Proceedings of the Standing Senate Committee on
Banking, Trade and Commerce
Issue 4 - Evidence of November 21, 2002
OTTAWA, Thursday, November 21, 2002
The Standing Senate Committee on Banking, Trade and Commerce met this day at 11:00 a.m. to examine and
report upon the present state of the domestic and international financial system (Canadian perspective to the Enron
Senator David Tkachuk (Deputy Chairman) in the Chair.
The Deputy Chairman: Our first witnesses today are from the Investment Dealers Association.
Please proceed, Mr Oliver.
Mr. Joseph J. Oliver, President and Chief Executive Officer, Investment Dealers Association: Honourable senators, I
should like to summarize our written presentation — a copy of which you have received — with an emphasis on the
recommendations contained in Appendix 1.
Close to half of all Canadians have investments in equities, and their confidence is essential to a healthy and
dynamic capital market. Unfortunately, investors have slowed their trading and reduced their commitment to equity
markets. The fact that this negative sentiment in capital markets has developed at a time when most economic
indicators are positive illustrates the seriousness of the problem.
The IDA is doing its share to bolster investor confidence and instill faith in our markets. We have taken a number of
steps, both before and since Enron, to bolster oversight, improve disclosure, tighten enforcement and enhance
In the crucial area of research analysis, the IDA board policy 11 research analyst standards impose stringent
requirements, very similar to those imposed in the United States. Our objective is to address investor confidence
through effective management of conflict of interest. Our tough and effective rules will prohibit activities that put
investors at risk and require disclosure of information that investors need to make knowledgeable decisions.
Analysts will be prohibited from issuing reports when they are an officer, director or adviser to the firm. Firms will
be prohibited from compensating analysts directly based on specific investment banking transactions.
Another key ingredient of investor trust is robust enforcement. On that front, the IDA has taken vigorous measures,
including strengthening our resources and, where appropriate, imposing significant fines, barring individuals from the
industry and suspending licences of member firms.
We are also seeking additional powers to, first, obtain investigation orders and compel witnesses to testify and
produce documents at disciplinary hearings and, second, to obtain the authority to file decisions of our disciplinary
hearings as decisions of the court.
Consumer confidence requires that the capital markets have a system in place to provide financial restitution to
recommendations and binding awards. In connection with the financial services industry, the IDA has just launched a
new consumer redress system — the Ombudsman for Banking Services and Investments, the OBSI — which is
independent, objective, accessible, timely and free. This service complements an IDA national arbitration system that is
faster, less expensive and less contentious than the courts. As a result, clients of IDA member firms now benefit from
the most comprehensive and robust consumer restitution in Canada, and perhaps in the world.
The Sarbanes-Oxley Act — or SOX — recently passed by U.S. Congress is the most comprehensive securities
legislation in the United States since the 1930s. The debate in Canada is whether regulators should simply adopt this
legislation as is, in the interests of market integrity and regulatory harmonization, or whether we should create a made-
in-Canada solution that is tailored to our markets, thereby avoiding an excessive regulatory burden, especially on small
and medium-sized companies.
Rule harmonization is important for the 184 companies listed both on the TSX and a U.S. stock exchange. Since
SOX is highly robust and comprehensive, we do not believe its requirements need to be embellished. However, we
should proceed cautiously in considering the appropriate regime for the remaining 95 per cent of listed Canadian
Several characteristics of the Canadian capital markets must be taken into account in carrying out that exercise.
First, there is a higher proportion of small businesses in Canada than in the United States. Care should be taken to
ensure that the benefits from regulatory reform outweigh the compliance burden imposed on small firms.
Second, there is a limited pool of qualified, independent directors in Canada relative to the number of public
companies, particularly if restrictions are placed on multiple directorships.
We are making several recommendations that would bring net benefit to the Canadian capital markets. The first
recommendation is to mandate CEO and CFO certification of financial statements, impose serious penalties for
misrepresentation of public financial statements and accelerate the reporting of insider trading. Our second
recommendation is to mandate disclosure of codes of business conduct and ethics for senior corporate officers.
Number three is to require shareholder approval of all share arrangement plans; four is to increase the penalties of
criminal liability and obstruction of justice and to impose standards and financial resources for better enforcement; five
is to include disclosure of indemnification or other protection for corporate whistleblowers; six is to require a majority
of unrelated members on an audit committee and restrict or limit individual directors from participating on multiple
audit committees; and seven is to establish rules that govern the relationship between the company and its auditor,
impose restrictions on non-audit services, and set tougher standards for financial disclosure.
We also recommend delegating certain enforcement powers to a specialized, integrated capital markets investigation
unit. An integrated unit could be responsible for the capital markets, combining federal and provincial policing and
regulatory resources and expertise to root out market malfeasance. The idea is committed to providing resources to
assist police and law enforcement with a criminal mandate in such an integrated unit, or to providing assistance to
criminal law enforcement. To protect such a unit, it must have dedicated funding. Furthermore, there must be a
balanced increase in the judiciary and prosecutorial services.
We need special courts that can deal with lengthy, complex white-collar crimes. Penalties in such cases must reflect
the seriousness of these matters and the adverse affect on the public.
The next subject is regulatory reform. Governments must address a problem that no other country in the world must
confront — that is, the lack of a single national regulator for the securities industry. There is no single voice for the
country. The existing regulatory framework imposes costs and inefficiencies that have serious competitive implications
for cross-border trading and financing.
The IDA position is that there are two viable alternatives that could be pursued simultaneously on parallel tracks:
first, a comprehensive, harmonized provincial regulatory system; and, second, a single national regulator under federal
or provincial jurisdiction.
Our position achieves two objectives. We can push for decisive and critical short and medium-term improvements in
the current system and await the result of the broader focus on a national commission. Whatever the ultimate outcome
of the second alternative, progress in achieving the first alternative will result in stronger and more efficient capital
markets. What cannot be justified is opposition to a national commission from decision makers who are not willing to
support substantive improvements in the present system; support in deeds, not just words.
Let me cite two regulatory approaches that cry out for adoption. First, responsibility for registering sales persons
and firms can be delegated exclusively to the home jurisdiction. This single registration could generate a passport for
carrying out business in every region in the country. A second decisive step to harmonization would standardize
disclosure for offerings in public and private markets and a single clearance jurisdiction.
We believe that Harold MacKay has made a timely and significant contribution in his report to the Minister of
Finance. It should kick-start a process to draw together provincial governments, regulators and self-regulators and the
federal government on the regulatory agenda.
We have a real opportunity to renovate our regulatory system and to restore confidence in our capital markets. The
problem is not an absence of goodwill or even an absence of good ideas; the fundamental problem is one of priority
and political will in large part, because of the dispersion of decision making. The vulnerability of our market should
raise the priority and energize politicians in Canada.
Senator Meighen: Mr. Oliver, in regard to harmonization of regulation in Canada, for how many years have we been
talking about this? What has changed? You sound optimistic. I hope you are right, but is there anything that you can
point to that should lead us to believe that one of these two approaches will be aggressively and successfully pursued?
What about the IDA? Your counterparts in the insurance industry have always, in their interest, mounted an effective
lobby. Is there something that you can do to improve your lobbying efforts among your members, scattered as they are
across the country, to impress upon provincial politicians and regulators the need that you have spoken about so
eloquently to this morning? Can you provide us with some reason to believe that we are moving forward and not
sideways in this area?
Mr. Oliver: Honourable senators, let me comment on the question of why there is the need now. It is true that this
issue has been around for a long time. Most recently, the federal government in 1996 raised this issue. It looked like
there was some hope, but it fell apart for a variety of reasons.
What I believe has caused the renewed interest in this subject is the state of the capital market, the state of the
industry and the implications of technological change and globalization, all of which have put increased pressure on
our market, which is only 2 per cent of the global market. It is no longer adequate to be barely efficient. It really
requires a superior level of competitiveness for us to maintain the health of our market, to keep issuers in the country
and to attract foreign investors. The federal government understands this concept, as do the provincial governments.
Having said that, however, the matter under discussion has never been exceptionally high on the radar screen.
People will go to the barricades for bread or liberty, but, alas, they will not go to the barricades for a national securities
commission. The provincial governments have been content to watch the regulators move gradually toward increased
harmonization. There has been significant goodwill and progress in that regard.
