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

Issue 9 - Evidence of December 5, 2002


OTTAWA, Thursday, December 5, 2002

The Standing Senate Committee on Banking, Trade and Commerce met this day at 11:10 a.m. to examine and report upon the present state of the domestic and international financial system (Canadian perspective to the Enron collapse).

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

[English]

The Chairman: We are here to continue hearings and examine and report upon the present state of the domestic and international financial system and, in particular, the Canadian perspective to the Enron collapse.

Our witness this morning is Mr. Purdy Crawford, counsel to Osler, Hoskin & Harcourt, LLP.

Good morning, Mr. Crawford. We are happy to have you with us. I know you have a statement to make, and then senators will ask you questions afterwards.

Mr. Purdy Crawford, Counsel, Osler, Hoskin & Harcourt, LLP: I have provided copies of my outline to honourable senators. There are two or three articles attached to it that may already be in your file.

I have labelled my discussion ``Confidence of Investors in Canadian Capital Markets.'' As you know, internationally we are often treated like the U.S. whether we like it or not. There is the question of confidence of Canadian investors in Canadian markets and the question of confidence of foreign investors in Canada.

There are a lot of public policy matters that relate more to honourable senators in dealing with confidence of investors in addition to good corporate governance. This country has a great opportunity, as we go forward, to be one of the great wealth creators with the resulting opportunity to have the resources to care for our people, and to help more people elsewhere in the world.

However, I am limiting my comments to areas of corporate governance. I am not aware of any surveys of the international community as to the perception of Canada as a place to invest, and to what extent these surveys relate to corporate governance. I believe the Toronto Stock Exchange may have done some, but it seems to me that in making this decision as to whether we follow the U.S. or to what extent we have a made-in-Canada solution that is an important piece of information. From my varied experience I am convinced that we have better corporate governance in Canada. I am not against the U.S. I think it is one of the great societies of the world, with great people. I am also convinced that the same is true of our security analysts and the employers and issuers to whom they relate.

I make that comment based on a certain amount of experience. Over the years, I have been on the boards of some U.S. public companies. I am on the board of one now and I chair its audit committee. I chaired a committee established by the Canadian self-regulatory organizations with OSC monitors relating to the standards of analysts. I simply cannot believe that the e-mails, et cetera that we have seen coming out of what we used to call the ``top-drawer'' firms in New York — the investment dealers — could happen with the calibre of people leading our investment dealer firms in Canada. I am sure it happens to some extent, but I am talking about a question of degree and not a question of black and white.

I am also convinced that our securities laws are as good as those in the U.S., although we may have been lax in enforcing them. I say that partly because of my background and partly because I am currently chairing a committee that is reviewing the securities laws in Ontario. We have published a draft report for comment. We are reviewing the comments and we will finalize our report very soon. Many of our early comments, what I might call the ``low cherries,'' were picked up by Ontario in their recent draft bill to which I will refer later.

What should we do in Canada to build confidence in our capital markets and respond to initiatives in the U.S.? The markets overtake us. They have perceptions of what is going to happen and they reflect that long before it happens. My guess is that by the time we start completely developing our responses the markets will have long since recovered.

By way of background, there is a lot of recent information that indicates that investors will pay a premium for good governance. The question is, what is good governance? As I am sure you have heard here, if you apply the Globe and Mail standards to Enron or to WorldCom, in terms of good governance they would have ranked pretty well.

At least until recently, it has not been possible to demonstrate that there is any correlation between good governance and performance, at least from the perspective of good governance that results from filling in the appropriate blanks. As a matter of fact, there was an analysis done by two professors from Montreal that shows, among other things, that the 25 firms with the best governance scores under-performed the 25 firms with the worst governance scores in the Globe and Mail survey. I have another very interesting article entitled ``Second Thoughts On Board Independence'' and another from the September Harvard Business Review entitled ``What Makes Great Boards'' the make the same case. That may well change as a result of the greater emphasis by institutional investors on the quality of governance. What may well change is that companies with good governance may actually reflect higher value in the markets over time.

