement security for 316,000 active and retired teachers in the province of Ontario. We have a long history of promoting good corporate governance and believe that good governance is good business. We are a founding member of the Canadian Coalition of Good Governance, and we are active in a number of formal and informal global organizations and networks across Asia, Europe and the United States.
Effective governance is about getting the right people around the board table and holding those individuals to account. That is why we fully support the amendment to the CBCA that requires director elections on a for/against basis.
Typically, public company shareholders have small ownership stakes, usually less than 1 per cent, yet the investment can be in the tens or even hundreds of millions of dollars. When governance fails, our investment is impacted, and this can affect the pension promise we have made to our members.
The vote is a tool we have to hold directors accountable but with limited effect, as our options are to support -- vote for -- or not vote -- withhold. It is difficult to reconcile the fact that we provide capital to companies yet have limited ability to hold directors accountable for how that capital is allocated.
According to the 2017 OECD Corporate Governance Factbook, Canada and the United States are the only two major markets where shareholders cannot vote against directors. For years, we have advocated a for/against vote in director elections. Some will argue that the current TSX rule requiring majority vote policy is sufficient. We disagree, because a loophole exists in majority vote policies where a board is not compelled to accept the director resignation, a situation that did occur a few years ago. The consequence of being voted off the board with no recourse may cause a board or director to think twice about how they exercise their fiduciary duty. We do not dispute that the vast majority of directors are qualified, competent individuals performing an important role; however, as providers of capital, it is only reasonable that we help decide who safeguards that capital.
I would also like to express our support for the disclosure of the existence and substance of a diversity policy. Diversity is an important issue that boards need to address. It is clear that board effectiveness improves when there are different views around the boardroom. Diversity isn’t limited to gender, but focusing on gender diversity is an appropriate starting point to encourage issuers to develop a broad and deep selection process that embraces and enhances all forms of diversity.
Are Canadian boards diverse enough? No. Are there diversity policies as robust as we would like to see? No. The solution, we believe, lies in cultural change rather than quotas. In the short run, quotas can indeed lead to greater diversity, but we fear that while establishing a quota incents boards to hit a specific number, it may hinder any progress over and above that target.
To be truly impactful, boards must take ownership of diversity. With a quota, they can abdicate ownership to the government. We believe that private ordering has a greater chance of creating a cultural change that will produce the positive and lasting impact that is desired.
Diversity should be achieved because it is good, sound business, not because it is a rule. This is the lengthier process, but it has greater long-term benefits and a greater likelihood of achieving its goal: to no longer have a diversity issue to talk about.
It is our job as investors to work with our investee companies to help them understand the importance of diversity and provide assistance where we can. This is something we are currently doing, and we will continue to engage with companies on this issue.
In closing, I would once again like to thank the chair and committee members for inviting me here today and reiterate our support for the passage of Bill C-25.
I hope you found my comments useful.
The Deputy Chair: Thank you, Mr. Schneider. We will now go to questions and answers. I will start with the sponsor of the bill, Senator Wetston.
Senator Wetston: Thank you for coming today. I have a couple of quick questions.
When you talked about roaming the globe with respect to majority voting, if I can put it that way, I think you indicated that the U.S. and Canada are the only two countries that don’t have a for/against today.
Mr. Schneider: The only major markets; there are some smaller markets.
Senator Wetston: I don’t disagree with you whatsoever; my research suggests the same, which is one the reasons for this bill, obviously. But I thought that in the U.S., they do often vote for and against by way of corporate bylaws as opposed to a corporate restriction on doing that. Can you clarify that? I may be wrong.
Mr. Schneider: In my experience, I have not come across that regularly. It is definitely possible to have a bylaw enacted. I guess my issue with that would be that you are relying on the board to enact something on their own.
Senator Wetston: I’m not suggesting it’s the right way to go. I was wondering in order to clarify that.
Mr. Schneider: I haven’t run across a lot of that.
Senator Wetston: Recently I read with great interest the fact that proxy advisory firms — and I’m not sure whether you rely on or use any of the proxy advisory firms — ISS and Glass Lewis have recently come up with policies specifically oriented toward gender diversity. Do you have familiarity with that? If so, can you discuss that?
Mr. Schneider: For full disclosure, we are 80 per cent owners of Glass Lewis.
Senator Wetston: That's correct. I just remembered that.