There is a growing realization that that is simply not enough any more. Beyond that, one may ask, whether there is
cause for optimism. I do not predict that that is likely to happen, even though there are enormous numbers of people
across the country who are talking about this subject in the industry, the legal community and the press.
That is why we are proposing a two-track system. We would like to see significant progress, but it would be
foolhardy to rely on that happening. Therefore, we believe that things can be done in the short term. There are decisive
things that can make a real difference that can be done at a sub-Constitutional level. This matter is in the hands of the
provinces for the moment. Political leadership can make the difference and kick-start that.
One of the benefits of the federal effort is indirectly to encourage that process. When the federal government starts
looming large, the provinces sometimes decide it is time to move.
Senator Meighen: Sometimes they decide to move away, though.
Mr. Oliver: Some provincial governments may move away from the federal initiative, but to repeat what I said in my
remarks, there really is no excuse to oppose the federal initiative and at the same time to refuse to make substantive
improvements in the current system. The pressure should be put on those who stand in the way of progress.
Senator Meighen: Can your organization do anything else in terms of advancing that cause, other than appearances
such as yours today? Do you plan a grassroots or provincial-level initiative?
Mr. Oliver: We have been around the country and have met with the premiers and with the ministers of finance of
many of the provinces, or the ministers responsible for securities regulation, and have discussed this matter. There is a
fair amount of goodwill and some potential interest in this matter.
As honourable senators will be aware, there are revenue considerations. In many of the provinces, the commissions
charge more than they spend. Some provinces are concerned about the fees, others have jurisdictional issues and others
have concerns about whether a national commission might not be sufficiently sensitive to regional issues. By that, they
usually mean small business financing. Small business financing is not a regional issue; it is a national issue. It is an
issue in Ontario as well as British Columbia, Alberta and elsewhere in the country.
Small business financing is an extremely important issue, but it is not an issue that is difficult to resolve. There can
be a national commission with sufficient representation from the regions and sufficient sensitivity to small business
financing. Regulatory content is critical. We will be doing that. We will also be looking at the costs of the current
regulatory system and hope that that kind of study will help to advance the debate. We are asking our members to
express their views on the subject, as well.
Senator Meighen: That is encouraging, Mr. Oliver. I do not know why I tend to be a pessimist in this area. I think it
will take a crisis in Canada before we wake up and realize the importance of harmonizing our regulatory system in one
fashion or another. Surely it is not beyond our imagination to devise a means whereby regional and provincial
priorities can be taken into account, at the same time putting in place some sort of conformity in regulation across the
country. However, that is more by way of editorial comment on my part.
I agree with you on Sarbanes-Oxley that we should not adopt it holus-bolus. The right approach would include
taking the best that applies to us but making a made-in-Canada type of legislation.
In terms of ethics, I have an uneasy feeling that in spite of our efforts to date Canadian markets are viewed in some
quarters, perhaps incorrectly, as being more loosey-goosey than other jurisdictions, a little more Wild West and a little
more lax, if I can use that word, in terms of regulation. Perhaps I am wrong; I hope I am.
What is the IDA doing at the entry level in your business in terms of teaching a course in ethics? We certainly did
that in law school. I do not know whether it had the right and desired effect, but are the universities or are you as an
organization paying attention to informing young entrants as to the importance of ethical conduct in your business?
Mr. Oliver: Let me comment on how people perceive us just by reference to a study that was done by McKinsey.
They concluded that the premium given to a company with good governance in Canada is less than the premium in any
other country in the world. That would imply that there is a sense that the standards are already very high here, and
higher than elsewhere.
For example, in the former Soviet Union a company that has good ethical and governance standards would realize a
considerable premium. On the hand, in Canada, since good ethical standards and good governance is always
important, and most companies are perceived to have it anyway, the differential is less. That study, which was done, as
I say, by McKinsey, an American consulting group, is indicative that the perception about Canada is a pretty good
In terms of your question about the IDA proficiency standards and teaching of ethics, an ethics component is part
of the initial proficiency standard required of registrants to join the business and is part of the continuing education
requirement. In addition, it is part of the analyst standards policy that we have passed. While you cannot require
ethical behaviour of people, you can require that they obey the rules. We believe that there is some logic and some
value in giving people an analytical framework. In that way, they can be more conscious of ethical issues; and with a
moral compass, they are more likely to behave in an appropriate way. We take that to heart.
Senator Fitzpatrick: I wish to address the issue of analyst standards and policy 11, which I feel is a very important
area. You may wish to elaborate on that subject. What is in your paper does not do very much for me to improve my
confidence in the analysts' standards and the operations of the analysts at the present time.
You mentioned that you have sent some recommendations to the securities commission for public comment, review
and approval. Are you able to share some of those recommendations in more detail? For us to comment on these
issues, we should have a more detailed knowledge of what you are suggesting. I appreciate you have just set out the
highlights here, but they do not tell me very much. Are you able to provide us with more detail or provide us with the
list of recommendations that you have submitted to the securities commissions for public comment?
This would be a good place to start to get some public comment or some comment from us.
Mr. Oliver: Honourable senators, I do not have the detailed proposal with me; however, I would be happy to file it
with the committee clerk. It is also available on our Web site.
I tried to set out the key recommendations, which are basically comparable to those imposed by the New York
Stock Exchange and the National Association of Security Dealers. We have an additional guideline that they do not
include, one that relates to the issue of quality. We are suggesting that firms require their analysts to have a proficiency
standard — the chartered financial analyst standard or equivalent — because we feel that quality of research is critical,
as well. We think that can move from a guideline to something more definitive down the road that is not something
with which the Americans have dealt.
The prohibition of issuing reports when someone is an officer or director of a firm is important. The prohibition of
compensating analysts based directly on a specific investment banking transaction is important. The prohibition about
using favourable research to attract investment-banking business is critical, as is the need to develop conflict-of-interest
policies and file them with the IDA.
The disclosure of pro-group holdings is important, because that deals with officers, directors and employees of
member firms. It is important for clients to know that there is an economic interest that might affect the objectivity of
the analysis, as well as disclosure about any investment banking business that has been done in the previous 12-month
period. Analysts cannot cover companies for which they are officers or directors.
It is impossible to come up with rules to preclude everything. What you do is prohibit what is egregious and disclose
what may lead people to be less than objective. With an informed investor, there is a more level and fair playing field.
Senator Fitzpatrick: Your highlights here seem pretty obvious to me. I would hope that any investment firm would
be complying with those now. That is pretty standard ethical behaviour.
However, that does not get to the nub of the question. What is important to know is what the analyst is doing, what
his relationships are, what his trading situation is. I know there is a prohibition or should be of any analyst holding
stocks that he is doing a recommendation on. There are many different ways for an analyst to benefit from the
recommendation he or she might be making. I do not see anything here that addresses the nub of it or provides any real
teeth. This may be something that seems a little outlandish to you, but what about analysts who do not work for
investment firms? What about contract analysts who operate as independent contractors, who do not have any
association with the firm. I do not think Chinese walls work, quite frankly.
What I should like to see is this list of policies. I should like to see something in more depth, because every
investment company's mission statement should specify that it would require this type of behaviour by the firm.
Mr. Oliver: In terms of whether it is adequate or not, that is a matter of judgment. I do not think there is any other
country in the world that has a more stringent requirement. That should give us some comfort.
Senator Fitzpatrick: I do not think so, not when you have a situation like Bre-X. It did not give the shareholders
much comfort. Again, it gets to the nub of who is promoting the stock.
Mr. Oliver: The issue about whether you need independent research firms is one that has been talked about often.
The reason they have not arisen is that institutional investors have not been willing to pay for independent research.
They complain about the lack of research from time to time, but they will not pay for it. Firms have tried to set up, but
they have not succeeded economically. That is why they do not exist. In this kind of market, if there were a market for
independent research, there would be independent research firms.
Now, if you are proposing that an investment banking firm cannot have a research department, if you are going that
far, then there would not be need for any of these rules. You would then have a significant impact on the
competitiveness of the Canadian capital market. There would be serious questions about whether there would be
adequate research, whether the research would be available, whether the thousands and thousands of smaller
companies that are covered only by one research analyst would continue to be covered.