The recent legislative developments and stock exchange and SEC rules in the U.S. and their counterparts in Canada are designed to deal with misbehaviour, compromised accounting, fraud, et cetera. They have absolutely nothing to do with creating shareholder value other than in a negative sense. That may be important. If you stop the crooks, at least you maintain the value. In fact, if these laws and rules cause directors to be more conservative and cautious, they may be negative to creating better performance. It is a question of a trade-off between risk and certainty or caution.

I am not denying, however, that these developments are not fundamentally important. They are and should be. The integrity of our capital markets requires no less. In this connection, the best thing directors can do to guard against misbehaviour, compromised accounting, fraud, et cetera, is to be satisfied with the values and integrity of the CEO and that the CEO and other seniors officers have spread their values throughout the culture of the organization — that is, they walk the talk. If a director does not trust the CEO, then either the CEO should be gone or the director should get out. I think that is the hallmark of what directors should be looking for in terms of fundamental core values in terms of corporate governance.

We have a high level of corporate concentration in Canada compared with the U.S. We have developed very sophisticated rules to deal with this. Corporations that want good share performance should be scrupulous in dealing with related party transactions and strong independent directors are needed to properly deal with these rules. I am, however, concerned about the tendency to disenfranchise the shareholder. Where I come from, shareholders do and can add value whether they hold 20 per cent, 40 per cent or 60 per cent.

In this connection, the ROB in its ranking of corporate boards treated as non-independent those directors who are from a parent company that controls the public subsidiary. This is wrong. The U.S. rules do no go this far, although — with one exception — major shareholders are treated as non-independent for audit committees.

The Toronto Stock Exchange revised their draft guidelines under date of November 28. I assume they resubmitted them to the Ontario Securities Commission for approval. This would appear to mean that if a controlling shareholder has business relations with the subsidiary, none of the officers or directors of the controlling shareholder would be independent on the board of the public subsidiary. It is only a guideline, but they suggest that the compensation committee should have no representatives from the controlling parent.

That is why I emphasize our sophisticated rules about arm's-length transactions, because I do not think the shareholders should necessarily be disenfranchised in that case. Perhaps a majority of the directors should be independent, but not disenfranchised.

This means that we need a carefully considered solution for Canada for our current issues. I am confident that with the input of this committee and that of many organizations in discussions across Canada, this will happen.

Some people have suggested we should simply adopt the U.S. Sarbanes-Oxley and the New York Stock Exchange rules and move on with it. That is the case, of course, for interlisted companies.

I would like to see, however, a made-in-Canada solution. We should require that a majority of directors of key committees be independent. We should require, and this is only a guideline proposed by the stock exchange, that if a company does not have a non-executive chairman, it should have a lead director or presiding director. ``Presiding director'' is a term used in the U.S. rules that I think will be mandatory there under Sarbanes-Oxley.

The initiatives taken by the Ontario government in Bill 198 go quite a way to deal with these issues. They include, providing the OSC power to levy fines and order profit disgorgement; raising the maximum court fines from $1 million to $5 million; prohibiting market manipulation so as not to have to rely so much on the general public interest power; new rule-making power for the OSC for audit committees; continuous disclosure reviews; civil liability for continuous disclosure; certification of financial statements, and so forth.

We need a less complex regime for smaller corporations that want to resort to the public markets. The market system dictates that we must have a higher level of tolerance for risks for start-up entrepreneurs. It is an interesting and fine balance. You want to encourage the start-up entrepreneurs — the new public companies — to have good governance, but if you go too far in terms of costs or the ability to recruit independent directors for those types of companies it may be negative to our society.

Of course, I conclude by simply saying: One securities regulator for Canada?

The Chairman: Thank you for the helpful comment.

Mr. Crawford: I am on the record clearly that we should have one and I do not care how it is created. It needs the cooperation of the provinces and of the federal government, ideally. Of course, that is a controversial subject these days. We deal with this quite a bit in our draft report reviewing the securities laws.

You can deal with many of the issues through cooperation among the commissions across Canada, issues such as only one commission dealing with registration, only one commission clearing with prospectuses. You may need legislation to permit inter-delegation or complete what the regulators call ``forbearance.''