Mr. Schneider: They have taken a more strident approach to gender diversity. I’m not exactly 100 per cent sure of their voting recommendations, because while we use their services for their research, we vote in our own way, so I don’t follow their policies that closely. However, if I recollect correctly, they are become being more strident in their diversity approach. I believe if you don’t have any women on the board, they will make a vote recommendation.
I’m not sure they’ve gone to the extent of the policy yet. Glass Lewis may have. They’ve just released their 2018 policy, so unfortunately I’m not able to give you a lot of background on that.
Senator Wetston: That’s fine.
The government has decided to address the issue of diversity more broadly than gender. First, I would like to ask you what your views of that might be.
Supplementary to that, they have decided on the “comply or explain” model, which is the model adopted by most CSA regulators, but not all — and I emphasize not all. That model itself has produced some results. There has been some suggestion, of course, that those results are not entirely positive. I think there are some positive results, but they may not be moving as quickly as some would desire.
Could you comment on both matters?
Mr. Schneider: On the broader issue of diversity, we fully support diversity in its broader sense. But we’re of the view, as I mentioned in my remarks, that we really need a cultural change. We need boards, when they recruit, to not look around the table and say, “Do you know anyone?” and rely on the network internally.
One thing we have been promoting for a number of years is a broad and deep selection process. Our thinking is that it’s an iterative process. If we focus in on gender first, which is a fairly obvious diversity move — half the population are female, so it’s a good place to start for us, which is not to say the other ones are not important. I’m not saying that.
If you get boards thinking about doing a broad and deep search, we are hoping it will change the whole way they do things. When they do, it will uncover other diversities as they are doing this, and they will get used to having a really robust process. That’s our hope. I hope we are correct in that.
When we engage with companies, we always ask about their selection process, recruitment process, as well as evaluation process, because those three are interconnected for us. We are really pushing boards to tell us how broader and deeper they are going in their selection process.
Also related to “comply or explain,” I’m hesitant about quotas because I think, as I mentioned in my remarks, if you give someone a number, they’re going to hit that number, but will they stop?
I think diversity will be a process. Personally, I would like to get to a place where it is not gender diversity but gender equality. I think that’s what we should be aiming for. If you say X is the number, people may stop at that because that’s the rule. I’m hesitant about that.
That being said, if boards are not reacting to “comply or explain,” you review it in a few years and say, “Well, we gave you a chance.” That seems to be reasonable to me.
Senator Wetston: Thank you.
Senator Ringuette: I have two short questions to put your statement into context for me.
First, $180.5 billion of assets is quite a lot. Approximately how much of those assets would be within the federal corporation that this bill deals with?
Mr. Schneider: I really can’t answer that with any accuracy because I would have to look at which companies are CBCA registered, which ones are OBCA and which ones are Alberta.
Senator Ringuette: How much of those assets are invested in Canada?
Mr. Schneider: It would say roughly 5 per cent of those assets.
Senator Ringuette: Will the changes to the act enhance your investment in Canadian firms?
Mr. Schneider: It’s always changing our investments. I’m not the one who decides where to put the money. It does change. It’s at a certain number right now, but it could always change in the future.
That being said, I think we are very impactful in Canada from a governance perspective, and something I have committed to do is to talk to Canadian issuers on this issue. In fact, I have a meeting set for early January with one such issuer to talk about their diversity and diversity policy.
Five per cent of $180 billion is still a fairly large number, and it is certainly doesn’t mean that we are not concerned or involved in Canada.
Senator Ringuette: Where would your biggest continental investment be?
Mr. Schneider: North America, right now.
Senator Ringuette: So you have a lot of money invested in the U.S.
Mr. Schneider: We are pushing the diversity issue there and in any market we are in, but we are pushing it, again, on more the private ordering approach. I have been doing this since 2003, and in my experience you get a lot further when companies do things voluntarily rather than when they are told to do something. I think historically you will get the minimum if you tell them.
The Deputy Chair: Could you keep your questions to the bill, senator, and not where they are invested?
Senator Ringuette: Yes. Thank you.
So you said, “Let’s review this in a year”?
Mr. Schneider: I don’t know if a year is long enough. I’ll leave it to people a lot smarter than me to determine when to review that.
As I said in my remarks, it’s not easy and it will not be a quick fix. But there is progress happening in Canada, and we need more progress. I totally admit to that, and I think we need to work with companies, we need to work with issuers and we need to do this together.
Senator Ringuette: Thank you.
Senator Wallin: On that point, you are Ontario Teachers’, a powerful and persuasive investor. When you sit down with companies to say you want a broad and deep selection process, how exactly do you say that to them?