Senator Fitzpatrick: It might be the converse, though. It might be that there would be more investment confidence.
If this concept worked, there would not just be one analyst covering thousands of companies, there probably would be
a number of analysts covering companies, and there might be more specific expertise relating to different industries. I
do not know how much you have explored this, but I think it is something that should be discussed further.
Mr. Oliver: I do not know why there would be more expertise as a result of that, but the reason we did not go to
what many people would view as a radical solution is that it would have severe competitive implications for the
Canadian capital markets to impose a restriction that does not exist anywhere else in the world.
Senator Angus: I should like to approach this issue of corporate governance from a slightly different angle. I think
your paper is an excellent and comprehensive paper in terms of stating where we seem to be at.
We have been listening to an array of evidence since we started this study on the effects of Enron in the capital
markets here. I am beginning to conclude that maybe we are doing more harm than good — not the Senate Banking
Committee, but some of the things that are happening. I am reading anecdotes that the strict application of Sarbanes-
Oxley in the U.S. is causing directors like Warren Buffet to have to step down as chairman of an audit committee when
he is independent by any other definition. I am seeing that, even with Sarbanes-Oxley in place, the directors of Enron
would have qualified and not had to change at all. They would have still been in perfect compliance with Sarbanes-
Oxley. I am seeing a knee-jerk reaction in the United States that is really causing more trouble than it is solving.
It is unbelievable to me that Canada would bring in a law like Ontario's Bill 198, when we have had a capital market
system that has worked well for many years. If a crook permeates the system, we have the Criminal Code.
In every speech we now hear on corporate governance, one hears that the days of self-regulation are over, that the
IDA simply has too many conflicts of interest to regulate itself and its members, that other organizations are the same,
the accountants, the lawyers, anyone who is involved in the preparation of a prospectus or an offering memorandum. I
wonder what you think about this?
I can say that my own view certainly is that Canada should not be like the United States. I do not like Ontario's Bill
198. I see better solutions in Europe and elsewhere.
I see all these conflicts between U.S. GAAP, Canadian GAAP, the international standards; everyone is running
around trying to compete, to see whose jurisdiction will prevail. It does not get to the nub of the problem, which is
whether there are good people in the system.
We did a comparative study of bank supervision several years ago, and we were struck by some evidence in the U.K.
to the effect that in the U.S. there is a rules-based economy, where you cannot see the forest for the trees, whereas in
the U.K. and Canada it is more judgment-based, where you have a look at the people.
I know many compensation committees and audit committees in Canada that will be decimated. The weakest
directors will now be on those committees, while the strongest directors just sit back, not on any committee.
I think you see where I am coming from. Perhaps should we be looking in another direction; would you agree?
Mr. Oliver: I think those are very important public policy questions. What is rarely asked in this context is whether
the proposed rule would have precluded the calamity that is precipitating it. When you ask that question, there is
usually silence in the room. Many of the things that are being suggested would not have precluded Enron. I do not
know if it was a model of good corporate governance, but it certainly, in the mechanistic way, followed the rules. They
had some very strong people on their audit committee.
The problem was that people were not doing their jobs. As you say, the approach in the U.S. is a more rule-oriented
one. People were not following the rules; so everyone says let us have more rules. Public directors were not doing their
job; so let us have more public directors. I think we must have a balanced approach, which is what we are
It is a bit over the top to suggest that 100 per cent of the audit committee should come from public directors, as if
someone who has a significant economic interest in a company would somehow contaminate an audit committee by his
or her presence. As well, the requirement, as they have in the United States, that the chair of the audit committee must
have a CPA or the equivalent, is a bit over the top. It is really judgment and integrity and diligence that are for, a lot of
common sense. That is why we do not think that is necessary. As well, it creates a terrible burden for smaller companies
and makes it more difficult in Canada, generally, because we have a higher proportion of public companies than they
do in the United States in comparison to our population.
Senator Angus: I know you come from a civilian background, as I do, where good faith is presumed. It seems to me
that we have done very well over the years in corporate Canada on the presumption that people that are going to the
public markets are in good faith and are honest folks. A Bre-X or a Cinar and a number of the Canadian examples do
not have anything to do with good faith. These were corrupt people.
It is possible that we are destroying rather than fixing a system in coming to that conclusion.
Mr. Oliver: You cannot absolutely preclude fraud.
In terms of this debate between a ruled-based and a principals-based system, the first point to make is that there is
no pure approach. Any attempt to preclude all problems through rules is doomed. Any attempt to rely exclusively on
principles is inadequate. Therefore, you have to have rules. The question is: Where on the continuum do you decide
that that is enough and now we will rely on principles? At the end of the day, you have to rely on a person's moral
compass and good judgment.
We think this country should avoid some of the excesses in technical rules-based regulation and rely somewhat more
than the Americans on principles.
Senator Angus: At the end of your brief you have listed your recommendations on governance. You set out a series
of guidelines and so forth, all of which make sense to me, if you buy into this new knee-jerk culture.
However, there is one thing that seems to be strikingly absent from your list, that is, compensation. All the literature
now deals with HR and compensation committees having to be independent. There are CEOs who are being paid $27
million a year, plus options. That is where the real corruption is. Shareholders are getting hammered because these
guys are just looking after their own interests.
You have nothing in your presentation about that, and I want to know why. I also want to know what you think
about the problem of compensation.
Mr. Oliver: I think most Canadians consider some of the compensation numbers as obscene, particularly when
companies have done poorly. However, I think regulations should avoid direct involvement in compensation. I think
we are down a slippery slope.
Senator Angus: Why is that a slippery slope?
Mr. Oliver: I do not think that regulators should determine compensation. Governments should not determine
Regulators should ensure that the governance approach to compensation is a fair and reasonable one. They should
ensure that compensation committees are independent and that there are public directors there to sit on them. They
should also ensure that the approaches and the systems are disclosed to the board and discussed at the board level. It is
at that level that things should be dealt with.
There still will be the odd abuse, particularly in a frothy market. We have to pause for a second and realize that we
are either at the end of or somewhere in or right out of a terrible bear market. Naturally, investor confidence will be
lower. That is inevitable. Naturally, instances of greed will have been at their height because in the froth people lost
judgment and boards were desperate to keep CEOs, who seemed to be doing so well either because of good luck or
good management. Thus, these kinds of excesses were at their peak.
We are examining an issue at a particular point in the cycle, that is, where things look the worst. We have to step
back to see how the system will work in the long term and ensure that we do not, in curing the patient, paralyze him.
Mr. Ian C. W. Russell, Senior Vice-President, Industry Relations and Representation, Investment Dealers Association:
Senator Angus, two of our recommendations do touch on compensation. One of them is a recommendation that the
TSE governance guidelines should be amended so that all share arrangement plans are properly disclosed and have the
approval of shareholders.
The second recommendation is a recommendation for appropriate financial disclosure. It seems to me that the most
egregious examples of compensation stem from options that have been allocated to senior executives. Thus, it seems to
me it would be appropriate that those option plans should be approved by shareholders so they understand the dilutive
consequences of that. Furthermore, they should be properly accounted for in the financial statements.
Senator Fitzpatrick: I think plans are approved by shareholders now. However, I do not think specific granting of
options is approved by term holders to officers. Is that what you meant?
Mr. Russell: That is what I am referring to.
Senator Setlakwe: We spoke at length about regulatory harmonization. The conclusion was to the effect that we are
not about to see a national regulatory body and that we are hoping, at the best, that we would have some kind of
provincial harmonization. Am I correct in saying that?
Mr. Oliver: No. I am not predicting the outcome. I would say that a national body has a probability less than 100
Senator Setlakwe: I read your submission with great interest. I think you are suggesting that we do legislate in some
sense, which is contrary to what I have heard from other people. Are you suggesting that this committee recommend to
the government that we legislate in certain areas?
Mr. Oliver: Yes. There are certain areas that require legislation and, in other cases, encouragement of regulatory
change. In other cases, what is required is for exchanges to make changes.
What we constantly confront in looking at the securities industry is that there is a multiplicity of decision makers
who have to be involved in a coordinated way to make this work well. It is the federal government, the provincial
governments, the securities regulators, the SROs and the exchanges. To have a comprehensive approach it is important
for everyone to work together to achieve the common goal.