The issue you cannot deal with is policy initiatives responding to problems in the market. I have had much experience on the committee dealing with the way the Canadian securities administrators work. It is a good organization. They made a great contribution. However, now it takes forever because it has to be a compromise. We have B.C. with a very good initiative, trying to simplify the law. We have the CSA working on a uniform act. We have the report that I am involved with, mandated by law but, nevertheless, all going in some different directions. We need some common direction.

Senator Meighen: It is always a pleasure to see you before us, Mr. Crawford. Thank you for provided us the benefit, at a very reasonable price, of your expertise. We appreciate it very much. Indeed, now that you are back as counsel for Osler, Hoskin and Harcourt, perhaps you will have more time to share that expertise with us.

You touched on the often-heard cry for one securities regulator for Canada, either in the sense of one organization or a coordinated national organization. To what extent do you think the lack thereof has contributed to what you pointed out was probably a lax enforcement of our securities regulation? To what extent also has lack of resources of the OSC and other regulatory bodies contributed to that lax enforcement?

Mr. Crawford: Lack of resources has probably been a factor. However, the reality is that the SEC, in the terms of the size of the country and the number of public companies it has to regulate, does not have the resources that the Ontario Securities Commission does, relatively. Having set up Sarbanes-Oxley and in the process of setting up a new supervisory board for the accounting profession, it does not have the funding from Congress to set it up and get it going.

On the whole, there have been two issues here. Whether it is at the criminal law level, at the OSC level or province level, we seem to take a long, long time to get from investigation to the laying of charges. It seems to take much longer in Canada than in the U.S. I am not an expert in this area. I heard some people discussing it several weeks ago. There needs to be more cooperation among the people in the Department of Justice, or those who deal with criminal law prosecutions, and the provincial level and other investigators. The Department of Justice clearly does not have the resources to prosecute every potential criminal offence, so it should be in a position, working with the provinces, to pick major ones that have precedent value, or to try to liaise with a common approach. One commission defers to another and I am sure this situation has impacted negatively on enforcement.

Senator Meighen: In another area, you mention the advisability of having different or less complex rules for smaller companies than for larger. Could you put a little flesh on that bone in terms of where you draw the line between a larger and smaller company, and what areas you would like to see less complex and, therefore, I presume, less onerous rules for smaller companies?

Mr. Crawford: I have been thinking about that issue. It really does require quite a bit of work to decide that. It is important that you push new organizations to the capital markets or small organizations that are there today towards higher standards. The United States has some literature coming out now predicting that Sarbanes-Oxley will mean that fewer companies will go public or fewer European companies will list in the United States, and so forth.

It is a question of balancing the desire to have some basic standards with encouraging risk-taking and encouraging entrepreneurs. You need the independent directors. I think the guidelines of the stock exchange require a majority of independent directors. The mandatory part of their proposed rules would require two independent directors. It is often difficult for some entrepreneurs to get independent directors.

Entrepreneurs who go through the venture capital route usually have some guidance in this respect. Some entrepreneurs think that we only need directors to help our letterhead and make us look good. This is the reality, not a criticism. Many entrepreneurs think this way. We must educate them about how older, more senior people with wisdom and background can help them with their business. I do not know where we draw the line, but a line must be drawn.

Senator Meighen: You think it can be done and should be done?

Mr. Crawford: Yes, I think it can be done.

Senator Meighen: You refer frequently to the need and the importance of independent directors. I agree with you. Just to be the devil's advocate, it seems with increasing rules about what constitutes an independent director, it is harder and harder to find this beast. If this so-called independent director's spouse happens to own shares and is the supplier of a company, some would say they are not independent. On it goes.

I would like your comments on our risk of going overboard on our concern about conflicts. I am concerned about conflicts not disclosed. I think if you disclose a conflict, it reduces quite substantially the danger of a conflict. Everyone knows.

We all have our biases, and everyone knows the biases that the legislator said must be disclosed. You are able to judge that person's opinion in the light of that bias. What would be your comments on that?

Mr. Crawford: I have a quote on page 4 from Jay Larsch, a Harvard business school professor:

Independence is a psychological condition as well as a legal one, so you can have directors who are technically independent but don't act that way when they become connected to a board.