Mr. Schneider: We actually say it that way. We say, “We think it’s important that you expand your network in terms of how and where you look for directors.” I think we have these fairly straightforward conversations. That’s even in our proxy voting guidelines and our corporate governance principles state that, so it is not a surprise when we talk to companies on the issue.
Senator Wallin: Do you find there is a responsiveness to that now?
Mr. Schneider: They do explain their process. We continue to push on this. We have recently updated our proxy voting guidelines for 2018. One thing we did put in there was a piece on board composition and the expectation that boards will be composed of directors who are, for lack of a better term, fit for purpose: They have the skills that are necessary and relevant to the strategy.
We will hold the chair of the nomination governance committee responsible. It is their role to make sure that there is some logic to the board composition and not necessarily friends, peers, or what have you, of other directors.
In my experience in governance, the role of the board and the role of a director has become a profession and it should be treated like a profession. It should have the high standards of performance and of composition. It’s an important job and you need good people sitting around that table.
As shareholders, we are really pushing for that. I think it’s important that we have good, qualified people who are smart and can add to the boardroom discussion.
Senator Wallin: I’m not a fan of quotas, and I’m not even sure I’m a fan of targets for some of the reasons that you cite, but do you think you can hold people accountable a little more effectively than government with “comply or explain”?
Mr. Schneider: I hope so, if you combine the “comply or explain” with our approach to diversity.
I should also mention that in our 2018 proxy voting guidelines we are taking a harder stance on the policy. We are communicating that we are expecting a policy and it’s not enough for a board to say they recruit based on merit. We’ve seen this a lot. Our view is, “Of course you do; if you don’t, then we have a bigger problem.” So you should recruit on merit, but within that recruitment on merit you build in your diversity approach.
We’re starting to communicate and socialize that with issuers. If Bill C-25 is passed and majority voting comes into play, I think that’s another thing that can work to our advantage. There will come a point in time when we will seriously consider voting against directors if they are pushing back on progress. I think that’s something we would be willing to do, but not next year because I think it’s important for us to have discussions first rather than go and use the hammer.
Senator Wallin: That’s very powerful and it’s very reassuring. Thank you.
Senator Unger: Thank you, Mr. Schneider.
You said you believe that good governance is good business and diversity should be achieved because it is good, sound business, not because it is a rule. Do you see Bill C-25 as implementing a rule?
You also said you believe the solution lies in cultural change rather than quotas, and so do I. Can you elaborate on that?
Mr. Schneider: Sure. Regarding Bill C-25 being a rule, because it’s “comply or explain,” I would think it’s not a rule. For me a rule would be a quota. I guess you could argue “comply or explain” is a rule. But I think you’re giving companies and boards the latitude to explain themselves. In my view, that is not a rule, per se. So I am comfortable with that.
Your second question was on the culture. Can you repeat your question, please?
Senator Unger: What do you mean by cultural change vis-à-vis quotas?
Mr. Schneider: What I think about cultural change is that it is just a way of thinking. We are moving in that direction, but it is more something that becomes a way of doing things. You are not doing it because you feel compelled to do it or because you are told to do it. You are doing it because, well, why wouldn’t you do it? That is where I see cultural change. It is something that happens naturally. I think it just becomes part of the DNA.
Senator Unger: So without this legislation, do you think that would happen? The question is: How long would it take?
Mr. Schneider: It helps to have “comply or explain” in the bill. If the bill didn’t get passed we would still push on this, but I think it is good to have the backing of the government. We also have the backing of the OSC or parts of the CSA on this as well. It stresses the importance of the issue to companies. It can make conversations easier.
Senator Tannas: Thank you for being with us today.
I want to ask about a couple of things that are connected, in my view. One is tenure of directors. Do you have any policies or opinions on tenure of directors? With respect to that, does it tie in that the focus and progress of diversity should be on who they are appointing as new directors, or do you think that middle-aged White males should get tapped on the shoulder early and told to get off in favour of somebody else, even though they are doing a good job?
Mr. Schneider: Tenure is a timely question as well because we tried to tackle the tenure issue in our most recent proxy voting guidelines.
Our view first and foremost is, to your point, there are a lot of good directors who may be long tenure directors. Being on a board past a certain number of years, you are not like a carton of milk where you suddenly go sour after the expiry date.
I will get back to my earlier comments on board composition where evaluation, selection and recruitment are processes that are intertwined, interdependent and interrelated.