Senator Setlakwe: One of the recommendations that you have made is that we should add specialized courts in
Canada. Could you elaborate on that? I wonder to what extent we do need that when we have so many courts that can
handle civil and criminal matters.
Mr. Oliver: The rationale behind that is that these cases are lengthy, complex, technical and tedious to prosecute.
There is a real advantage if the judges have proper or specific training, background and interest in white-collar crime.
There are special courts for addiction, for youth, for domestic violence, for members of the Aboriginal community and
for drug-related matters.
Senator Oliver: There are tax courts.
Mr. Oliver: There is a rationale for these specialized courts because they are dealing with specific subjects, where
people have to be interested, committed and knowledgeable.
The public perception is that we do not take white-collar crime as seriously as many of us feel it should be taken.
When we look to the United States there perhaps was that perception, but it is changing pretty quickly.
This is another way not only to do something substantive but also to build public confidence in markets.
Senator Setlakwe: My thought was along the lines of Senator Oliver's comment that we do have some courts that
could handle cases like these. I refer to the tax courts.
Mr. Oliver: I thought Senator Oliver's comment was to suggest that we have a number of specialized courts. I do not
want to speak for him, but I thought that, perhaps, we could have another one, rather than that white-collar crime be
put in a tax court. Have I misunderstood?
Senator Oliver: Senator Setlakwe is correct. They are highly trained in tax and business matters.
Mr. Oliver: I thought their specialization was more focused.
Senator Setlakwe: I agree with you that we should be extremely cautious and we should go ahead with penalties for
these people. I think our courts can handle them.
Mr. Oliver: It is very important that we have tough enforcement, that the courts take these matters seriously. We
have also recommended an integrated capital markets unit to handle investigations and prosecutions. That is even
more important, because there has been a tendency for the police to be reluctant to take on these cases because they are
so long, time-consuming, technical and difficult to prove. When they finally get to court and a judgment is rendered,
the penalties do not seem to be worth it. The police are discouraged and are therefore, understandably, not as
committed as I think they need to be.
Senator Setlakwe: Would we be here today if the bubble had not burst?
Mr. Oliver: I cannot speak for you. We would be here if you were here.
Senator Oliver: When dealing with this topic, which is the Canadian perspective to the Enron collapse, a number of
witnesses have asked what we can do to strengthen and make more accountable boards of directors and audit
committees, in particular.
You have a couple of suggestions on that in your recommendations section. I want to try to flesh out a little more
detail, particularly with respect to your language, which is different from that of many of the other witnesses who have
appeared before us.
In terms of getting more accountability and more transparency, the term that a number of people use for members
of boards and committees is ``independent.'' When talking about audit committees, for example, you say that a
majority should be unrelated. Can you tell me what the difference to you is between unrelated and independent?
Mr. Oliver: This is a technical but very important area. What are we are trying to achieve? One thing we are trying to
achieve is independence from management. Management is entitled to be on the board, but when you talk about an
independent director you clearly do not include management in that regard. That is one issue.
Another issue relates to people with an economic interest in the company, people who do business with the
company. Yet another issue relates to those who have a significant shareholding interest. That goes to the question of
closely held companies in Canada, of which there are more than in the United States.
Our view is that we do not take a cookie-cutter approach to every company in the country and require total
independence on the part of all public directors, because we do not think that an economic interest in the company
necessarily precludes one from involvement.
The word ``related'' essentially refers to share ownership. I am not clear whether our policy thrust is that different
just because of the use of the words. It is an important subject. We have not gone into it in perhaps the same detail as
we did some other matters.
Senator Oliver: Senator Angus raised an interesting question about whether or not, under some of these proposed
rules — Sarbanes-Oxley and others — and he referred to the Ontario legislation, it might drive good people away from
sitting on certain committees and boards.
Would you explain to us what would be wrong with a very eminent, qualified and good director serving on the audit
committee of more than one company?
Mr. Oliver: We do not think there would be anything wrong. What we are saying is that at a certain point it is clear
that an individual cannot do the appropriate work if he or she is on a couple of dozen audit committees.
Senator Oliver: No one is on a couple of dozen committees. In your written brief, on page 17, you say, ``participating
on multiple audit committees.'' You would see nothing wrong with an eminent, qualified person sitting on two audit
Mr. Oliver: No.
Senator Oliver: This does not say that though.
Mr. Oliver: Perhaps there is an implication that we would find that unacceptable. We did not define the number. We
did not define ``multiple,'' but it was not intended to preclude a few.
Senator Oliver: KPMG did a study in the U.K. of 160 directors. Through a detailed questionnaire, they found out
their experience, age and knowledge. They found that of the 160 the majority have never taken any course and had no
experience in risk analysis. Is that something that you think is important in this study, post-Enron collapse, and is that
something that should be included in director audit committee training?
Mr. Oliver: A number of years ago there was thought given to some kind of proficiency standard for directors. It
was discussed but was never pushed forward. I think that out of that there was, nevertheless, recognition that
education, particularly for directors who were new to public companies, would be a good thing, without making it
mandatory. I think it is appropriate to have some kind of reference to the need for financial expertise on an audit
Senator Oliver: Financial literacy?
Mr. Oliver: Yes, financial literacy. The technical aspect of audit committee work really requires that to be effective.
The Deputy Chairman: On a supplementary question, board members are chosen not only for their financial
expertise. Companies will choose board members for their knowledge of product or the business. They will choose
them because of a consumer group. In other words, do we run the risk of having just a bunch of accountants running
these boards? You want the human flavour of the smart people, but a cross-section of people, each with their own area
of expertise. Otherwise, the CEO and the management team do not get a wide variety of opinion about certain
decisions. We always talk about finance, but what about all those other things?
Mr. Oliver: You raise a key point. It seems that in the rush to judgment on a number of these matters so-called
independence always trumps experience, and it should not. Independence is clearly important, but experienced people
are often the most effective in providing oversight.
Someone who has a huge financial stake in a company will focus like a laser beam on the audit committee and on
the management of the company. As well, customers and people who supply other services, and occasionally even
competitors, can be extremely helpful, as can people in related fields.
We did not get into that kind of detail, but broadly speaking, I am very sympathetic to what you say.
Senator Fitzpatrick: I take it from what you just said that you are in agreement with directors being shareholders of
companies, particularly having a large stake. What is your view on directors receiving options?
Mr. Oliver: There is a bit of a small-company issue in this respect. It is difficult for small companies to attract the
number of independent public directors that they will have to attract without paying them in some way, particularly
given the greater liability. That can be huge in some cases. A small environmental company or a small technology
company could attract huge liability.
There is a more litigious environment in the United States, but it is coming here to some degree. Companies that
simply do not have the financial resources to pay in cash have been paying in options. It would be a mistake to
preclude that. I would be concerned about that.
There are suggestions about requiring officers to hold their stock or the after-tax equivalent for at least a year so
that they are not in a position of having a tax liability that has not been discharged.
There are some suggestions that directors should not sell or exercise their options while they are still directors. These
are interesting ideas that should be refined and talked about.
Senator Oliver: There is one line when you are talking about CEO/CFO certifications following from Sarbanes-
Oxley. In that same paragraph, you have a recommendation that you would like to see an acceleration of the reporting
of insider trading.
Mr. Oliver: Yes.
Senator Oliver: I should like to know what you would like to see it accelerated to.
Mr. Oliver: In the United States now, the proposal is 48 hours.
Senator Oliver: What would you like to see in place here in Canada?
Mr. Oliver: Currently, in Canada, it is 10 days, which is too long. Eventually, we will get into real-time reporting, in
effect, or same-day reporting. I should like to see that. There are mechanical problems. It probably should be
shortened closer to the two-day period.
Senator Meighen: This has been a hobbyhorse of mine for a long time. What is the difficulty in having anyone who is
a director or otherwise an insider of a company electronically registering themselves as such. Then whenever a trade is
done in a company in which they are an insider, a ticket automatically goes to the regulatory authority? What is the
challenge? I do not get it.
Mr. Oliver: It is achievable. That is why I say real-time. That would really level the playing field.