We all know cases of strong, powerful directors who call it as they see it who may not be independent in terms of business relationships.

General Electric has recently come up with guidelines in response to the independence issue. They say that if you are on their board and you are a supplier of product to General Electric, if it is one per cent or more of your sales in total, you are prima facie not independent, although the board can still determine that you might be independent.

The rules are getting complex. For example, the early ruling of the SEC said that if a director had any child, offspring, working for the company on which you were a board member, you would not be independent. They have changed that now to an officer or an executive officer. That is interesting.

I am not sure what the New York Stock Exchange is doing and what Sarbanes-Oxley does, but I think it is important to require all the directors of all the major committees — nominating, governance, compensation and audit — to be independent. Even if you have a majority of independent directors, but you have four our five who are not independent, if you are not on one of those committees, your contribution as a director is significantly lessened. I would not go beyond a majority, and I would be careful about the definition.

Senator Kroft: When we began the work of this committee this past June, we spoke to officials from the Toronto Stock Exchange, the OSC and others about the question of where we should stand. ON the one hand should we become a haven for being the higher standard, and, therefore, we would be attractive because we would be seen as being the place where everybody knew they could get a fair shake. On the other hand, if were too strict, we may be a bit of an obstacle for investors or people who wanted to do public financing. This has become a complicated watching people move back and forth through this spectrum.

I was interested in picking up a question you were asking today about how we are perceived as a market. It would be valuable to have that kind of information if does exist. The lead story in the Financial Times of this morning stated that the chairman of the New York Stock Exchange in a speech yesterday warned that the United States corporate governance rules will seriously damage the NSE's business by deferring foreign companies from listing in the United States. If the New York Stock Exchange has concerns about not being an attractive and competitive place, then that, obviously, has implications for us. We should know where we stand on that spectrum of attractiveness.

You have raised that point, underscoring that we should have that information.

I would like to go to the area of compensation, although that is not a subject that you have raised in your notes.

Mr. Crawford: Yes.

Senator Kroft: This is within your scope of governance that you said you wanted to focus on.

In view of the things that have created our preoccupation here, it has become increasingly obvious to me that they would not have happened if the obscene scale of the potential reward did not put amazing temptation in the path of people who otherwise might have conducted themselves in a perfectly appropriate fashion. I would like to invite you to put the issue of compensation in some sort of context for us. Where do you feel it stands in the importance of issues that we have to deal with? What do you think the Canadian issue is as compared with the U.S. issue in this regard? Could we have some dialogue on the subject of compensation?

Mr. Crawford: Until Enron and WorldCom, et cetera, my great interest was and is human resources and people and leadership programs and development of people within companies, and therefore compensation.

There is a good study that compares very favourably to the work of the Canadian Council of Chief Executives. A committee studied the area of compensation. Clearly, the compensation in the U.S. has gone much too far. I used to be in favour of, for example, options for directors. I am not sure I am any more. If you have director or officer compensation, you have to value the options, and if the total package is reasonable, there is nothing wrong with options unless you can exercise them quickly.

It seems to have been a problem in the U.S. that officers were getting huge numbers of options, pushing up the stock, dumping the options and taking the big profit, which later went down. There has been some of that in Canada, too, although I do not think it was deliberate in the case of one of our major companies.

It is very troublesome. We get the surveys from the compensation consultants, and they sort of jack one another up because they measure the comparable companies in a never-ending cycle. On the other hand, the problem in Canada is that we are very much one market with the U.S., and we have to recruit people from the world, or at least from North America, and we have to deal with the compensation levels of the U.S. I do not think we have gone nearly as far in Canada, but when you have an integrated Canadian-U.S. operation and U.S. employees, you have to pay close attention.

Can you outlaw compensation? They tried to do it through the tax system in the U.S. If compensation was more than so many dollars, you could not get a deduction, but it has not made a difference. Certainly, this committee could state something very strongly about the responsibility of directors to keep this under control.