We are looking at tenure. We look at the board and do a histogram of board tenure. If you remember your statistics, we like to see a nice normal curve. And we have discussed this with a lot of people who do board evaluations and recruitment. The bulk of the board should be somewhere between three and ten years. That is where we’ve landed. We think that is the sweet spot where directors are contributing the most to the board.
Where you have zero to three years, you are learning the ropes and understanding the business. There is a certain orientation process that it has to go through. You don’t sit around the table, read some notes and say, “I think I could be a great director.” We think that some members deserve three, the bulk at three to ten years, and some at more than ten years.
We would be concerned if there are no new directors because that means there could be succession issues. We are also concerned if everyone is at the high end because there are succession issues.
In order to get to this, you need an evaluation process that is robust and challenging. Getting back to my earlier comment regarding directors being a profession, you need a strong chair to run that process. It may result in some directors being tapped on the shoulder saying, “Unfortunately, your skills are not needed anymore because we did a board evaluation and the company is moving in a different direction and the skill set that you have, while valid, is not where we are going and not what is needed,” or “Your contribution is not what it has been.” We leave that to the board.
We are not comfortable saying that after 15 years on the board, you should get off of the board. That is not our decision to make as a shareholder. We expect the boards to be self-regulating bodies that can evaluate themselves and make those decisions. We expect them to make those decisions.
The Deputy Chair: Thank you, Mr. Schneider.
I hear the bells. We anticipate a vote, so I am suspending the committee until after the vote, and then we can meet back here.
Thank you very march for your presentation.
Senator Dagenais, I apologize, but I don’t want to ask Mr. Schneider to stay for an hour.
Thank you so much. We very much appreciate you coming here and adding your expertise.
Mr. Schneider: Thank you very much for the opportunity.
The Deputy Chair: We are suspended until after the vote when we will meet back here for clause-by-clause consideration of the bill.
(The committee suspended.)
(The committee resumed.)
The Deputy Chair: I am recommencing the committee. Thank you very much.
Invited guests and members of the general public who are following today’s proceedings of the Standing Senate Committee on Banking, Trade and Commerce either here in the room or listening via the Web, welcome back to the second portion of our meeting on Bill C-25, An Act to amend the Canada Business Corporations Act, the Canada Cooperatives Act, the Canada Not-for-profit Corporations Act, and the Competition Act.
We are now going to begin going through the bill clause by clause. I would remind senators that if at any time you are not clear where we are in the process, please do not hesitate to ask for clarification. I want to ensure that at all times we have the same understanding of where we are in the process.
Senator Tkachuk, do you have a motion?
Senator Tkachuk: Yes. I move that we not proceed with clause by clause and that we postpone the clause-by-clause reading of Bill C-25 until January 31, 2018.
The Deputy Chair: Senators, we have a motion before us. Would anyone like to comment on the motion?
Senator Marwah: I am just curious, Senator Tkachuk, as to why.
Senator Tkachuk: The reason that I moved the motion is because right now the majority of the members of this committee are not members of the government, and I feel very uncomfortable with that situation. It seems that we can go ahead and do clause-by-clause when you are able to get your members out to a meeting. Right now the majority of the members are Conservative members, and this is not our bill. This is a government bill. That is why I moved the motion.
I would like to call the question.
The Deputy Chair: Question. We will have a recorded vote. Would you call the roll, please.
Lynn Gordon, Clerk of the Committee: The Honourable Senator Carolyn Stewart Olsen?
The Deputy Chair: I support the motion.
Ms. Gordon: The Honourable Jean-Guy Dagenais?
Senator Dagenais: Yes.
Ms. Gordon: The Honourable Senator Marc Gold?
Senator Gold: I oppose the motion.
Ms. Gordon: The Honourable Senator Sabi Marwah?
Senator Marwah: I'm opposed.
Ms. Gordon: The Honourable Pierrette Ringuette?
Senator Ringuette: No.
Ms. Gordon: The Honourable Senator Scott Tannas?
Senator Tannas: I support the motion.
Ms. Gordon: The Honourable Senator David Tkachuk?
Senator Tkachuk: I support the motion.
Ms. Gordon: The Honourable Senator Betty Unger?
Senator Unger: I support the motion.
Ms. Gordon: The Honourable Senator Howard Wetston?
Senator Wetston: I oppose the motion fervently and with great passion.
Senator Tkachuk: I move that we adjourn the meeting.
The Deputy Chair: The motion is adopted and the meeting is adjourned.