Senator Meighen: I know. Tell me what the problem is.
Mr. Oliver: I do not know that there is a problem.
Senator Meighen: Why do you not put that in your recommendation?
Senator Oliver: Accelerate it to real-time.
Mr. Oliver: We would be ahead of the game on that one.
Senator Meighen: We have the means to do it.
Mr. Oliver: For sure.
Senator Meighen: It would obviate things that have happened to me, frankly, where I have, for a reasonable reason,
forgotten — for example, when acquiring a small number of shares through an inheritance that you were not an owner
of prior to a death. In other words, a death occurs, and all of a sudden you are an owner, which does not come to mind
immediately, particularly if it is a insignificant number. It happened to me recently.
Surely, there is a way. If there is a will, there is a way.
Senator Kroft: I wish to return to the subject of compensation that Senator Angus was pursuing. We have sat here
for some time. We have been contemplating the core issue of what do we have to do to protect investor confidence in
our system. That in a broad sense is what this is about. We have many positive things that have been done on the
accounting side and on a number of sides.
However, the core issue of human conduct is still the hardest one, at least I find, to get at, and perhaps the most
significant. As I am sitting here, and also through what I do and do not read, I become increasingly convinced that the
compensation issue is at the core of it.
If someone finds a penny on the road, he or she will not pick it up. If there is a dollar bill, it will be picked up
quickly. People's behavioural threshold changes depending on what is at stake. That is a reality.
In the face of this, while there is a nod to the compensation issues, there is a great delicacy in the way that all people
addressing this are approaching or not approaching the core issues of compensation.
It is true that the kind of markets we had where stock values increased enormously in a short period of time put
some plans, option plans particularly, into a numerical value that would not have happened under other circumstances.
I am inclined to believe that had there not been the enormous amounts of money at stake for individual executive
companies, or in most cases individual executive companies, that we would not have had nearly the conduct and
behaviour that we have had. For sure, we would not have had the public disillusionment with corporate conduct and
with investment opportunity. I am coming to believe that this is the most important single area that has put people off.
I refer not only to compensation, bit I also refer to the indirect sides.
I talk about the Jack Welch syndrome, where, because he increased shareholder value enormously, it seems that
anything was okay, multiples of apartments, airplanes or anything. This seemingly unlimited approach — as long as
someone is producing, there is no amount that is too much for him or her — I believe has contributed enormously.
There are many reasons for this.
It is very positive to have CEOs sitting on each other's boards. They share experience, knowledge and
understanding. They also share a common stake in an aggressive compensation environment. Everyone wants to be in
that mysterious third quartile. The bases continue to move.
The core of my question is that your approach and the approach of the community in which you work is really
coming to grips effectively with this. You refer to the obscene levels of executive compensation, yet I do not see much
in the way of addressing what is broadly recognized as being a core issue.
Mr. Oliver: What makes compensation obscene is that not only is it large but it is unrelated to corporate
performance. Jack Welch is seen as one of most successful businessmen in the United States. He contributed
enormously to the growth of his company. It is a matter between him and his shareholders as to what type of
compensation he receives. However, if you have independent directors looking at that issue, and shareholders
approving plans and overall approaches, then I believe you are taking the right issue.
Senator Kroft: I wish to return to Senator Fitzpatrick's point.
I have never seen a financial statement that listed the definition of compensation. You talk about a stock plan. You
did not talk about the allocations and the details of the plan, let alone many other issues that, in fact, because they are
not taxable and because they are lifestyle things do not appear in any report or statement anywhere. I agree. If this is
between the shareholders, someone has a right not to buy the stock. Someone from the Ontario Teachers, I believe,
testified here and said that they decided to sell Enron because the CEO's sister booked all the travel arrangements.
However, you are making an assumption that there is a bargain between the investor, the board and the executive of
the company in which there is a perfect market and all information is shared, and people make a judgment. That is just
Mr. Oliver: As you know, there is a requirement for the disclosure of the top five people in the company's
compensation. That is helpful. The shareholders delegate oversight of management to the board.
The board will sometimes delegate oversight to a committee, like a compensation committee. It is that kind of in-
depth review that you want to have if it is done independently with smart people with good judgment. You cannot have
all the shareholders involved in every detail of executives' compensation. You do need their approval for certain types
of compensation plans. However, you must distinguish in this regard between, let us say, excess generosity, or maybe
some type of gullibility, and criminality.
Senator Kroft: I am talking as much morality as criminality here. I am talking about the information where, if they
knew it, shareholders would sell their stock. It does not need to be a criminal action.
There is a huge gap between criminal action and greed. There is a lot of pussy-footing in this area. We talk about
approval of stock option plans. You do not get a bottom line and say, ``What is the effective real dollar value of the
compensation and benefits that that executive received in the course of the year?''
Mr. Oliver: I think you do. You get that in the disclosure.
Senator Kroft: You get it in the divorce action when the wife forces the documentation to be released.
The Deputy Chairman: Actually, Senator Kroft, I believe that all the compensation was filed with the securities
commission. It only shows that reporters are more interested in sex than they are in the securities commission.
However, it was filed.
Senator Kroft: No, it was not.
The Deputy Chairman: Yes, it was.
Senator Kroft: Along with all the clubs and all those airplanes and all the apartments and all those things?
The Deputy Chairman: It was. The reporters just never bothered to get it.
Mr. Oliver: He was being lionized, and people did not look at it.
Senator Kroft: You are suggesting that this information is fairly put before the investing public.
Senator Oliver: It was Jack Welch's argument that it was.
Senator Kelleher: On page 3 of your brief, under the heading ``IDA Mandate,'' you say that your mandate is to
protect investors and enhance the efficiency and competitiveness of the capital markets, which is the same mandate as
provincial securities commissions. Yet you sit here and tell us that we must do something here about getting to a single
regulator or some sort of harmonization. I go to page 28 of your brief and look under ``Better Harmonization.'' I do
not really see too much about that. Should you not be putting in there that a good place to start is the admission by
yourselves that you have the same mandate as the securities commissions? I cannot believe, where you admit that you
have the same mandates, that this can lead to efficiencies. It seems to me that a good place to start is to look at your
own mandates and try to eliminate some of this duplication and overlapping. This might be a way to start, rather than
focusing on a national securities commission which, as much as I would like to see it, I do not believe there is a
snowball's chance in you know where in ever getting it. I have seen enough of Ottawa over the years to know that,
when you have the same mandates, there is duplication and it just will not be very efficient.
Mr. Oliver: Senator, we have the same mandate but we have different functions. We are delegated powers by the
securities commissions to regulate our members, which is financial compliance, business conduct compliance,
enforcement and those related matters. We do not see this as duplicative; we see it as helping the regulatory community
achieve its objective. The other thing that we bring to the party, which is unique, is the expertise of people who are
actively involved in the capital markets to the development of regulatory policy.
The result is balanced and effective regulation that takes into account the impact of regulation on the marketplace in
a way that achieves the regulatory objective and, at the same time, makes it work in a practical way that enhances the
efficiency of the market. That is the value of self-regulation. We bring that added value, but we do that pursuing the
same objectives. It is a different function. I do not see that as being duplicative; I see that being additive.
Senator Kelleher: I do not think it would hurt to take a look at it.
Senator Prud'homme: My question is brief, but perhaps not highly professional question, being new on the
I am prompted by the question of Honourable Senator Kroft. I have had difficulty understanding the talk about
compensation and bonus. It may be a naive approach, but I always thought that employees are supposed to put forth
maximum effort, regardless of the company they work for. This applies to everyone, in my view, including civil
Some people receive compensation for good production, receive bonuses, and so forth, and some do not. Over the
years, I worry about those who never receive compensation and bonuses. I was given part of the answer by Senator
Oliver, saying that we retain the better. However, if an employee, after five years, for instance, has never received any
compensation or supplementary compensation or bonuses, do you not question his or her ability to be in that
company? I would, as I do in another place, question the ability of people who work in certain departments of the
federal, provincial or municipal government where it is always the same ones who receive the bonuses and the benefits
because of production.
I conclude by saying I realize that when you are employed somewhere, you are employed because you have
qualifications, and you are duty bound to give the best of your talent to the company or whatever else you have been
Mr. Oliver: Honourable senators, the first point is that I do not think that regulation should get into compensation
planning for firms.