I am fortunate in a sense. My involvement with boards of directors in practically all the cases is with people whose integrity I trust. We review the performance of the CEO, retain our own compensation consultants where we think it is advisable and try to bring some discipline to it in terms of compensation.

One thing to do with options for officers is to have a long vesting time over time — perhaps so many a year for five years — and also have performance conditions. They cannot vest unless certain performance criteria are met. That is where I and most of the boards I am involved with are now — not always successfully. You cannot get the options unless you meet certain performance criteria over a fairly long period of time. That is a fairly good regime.

Another thing to do, which is more akin to ownership, is to have restricted stock. Again, you have the stock, but you cannot get it unless certain performances are met. However, it is ownership and your value is up and down, unlike options, where people argue you do not have any downside.

Senator Kroft: We recognize that even the best, well-meaning CEO or boards are under pressures in these areas. Regarding the appropriateness of some regulation that allows people to have a reference point — whether it is the length of term of options before they can realize or whether it is performance related — that would bring discipline to it, is there a place for building that into law or regulation? Is it a matter of, over time, trying to affect the corporate culture?

Mr. Crawford: I would say some of each, maybe. It is partly corporate culture. You may be able to regulate, for example, the terms of options. My own approach to compensation is that I like the base salary reasonably low, and the annual incentive and the long-term options, or whatever else, to have really tough performance criteria. If the CEO and his people perform well, they can make quite a bit of money, but there is a lot around to pay for it. If they do not perform well, you have a salary somewhat below the medium. You could regulate more options terms. It is hard to regulate how much you can pay someone in this North American market.

The Chairman: Is it up to our committee to talk about such things, or is that a stock exchange matter?

Mr. Crawford: It would be appropriate for your committee to say something.

The Chairman: It would be in general terms without getting down to specifics.

Mr. Crawford: You cannot get down to specifics. It is more of a warning to directors about this issue. There is an issue with the stock exchange, just as the New York Stock Exchange is worried about losing listings — and properly so, from what I read about what is happening in Europe and the London exchange now attracting North American companies.

On the other hand, stock exchanges, having gone public, have a bit of a conflict, particularly the Toronto Stock Exchange. I see no evidence that they are not handling it carefully, but the reality is that it is there. Maybe the best course of action is to have the highest possible rules and attract listings, but someone from Europe with a different culture probably will not see it that way.

Senator Angus: Whereas I agree that bad corporate governance is not the only thing affecting investor confidence. Certainly, there was a bubble that burst, whether it was Enron or WorldCom or companies such as JDS or Nortel in Canada where there was not even fraud necessarily. The shareholders suddenly threw up their hands, and they do not believe the numbers any more and so forth. What you are doing in this area is very good.

With respect to the solution you mention for Canada vis-à-vis the Sarbanes-Oxley U.S. solution, I read this morning that Gordon Nixon said something along those lines in a speech yesterday.

I would like to approach my question from your own personal experience as chairman of the audit committee of a U.S. public company. I am not sure I know all of your background, but my guess is that you would not qualify, strictly speaking, under Sarbanes-Oxley to be chairman of an audit committee in a U.S. public company. Would I be right?

Mr. Crawford: There are two tests. I would not be disappointed if I did not qualify.

Senator Angus: I am sure you would not.

Mr. Crawford: There are two tests. You have to have an accounting expert. I certainly do not qualify as that, and, as a matter of fact, the SEC in the last two or three days has come out with some guidelines on that. It is a long, complicated definition, by the way. Then you have to be — the term is not ``sophisticated about accounting,'' but another one.

Senator Angus: It is ``financially literate.''

Mr. Crawford: Whether I qualify as being financially literate, God only knows. People at the company I am involved with and their advisers seem to think I do.

Senator Angus: I do as well. However, that is only to be a member of the committee, not to be chair.

Mr. Crawford: That is only to be a member; that is correct.

Senator Angus: Your case makes the point of how stupid Sarbanes-Oxley is. Here is a person like yourself with not only tremendous experience in management as the CEO of a huge international public company, Imasco, and all your experience on boards and as a councillor to securities commissions and so on. I, as a shareholder, frankly, would feel comfortable if you were chairing or playing a key role on the audit committee or the corporate governance committee or the comp committee of any company I am investing in.