The value of bonuses is that they can reward success and extraordinary achievement. Particularly in companies that
are highly leveraged, in order to attract good people and pay them well, they do not want to be saddled with very high
fixed costs. They are, however, prepared to compensate for additional revenue and profitability. Thus, in sales
positions and other positions that are revenue related, there tends to be a much higher proportion of compensation
coming from the bonus rather than the fixed side.
Essentially, it should be left to the boards of directors to determine what is in the economic interests of the
companies, and the shareholders can decide how the companies are doing, knowing what the total and individual
compensation of the five best people are. The ability to retain and attract employees is, of course, critical to many
companies, and compensation goes to the heart of it.
Senator Fitzpatrick: I have a further question on compensation. We know now that the process, particularly with
major companies, is to have a compensation committee make recommendations to the board of directors for
compensation, which is a good thing. Normally now, with larger companies, and I hope with SMEs, that is subject to
independent evaluation or independent reports to determine that the compensation package is within the range of what
is acceptable for the industry and the type of company.
Compensation usually comprises salaries, bonuses and options. I can well see how bonus can be related to specific
criteria. Salaries and options, perhaps, are a different matter.
The compensation packages of senior officers are disclosed. What do you think is wrong with submitting the
compensation package to shareholders for approval, just as audit committee recommendations and financial
statements are submitted to shareholders for approval? Doing that with bonuses could be a problem because it is
difficult to be precise. However, with salaries and options, you can be precise — number of options, price on options
and besting and length of option periods. Could you comment on that?
Mr. Oliver: I do not know whether you are suggesting this should be applied to all officers or just to the senior
Senator Fitzpatrick: Just for senior officers.
Mr. Oliver: There are some subjects that are best handled by a smaller group of people. To have individual
shareholders making that kind of judgment, without being able to have all of the facts, is a difficult thing that could
lead to some perverse results. Some matters are properly left to the board, and that is one of them. The shareholders
can vote with their feet or vote with their votes on plans. It would go too far, get into issues of privacy and be
disruptive of good management.
The Deputy Chairman: Thank you, gentlemen, for your presentation. We have had a good discussion.
Our next witnesses are from the Shareholder Association for Research and Education. I would ask Mr. Yaron to
Mr. Gil Yaron, Director of Law and Policy, Shareholder Association for Research and Education: Honourable
senators, thank you for the opportunity to appear before you today and to address concerns about the domestic and
international financial systems following on the Enron collapse, specifically, the issue of corporate governance policies
and practices in Canada.
The Shareholder Association for Research and Education, SHARE, is a national, non-profit organization
originating within the labour movement working with institutional investors to promote socially, environmentally and
economically responsible investment practices through research, educational activities and advocacy. SHARE
currently represents institutional investors with total assets exceeding $2 billion. Our primary constituencies are
pension plans and pension trustees. SHARE made representation to this committee previously on amendments to the
Canada Business Corporations Act, CBCA, enacted in November 2001.
The recent corporate scandals have focused attention on the issues of board oversight, independence and
accountability, as well as the inadequacy of current accounting standards and practices. Poor corporate governance
practices are not only detrimental to long-term corporate financial stability, but also to the financial security of
individual Canadian investors and the well-being of the Canadian economy as a whole.
Pension plans and other large institutional investors, as major investors in the Canadian equity market, have a
responsibility to invest with a long-term view to satisfying the financial requirements of beneficiaries and ensuring the
sustainable environmental, social and economic framework necessary to provided adequate returns to future
beneficiaries. For this reason, pension plans are interested in corporate governance practices that support these
SHARE believes that a strong regulatory and enforcement regime is required in areas such as board accountability,
corporate disclosure and accounting practices. We also believe that institutional shareowners not only have the right
but also possess the requisite knowledge to provide direction regarding a corporation's governance policies and
practices. One commentator observed that active ownership matters even if specific features do not.
Studies reinforce the view that shareholder activism employed responsibly is a positive influence on corporate
decision making and performance and that strong shareholder oversight of a corporation's governance has a positive
financial impact on long-term shareholder value, especially in the case of underperforming companies.
To the extent that shareholders are able to support and promote good corporate governance within the corporations
they own, such involvement requires adequate disclosure about the corporation's affairs and mechanisms that permit
shareholders to exercise these rights and responsibilities, as owners.
Our written submissions, which I understand honourable senators have received, identify areas of reforms that we
believe will help to address the governance issues arising in the Enron context. We also believe that these reforms will
help to establish a framework of broad corporate accountability, provide shareholders with the mechanisms necessary
to be active participants in corporate governance and encourage a more long-term investment attitude, thereby
enhancing corporate performance, returning stability to equity markets and, ultimately, restoring investor confidence.
Our suggested reforms fall under six broad categories. I had intended to address them in some detail, but I can
simply state them and if honourable senators have questions I will elaborate.
The six broad areas cover board independence, shareholder democracy, share structure, auditing practices,
corporate disclosure, and pension fund and mutual fund disclosure.
We recognize that not all corporate governance practices can be mandated. However, a mandatory corporate
governance regime for corporations addressing reforms discussed in our submission is required to provide minimum
governance standards and to ensure consistent, comparable and timely disclosure of information to shareholders. This
must be supported by an enforcement regime with adequate resources and penalties for non-compliance.
I am in the hands of honourable senators as to whether I should spend time on the specific recommendations or
whether you would just like me to answer questions.
The Deputy Chairman: Please summarize your recommendations, following which we will have a significant amount
of time for questions.
Mr. Yaron: Certainly. With respect to board independence, we recommend that an expansion of what constitutes
independence is required in our regulations and that boards of directors be comprised of a majority of independent
directors. This recommendation is consistent with that which was put forward by the Council of Institutional Investors
representing American institutional investors with more than $1 trillion in assets.
We also recommend that the audit committees, nominating committees and corporate governance committees of
corporations be comprised entirely of independent directors. We recommend that shareholders have the ability to vote
on board nominees individually — on proxy ballots. In that way, they are able to consider each candidate on his or her
With respect to shareholder democracy, we put forward a number of recommendations last year to this committee
to amend the rules governing shareholder rights under the Canada Business Corporations Act. The ability of
shareholders to participate in corporate governance is stronger as a result of these reforms and SHARE commends the
Senate committee for its leadership in advancing these reforms. However, both new and pre-existing problems require
immediate attention in this area, including the inability of shareholders to identify other shareholders, an inadequate
definition of who constitutes a beneficial shareholder for the purposes of the act, the difficulty of beneficial
shareholders to satisfy the act's requirements for providing proof of beneficial ownership at the request of a
corporation, confusion regarding filing deadlines and a lack of a dispute resolution mechanism.
We also recommend that the CBCA be amended to require confidential proxy voting where all proxy ballots are
tabulated by independent tabulators and where confidentiality should be automatic, permanent and applied to all
ballot items. The rules and practices concerning the casting, counting and verification of shareholder votes should also
be clearly disclosed in a company's proxy circular.
On the issue of share structure, SHARE recommends that the Canadian Business Corporations Act be amended to
prohibit dual class share structures with multiple voting rights. Each share of common stock, regardless of class,
should have one vote. Authorized unissued common shares that have voting rights to be set by the board should not be
issued without shareholder approval.
Under the area of auditing, SHARE believes that the independence of the audit committee is essential and should be
mandatory. We support the submission of the Ontario Teachers' Pension Plan endorsing the application of
independence criteria as articulated by the U.S. blue ribbon commission on audit committee independence.
We also support mandatory disclosure by accounting firms of fees received by corporations for audit and non-audit
services as required under the Sarbanes-Oxley Act. Finally, we propose the adoption of a five-year limitation on the
period that any accounting firm can provide audit serves to a corporate client with the ability of corporations to retain
the firm again after 10 years.
Under the subject of corporate disclosure, we recommend that all federally incorporated CBCA corporations be
required to disclose the results of votes at shareholder and special meetings immediately following a vote, using a form
posted on the System for Electronic Document Analysis and Retrieval, SEDAR, or on a company's Web site. The
Ontario Securities Commission, OSC, is currently considering this requirement for public issuers as part of its
continuous disclosure requirements.