Yet, with Canadian companies that are inter-listed with the U.S., if we applied, I think we would technically have to meet Sarbanes-Oxley. You will have to hire a bunch of chartered accountants to be on your audit committee who may not have any of the kind of the experience you need.

Mr. Crawford: I have been going through that, restructuring a board that is coming out of CCAA, and the bondholders are putting in the directors. We have quite a lineup of good directors, but we have not got our accounting expert yet. Everyone we have turned up so far that were good had conflicts.

It is a bit like Senator Kroft's broader perspective. Generally, in terms of attracting investors to the Canadian capital markets, we need to show a good image to the world. We can do things well and maybe better than the U.S. and not go to the extremes. This is the way it often happens in legislation. The outlawing of any loans or even assisting — not guaranteeing but assisting in getting loans — is overkilled. You should outlaw people who use their company for their bank, which has happened in Canada, too, as you have noticed recently. However, to say that home help for moving and all those loans are illegal is overkill.

Senator Angus: It is. I agree. I also heard you, in answer to Senator Meighen, talk about taking the comp committee, the audit and the HR, and the governance focused in Sarbanes-Oxley. Are you saying a majority are independent, as opposed to every one of them being so-called independent? As you point out, and this last paper in your bundle on what is an independent director is interesting. They have taken it to ridiculous lengths.

Gordon Nixon seems to be recommending some kind of international agreement between Canada and the U.S. that recognizes that we are a different place, with a different economy, a different corporate structure, and even different capital markets. Therefore, there should be a ``Canadian'' way of doing it. How close do you think we are to that? Do you think that for now, at least, in our Canadian public companies listed in the United States, we must have word-for- word compliance?

Mr. Crawford: I read Mr. Nixon's comments. The possibility, within any reasonable time frame, of getting the type of agreement that he is talking about, which would permit a made-in-Canada solution even for the inter-listed companies, is not likely to happen. After all, the shot is being called here in the president's office. It has some relevance to our Canadian position.

Senator Angus: Is it your understanding that there is a lead time, say February or March next year, or are these inter-listed companies already tied down to the words of Sarbanes-Oxley?

Mr. Crawford: I can only say is that various provisions become effective on different dates. For some, there is quite a long lead time; for others there is not. I do not have it. I am not able to articulate the various effective dates.

Senator Angus: There is still a bit of hope?

Mr. Crawford: Yes.

Senator Angus: When we first got into all this talk about corporate governance, going right back to the Dey report, it became in vogue. That is probably one of the reasons that Canada got ahead of the U.S., as you pointed out. One of the big points being made was the separation of the CEO and chairman. I am hearing around the corporate governance circuit that maybe this is not such a big deal after all, provided you have a strong lead director and a process for in camera meetings for independent dealing with the management by the board. That is, whether or not you have a non- executive chairman perhaps is not is the nearly as important as people thought it would be for a while. Could you comment?

Mr. Crawford: I agree with that. That is my view. We all know cases where the non-executive chairman is not as strong or as independent as some of the other directors, but life is complicated.

Senator Angus: Is it true that in the United States the concept of the CEO and the chairman being the same person is much more prevalent?

Mr. Crawford: Yes. I got into a debate about that in a board meeting about three weeks ago in New York. I made the suggestion that if we do not have an independent chairman, maybe we should have a leader presiding director. They all looked at me as if I were some radical from the north, rather than a small C conservative.

Senator Angus: My last question is on this subject of the independent chair. It is on your point of it being a global economy or an intertwined economy these days. You said U.S. standards must be applied on compensation levels. In like fashion, when you are recruiting new senior management for many of these companies, there simply is not a wealth of talent in Canada and you have to go to the United States. In my experience, I am finding at the top level they will not come unless they can be both the president and the CEO. Do you find that as well?

Mr. Crawford: To some extent, yes, I agree with that.

Senator Angus: It is not the end of the world, is it?

Mr. Crawford: No, it is not the end of the world.

Senator Oliver: Mr. Crawford, in preparation for your visit today, I reread a chapter in Bill Dimma's new book on corporate governance last night dealing with director accreditation. I know that you are familiar with that. In the book, he listed a number of objections that senior CEOs and directors had to the thought of it.

One of the articles you gave us today in your package is, ``What Makes Great Boards Great,'' from the Harvard Business Review. In view of my suggestion about director accreditation, I would like to read two or three lines from that on page 107 and ask you to comment on it. Mr. Sonnenfeld states:

Patrick McGurn of Institutional Shareholder Services, like other expert observers, has frequently questioned the financial literacy of troubled companies' audit committee members. It's certainly true that many board members have their jobs because they're famous, rich, well connected — anything but financially literate. But just as many board members have the training and smarts to detect problems and somehow fail to do their jobs anyway.

In light of that comment with the paper you submitted to us today to read, could you comment on the concept of accreditation?

Mr. Crawford: I happen to agree with Bill Dimma. As long as you grandfather old guys like myself, there should be a process. I think it is one of those things that must develop. I would not make it mandatory at the start, but in looking for new directors, there should be a process of accreditation.

As you know, some institutions have provided partial funding to help the Institute of Corporate Directors to set up a program, in conjunction with the Schulich School of Business, to develop that program. I think it is well worthwhile.

I also had dinner one night this week with Dean Ross from McGill. He is looking to develop the McGill management school or something like that. I think that is very worthwhile. It should happen.

Senator Oliver: I would like to know from you some of the things that you think would be prerequisites in such a course as that. At one conference I went to on corporate governance, one thing they said is that you always must begin by having someone like yourself, who is a well-known, very experienced director, to be there at those schools and at those courses to give training for best practices.

I suppose that something in terms of financial literacy would be another thing that should be there. What other things would you say would be material?

Mr. Crawford: Certainly in the financial area in a private sector profit-making company, the bottom line begins and ends with numbers. Yes, strategy and human resources is important, but if you do not have a grip on the numbers, you have a problem. I went through this myself. If you do not understand the numbers and you let a couple of board meetings go by, then you are reluctant to ask the question. The financial part of it is important.

Coming back to Senator Kroft's question, the understanding of human resources and people and their development and how incentive plans work is very important. Ultimately, operations are fundamental; strategy is important, but if you do not have the horses to implement it, you are not going any place.

I talked to the person developing the curriculum for the Schulich School. I do not know whether people like me have to be there, but they need guidance to develop the curriculum. The lawyers put the framework around the infrastructure around which corporate governance operates, so the lawyer's role is important but experience, know- how and expertise is also important.

Senator Oliver: In a recent survey done in the U.K. of experienced directors, some 65 per cent indicated they have no training for business risk assessment, they did not know how to ask a question on business risk and they were unprepared for it. What do you say to that finding of 2002?

Mr. Crawford: To some extent, the accounting profession have confused this. They would like to take over business risk. I do not blame them. They see it in accounting terms, whether you have the right insurance for risks from this and that. The reality is that for most of the companies we are involved with, the biggest business risk is whether you have the calibre of people long-term. That is a human resource function. Some of the financial risks are important, but it is much broader than financial. It is operational and human resources. It is a very important matter for boards of directors to make sure that you focus all the major risks and either have them assigned to the board or to the appropriate committees. It is not just the audit committee.

The Chairman: Have you given any thought to how a board should be made up, especially in a large company? Should there be a diversification of talent? It cannot be enshrined in legislation — that is not what I mean. How do you perceive it can be done, because on the boards I used to be on, we were sort of clones of one another?

Mr. Crawford: I am a great believer in diversity of backgrounds on boards — not only diversity in terms of male- female balance, but also in terms of expertise or know-how. There used to be a favour in the U.S. that you had to get fellow CEOs; they were strong and independent. The reality is they are so delighted to be on their friend's board that I do not think they are as independent as they might be.

People with business school backgrounds, economic backgrounds, business backgrounds, psychology backgrounds, all help the mix. That means that accreditation or training is important, because if you bring in a psychologist or somebody who would be good on a human resources committee, they have to be responsible on the board also. Therefore, they need more financial help than an experienced business leader, for example.