As with auditors, we are recommending that companies be required to disclose in their proxy circulars all fees paid
to the public accounting firm that they retain to conduct the company's audit. Fee disclosure should include all fees
paid, including those paid for audit and non-audit services, and should define what is meant under each category of
We also fully endorse the submissions and recommendations of the Social Investment Organization, SIO, on
requirements for all CBCA publicly listed corporations to adopt corporate codes of conduct that incorporate social
and environmental principles, amendments to securities regulations, stock exchange listing requirements and to expand
the definition of ``material information'' to require companies to report on their social and environmental policies and
to disclose social and environmental risks.
The final area of reform deals with pension plans and mutual funds. Canadian pension funds are among the
country's largest groups of shareholders, owning approximately 25 per cent of the country's equity market. Funding of
pension plans is, therefore, heavily reliant on both well-managed corporations and the overall health of equity markets.
Without providing any of the background in our submission, SHARE recommends amending the Pension Benefits
Standards Act, PBSA, to clarify that fiduciary duty includes voting proxies and further specify that pension trustees
may not delegate this responsibility entirely to others.
We also concur with the Ontario Teachers' Pension Plan, OTPP, and SIO that federal pension and mutual fund
regulations should be amended to require all investment managers to apply proxy voting guidelines approved by their
pension clients and disclose proxy voting records or, at a minimum, provide compliance reports on at least an annual
basis, indicating votes not in compliance with these guidelines.
Finally, following reforms in the U.K., Germany, France, Belgium and Australia, SHARE urges the Senate
committee to recommend amendments to pension regulations, requiring pension plans to disclose the extent to which
social, environmental and ethical considerations are taken into account in the selection, retention and realization of
Senator Angus: Thank you for an excellent brief.
Mr. Yaron, you indicated that SHARE is a national, non-profit organization that originated in the labour
movement. Could you elaborate on that? I understand that it was because of the need or the desire to protect the
beneficiaries of retired workers, in that pension plans are comprised of retired workers?
Mr. Yaron: Yes, and indirectly to provide education to the trustees that oversee those assets.
Senator Angus: Your constituencies are the big pension plans. Would the Caisse de dépôt in Quebec be part of your
Mr. Yaron: Our constituencies are not the large pension plans, although we do have working relationships with
some of them. Currently, we represent more mid-range pension plans — small to mid-size plans — in Canada.
Senator Angus: There are buzzwords that around, often inappropriately, that refer to shareholder activist groups.
Would you consider your organization to be a shareholder activist group?
Mr. Yaron: Part of our mandate involves representing our affiliate pension plans in dialogues with corporations and
supporting the voting proxies and assisting with shareholder proposals that are filed with companies. To that extent,
we are engaged in shareholder activism.
Senator Angus: Would you attend annual meetings? You would not necessarily have people carrying placards that
say, ``Dump the CEO,'' but might you take a position at a meeting?
Mr. Yaron: Certainly. We attend meetings regularly with our affiliates, and we raise issues that are of concern to the
Senator Angus: I saw you in the room during the testimony from the Investment Dealers Association, IDA, a few
minutes ago. I was questioning compensation issues, which interest me. Do you have reference to that in your brief?
How could we improve corporate governance or issues you are interested in, in the area of compensation?
Mr. Yaron: Part of the problem with a discussion around corporate governance is that there are myriad of issues to
be raised. We have not included any discussion of executive compensation. However, we are concerned about it. We
take a strong position on disclosure of the expensing of compensations in corporate financial statements. Many of our
shareholders have spoken to this issue with many companies in Canada.
We currently view the situation as unacceptable, and we support efforts to provide greater disclosure around
compensation, to put executive compensation more in line with corporate performance and in proportional relation to
the salaries of the employees of a company.
Senator Angus: The previous witness alluded to the fact that, since 1993, it has been a legal requirement in Canada to
disclose the total compensation of the top five employees. I guess they are mostly executives. I forgot to ask Mr. Oliver
the following question. There seems to be a body of opinion evolving to the effect that that has not been a good
requirement. In fact, it has had deleterious results, in that it becomes a peer pressure thing. CEOs come to the HR
committees to negotiate, saying: ``I was quite happy with my $300,000 a year, but I see Harry over here in a smaller
company with less shareholder value is getting $800,000.'' There have been a number of very telling statistics published
to show that the total compensation has gone very radically in that direction since the bringing in of that law. What are
Mr. Yaron: Certainly, that is a consequence of providing disclosure on executive compensation. However, one has
to weigh that against the benefits that shareholders and investors receive in being provided that type of information
and deciding on how to factor that in to the value of the company.
I think that addressing the concerns that you have raised could be done in other ways. I have not given it a
tremendous amount of thought, so I am not able to elaborate in great detail at this time. However, it could be done by
providing other kinds of parameters that would constrain the level of compensation for directors. I do not think that
eliminating the disclosure requirement would be my first approach.
Senator Angus: I have some thoughts on this. It is also a requirement today — I am not sure if it is a strictly legal
requirement, but it is certainly part of the TSE guidelines on governance — that the HRC committee needs to have its
report in the annual report, signed off by the chairman of that committee.
Now, as we see in Bill 198, in Sarbanes-Oxley and in a lot of the new recommendations, it will be a requirement that
all the members of that compensation committee are ``independent,'' and that the chairman in particular will be
particularly independent, whatever that means. Would it not be sufficient, following up on my suggestion earlier of
what is reasonable, if you have people of good judgment who are independent, if you had a statement in the annual
report from the HR and compensation committees to the effect that they have carefully reviewed the compensation
packages of the top executives and the whole management team, have consulted with independent outside advisers as
to the reasonableness within the context of the particular industry of these numbers and are satisfied that they are fair
and reasonable in the circumstances?
Would that not do it? I am very concerned about comparing apples and oranges. There are surveys where people
will say that anything over $300,000 is unreasonable. Perhaps it is a very technical business, a global business, and
there may not be anyone in Canada qualified to be the CEO, or maybe even the CFO, in that particular company. You
would then have to go into the global market to fill those positions and pay much higher compensation than might be
considered reasonable in Canada.
Mr. Yaron: Unfortunately, I do not think that would be sufficient. I think you will find a lot of boards arguing that
the current levels of compensation are reasonable, with which we disagree. I do not think that simply providing a
statement in the annual report or in the proxy circular to that effect would assure our shareholders.
Having said that, if there were parameters that we knew were being followed that set limits on the types and levels of
compensation awarded, it might provide more comfort if a company were to make that kind of statement in lieu of full
disclosure. Those kinds of parameters do not currently exist. I think that obtaining those kinds of limitations would be
a much more difficult task for government than simply providing disclosure.
You can do it, if it is possible.
Senator Angus: It is a problem for the boards, as well. The CEO comes to the HR and compensation committees and
says, ``I am looking here at the annual report of Algoma Steel, and the president is getting X, Y and Z,'' which the
board of Algoma thinks is reasonable, by international steel company standards of that type of a company. We think it
is apples and oranges, but the guy says something different. I do not know what the answer is. I am looking to see what
your thoughts would be. You can sometimes kill the goose that lays the golden egg. It is a drop in the bucket
sometimes. It seems like a big number, but the results may be there. I think that is the key, tying the compensation to
Senator Fitzpatrick: This, too, has to do with compensation. I do not know whether you heard the question that I
asked the previous witnesses, which had to do with shareholders having the opportunity to review and vote on
compensation packages. In fact, I think now in most cases disclosure of compensation for the five top officers is made
in the information circular. I think what Senator Angus was referring to is normally made available to shareholders.
Normally included in that is the support of an independent adviser or consultant, saying the compensation is within or
outside the ranges for that particular industry.
I ask you the same question. Once a company goes through the process of having a compensation committee make
recommendations on compensation for senior officers, supported by independent advisers, do you believe that should
be submitted as a recommendation to shareholders for approval?
Mr. Yaron: I do not see the harm in doing so. I understand the witnesses before me had indicated that that type of
decision or complex assessment should not necessarily be left to shareholders. However, I do believe, certainly from the
perspective of institutional investors, that they have the sophistication to make a determination in that regard. I think
it would probably be a prudent step.
Senator Fitzpatrick: If there were a process in which the proper steps are taken, something like an audit committee,
in determining what the compensation level should be in a particular industry for a particular responsibility, you
believe that the shareholders, properly informed, could make such a decision?
Mr. Yaron: Yes.
The Deputy Chairman: You are not suggesting that the people of Canada might vote on salaries for Members of
Parliament, do you?
Senator Fitzpatrick: We have already settled that.
The Deputy Chairman: You cannot fire the judges.
Mr. Yaron: Practically speaking, simply referring these types of decisions to shareholders is not necessarily the only
option.I think that if shareholders were assured that there are clear rules and parameters put in place in the
determination of salaries there would then be enough confidence to put that in the hands of the HR committee or the
I am not saying that we necessarily advocate for that requirement, but I do not think we would necessarily be averse
to it. I am not sure that that is the only way to address the issue.
Senator Meighen: On page 4 of your brief, which, as Senator Angus said, is very complete and well done, you talk
under the heading of director independence about Enron. You say, ``The scandals involving Enron and other
corporations strongly indicate that the TSE guidelines are inadequate.''
It is a bit like saying the criminal activity in Afghanistan indicates that our Criminal Code should be amended. I do
not see the leap of logic there as necessarily valid, but it may be.
I think in our discussion this morning, for which you were present, there was some consensus that the problem with
Enron was not so much about rules or the absence of rules but the fact that people either lied to the board of directors
or that people did not do their jobs as mandated. I am not sure I am prepared to make that leap of logic that you do in
terms of concluding that TSE guidelines are inadequate. They may be, but I am not sure Enron proves it. I should like
your opinion on this: Even with more rules, could Enron have been avoided?
Mr. Yaron: I am not suggesting that Enron would have been avoided if the TSE guidelines had been mandatory.
Where there is fraud and other types of white-collar crimes of the nature committed in Enron and WorldCom, a strong
enforcement regime is required. That is something we are calling for in our submissions as well.
Senator Meighen: I do not mean to interrupt, but that is the same as saying we need better policing to stop armed
robbery or murder, is it not? You are saying we need better enforcement?
Mr. Yaron: That is right.
Senator Meighen: That would not necessarily put an end to it, but it may catch more crooks?
Mr. Yaron: That is correct. We need more review and better enforcement. As to the TSE guidelines, I think that
speaks to the issue of investor confidence. Canadian investors are operating in the same market environment as
Americans, in the sense that the issues that are of concern to investors in North America are shared interests.
Therefore, when Canadian investors see things happening in the United States, it affects their perception of the
The current voluntary guidelines under the TSE are not sufficient to restore investor confidence. We need certain
mandatory guidelines in place to address that aspect of the fallout from Enron.
Senator Meighen: That is a fair position, although I am not sure I agree with you. It may be good luck more than
good management, but we have not had an Enron in this country.
Mr. Yaron: Maybe not of that magnitude, but we certainly have had our share of dishonest people and corporate
mismanagement in this country. It is not on the scale of those organizations, admittedly, but nor are we the size of
Senator Meighen: There is a debate going on, as you know, as to whether we need a rules-based or judgment-based
system of supervision. You seem to come down, and tell me if I am incorrect, on the rules-based side, more like the
Americans. Can you tell me why you believe that?
I also want to slip in one other question before the chairman stops me. You say, for example, that the audit,
nominating and compensation committees must be comprised entirely of independent directors. There is an argument,
which I think has some validity, that someone who is not independent but is associated with the corporation can add a
dimension to the deliberations but clearly cannot carry the day because there is more than one person on the
committee. If the committee is composed of a majority of independent people, then the independent people can carry
every day if they want to.
In your submission, you suggest that nobody who is not independent can sit on that committee. At the end, you then
talk about how anyone, for example, would be precluded from sitting on the board of a company who has at one point
been a director, employee or officer of a non-profit organization in the last five years. That would mean, in my case,
having been the president of the Stratford Festival, having taken a great deal of time and effort to try to raise money,
and having been modestly successful, I could not sit on the board of, let us say, a large bank or a large transportation
company from whom I was successful in extracting $100,000 for five years. Why not?
Mr. Yaron: Let me begin by saying that the criteria to which have you referred are those of the Council of
Institutional Investors, which represents very large American investors with assets of over $1 trillion dollars. This is not
our view alone on this issue.
Senator Meighen: You have adopted them, though.
Mr. Yaron: Certainly, we have. As to the specific criteria that you have pointed out about an individual having been
an employee, officer, director of a foundation, a university or a non-profit organization from which it has extracted a
Senator Meighen: Five years ago.
Mr. Yaron: — within five years, this again speaks to the perception of independence of the director. If the director
has some type of vested interest in securing a benefit for himself as an employee, director or officer of another
organization, whether it is through a for-profit capacity in obtaining certain contracts or through a non-profit
organization obtaining a donation, we believe that this has the potential to compromise the independence of that
director. It certainly would not be in every instance but it does have that potential. It is for that reason that that
criterion is there.
Senator Meighen: What about the one about the audit committee having one non-independent person? You reject
this. Why are you so strict on that? What is wrong with one non-independent member of an audit committee who
should be able to bring some pretty specific information on the financial structure of the company to that committee,
because they work in it day in, day out?
Mr. Yaron: In principle, the integrity of the audit committee is paramount. We are suffering a crisis of confidence in
the auditing profession, and if not actual then a perceived crisis. The requirement to have an audit committee
comprised entirely of independent directors serves to allay these perceived fears and actual problems where they have
The U.S. National Association of Corporate Directors' blue ribbon commission on audit committees, you may
note, does have a provision that allows for an exception in a situation where the company has identified a particular
director to provide exceptional value to the corporation's performance as a member of the audit committee. I do not
think that we would be averse to having that type of exception included, but, in principle, we are calling for complete
independence of the audit committee. We believe that the current situation demands nothing less.
Senator Meighen: I hope that the pool of independent qualified directors deepens rapidly in Canada, because there
will be a need for it.
Mr. Yaron: If you are referring to the actual criteria that have been stipulated in Sarbanes-Oxley, we have not
reflected on what constitutes the level of proficiency of a board director who would sit on an audit committee.
Depending on how you frame that requirement, we could avail ourselves of a much larger pool of individuals in the
country to provide those services.
Senator Prud'homme: I will use the French name of the organization of a witness who appeared yesterday —
L'Association de la protection des épargnants et investisseurs du Québec.
I see that you are including the Ontario Teachers' Pension Plan and other groups similar to you. Is there a good
working relationship among the parties? Do you meet at all?
Mr. Yaron: We do.
Senator Prud'homme: You are facing such strong, highly organized and well-defined people. Instead of subdividing
your efforts, you should be putting your minds together to achieve success.
Mr. Yaron: We do have working relationships with a number of shareholder organizations and a number of investor
groups in Canada. We do not have official relationships with, for example, the teachers or the Coalition on Corporate
Governance, but we try to align our views and interests with these other groups wherever possible.
As these issues achieve more prominence and as the voice of shareholders is being recognized more, we are working
more closely with these groups. For instance, we are developing relationships with the Social Investment Organization
and the group that you mentioned.
Senator Prud'homme: I have never attended a board meeting. I know Senator Angus will make a joke about that. I
am an average Canadian. I have a few shares, and so I am not in conflict of interest. Now I intend to attend one,
because after all I am on this committee. I would like to see where my allies would be if I happen to share some of your
opinions or some of the opinions expressed yesterday. Who knows? I may go the other way and defend the views
expressed by those who are highly organized, well-financed and armed with research to face this growing interest of the
Could you take the initiative to be much closer as a federation expressing the same view that you have expressed so
well in your brief, which I promise to read again on the weekend because I am a learner. Would it not be fair to put
Mr. Yaron: I am not quite sure that I follow.
Senator Prud'homme: Would it not be better if you had a federation of people who are like-minded people?
Mr. Yaron: SHARE represents the views of institutional investors at this point. We represent the interest of small
and mid-sized pension plans specifically. The individual investors about whom you speak are represented by a number
of other investor groups with which we are trying to work. I am not sure whether a larger federation will result or
whether we will develop strong working relationships. However, I will take your comments back.
The Deputy Chairman: Thank you for your presentation.