Senator Kelleher: One of the big problems that has been shown to exist, particularly in the United States, is unethical behaviour. As we all know, it is difficult to legislate ethical behaviour. From your experience and background, how do you suggest we tackle the problem of unethical behaviour? That is what it comes down to much of the time, together with greed.

Mr. Crawford: As I said earlier, if you are on a board and if you have complete confidence in the integrity of the CEO and the other leaders in the company, it makes life fairly comfortable in terms of the types of things we are worrying about in the U.S. That, of course, is provided they have the level of intelligence, they are not lazy and they are prepared to dig into things. I will not get into Enron. That is another matter.

It is hard to teach ethics. However, what you can teach is the ethical implications of what people are doing. I think a lot of the investment analysts in the U.S. and other people lost their way. It is easy when you are young if you go into a firm and a certain practice is common to not think through the ethical implications of it. Law schools or business schools may not need a specific course on ethics, however, it is very important that they ensure that the curriculum is permeated with illustrations of the ethical, or potential ethical implications of the transaction. You can do a lot in that area. There are people who do not give a damn about that, fine. At least other people will benefit.

I remember a young lawyer I taught in a course at a law school in Ontario. It was a bar admission course. I was concerned about young lawyers signing minutes as if there had been a meeting. There actually had been a judicial decision about it. I was speaking to a huge class of about 400 people. I said that is wrong and it should not be done; one should not indicate they were present at a meeting where certain things happened when they were not. I got booed. That has changed now. However, I am sure it was a matter of not understanding the ethical implications of what they were doing.

I have not really answered your question. I think much can be done in that area.

Senator Kelleher: Following up in that area, are you or would you be prepared to comment on the Canadian Council of Chief Executives Code of Corporate Governance? Has this been a useful code?

Mr. Crawford: It is a good and useful code. I am not sure it adds anything to the literature or guidelines on the subject in Canada. However, if it makes a few CEOs stand up and take notice, fair enough.

If it is contrasted to what this businessman committee of the conference board in the U.S. came out with in terms of compensation, you will get the answer to my question.

Senator Kroft: Mr. Crawford, I would like to specifically ask a question about audit committees. Like you, I have served as chair on audit committees of public companies and I am very sensitive to the enormous pressure and challenges in that position, never more so than now. I have been preoccupied through these hearings with trying to find a way to help that part of board governance work more effectively and in a way that would give greater confidence to investors.

Early on in our hearings, one of our witnesses led us into a discussion about audit committees having independent advice. This raised all sorts of concerns. However, I want to put a suggestion or proposition to you to get your reaction. There is all sorts of advice available to an audit committee and consultation, both with and without management between the corporate auditor and audit committee.

I would like your reaction to the idea of the audit committee having an independent expert at their disposal at a quarterly meeting to make observations on pursuing this or that, according to the agenda. Recently an expert in the field suggested to me that there are wonderfully talented people who have retired at the age of 55 or 60 years. There is a boutique opportunity for people to provide an enormous service to corporate governance.

Without getting into the specifics, would you react to the idea of an audit committee having such an expert available? There would obviously be a financial component; the company would have to fund it. Would you make an observation on the propriety of an audit committee having independent outside advice, not to produce another audit, but to help guide them in their work?

Mr. Crawford: Sarbanes-Oxley does something rather unique. They legislate direct responsibilities to the audit committee. Under our normal structure, the board delegates to the audit committee — I do not what the implications for liability are. The auditor is responsible to the audit committee, for the hiring and firing, et cetera.

I am not ducking your question. It is very important to keep underlining that the chairman of the audit committee should meet regularly with the lead in the audit firm and establish a relationship. It should be constantly underlined that they are responsible to the audit committee and not to management because if they are, then in theory, you should not need expert advice from the audit committee. That is not always the case.

I would think it is important for the audit committee to have available consulting advice from time to time about important accounting or financial matters. However, I would doubt the utility of having a permanent sort of ombudsman query.

I would very strongly support the first route. The auditing firms have learned their lesson. They will be more independent.

The Chairman: Thank you for being with us Mr. Crawford. You have been very informative and helpful.

The committee continued in camera.