Proceedings of the Standing Senate Committee on
Banking, Trade and Commerce
Issue 12 - Evidence of February 12, 2003
OTTAWA, Wednesday, February 12, 2003
The Standing Senate Committee on Banking, Trade and Commerce met this day at 4:05 p.m. to examine and report
upon the present state of the domestic and international financial system (Canadian perspective to the Enron collapse).
Senator E. Leo Kolber (Chairman) in the Chair.
The Chairman: Our first group of witnesses are from the Advisory Group on Corporate Responsibility Review.
Mr. Kazanjian, please proceed.
Mr. John Kazanjian, Partner, Osler Hoskin and Harcourt (Advisory Group on Corporate Responsibility Review): The
Advisory Committee that we represent consists of six large, Canadian, widely held public companies: Alcan; Bell
Canada Enterprises, BCE; CN Rail; EnCana, Royal Bank of Canada, RBC; and TransCanada Pipelines Ltd. All of
these companies are inter-listed, that is, they list on the Toronto Stock Exchange, TSE, as well as on the New York
Stock Exchange, NYSE, and, in some cases, on other foreign stock markets.
We formed this group with the intention of being able to work closely with the federal government on a legislative
and regulatory response to the Sarbanes-Oxley Act. We formed the group shortly after its passage.
The group's focus is to support a timely legislative and regulatory response in the interests of Canadian capital
markets. We have submitted a brief in December 2002, in anticipation of appearing before you at that time.
Essentially, it is in three parts. Mr. McAusland will outline the first part, in the continuation of this opening statement,
which deals with the general principles that we believe should influence Canadian governments in how they address the
The second part comprises a set of principles on what the substance of the legislation should look like. We have
some specific, but non-exclusive, legislative proposals and, in particular, some thoughts with respect to the definition of
``Independence,'' for example.
The only thing that has changed from our view back in December and the way we see things now is that our
committee is becoming increasingly concerned with the passage of time since the enactment of Sarbanes-Oxley. While
there have been various Canadian initiatives, we would like to see the process pick up some momentum and move
forward as quickly as possible, in terms of the Canadian response — particularly at the federal level.
Mr. David McAusland, Senior Vice-President, Merger and Acquisitions and Chief Legal Officer, Alcan, Advisory
Group on Corporate Responsibility Review: We were chatting with Senator Kolber and he mentioned Warren Buffet,
which brought a little story to mind. Warren Buffet's response to his many marriages and the issue of success in
marriage was, ``low expectations...'' His views on success in marriage do not extend to the capital markets — quite the
I thank you for this opportunity on behalf of Alcan and our five partners in this endeavour. The situation that we
see unfolding right now from a regulatory and legislative framework in the corporate governance area between the
U.S. and Canada is troubling to us. It is troubling for two related reasons.
First, a schism is developing as a result of two differing approaches to the border. One is much more aggressive.
They are not proceeding at the same pace or in the same direction. In the context of two capital markets that had been
moving towards integration, this raises the spectre of the risk of a costly patchwork approach that is taking form. This
patchwork of regulations is difficult to comply with and creates a significant financial burden on corporations. It is a
burden for companies such as Alcan and our five partners; for the smaller companies it is obviously much more
We have worked out different matrices that show how difficult it is for an interlisted company to work out all the
different regulations and rules to which one must comply. In the longer term, it does not make sense. It is not
If this schism between the two jurisdictions is not addressed, the efficiencies we have been seeing between the capital
markets will be driven out one way or the other: We do not want to see the Canadian capital market marginalized or
become less integrated, less efficient or less liquid. That is certainly one possibility. As it is now, the Canadian capital
market cannot compete with the U.S. unless they are competitively rigorous in the area of corporate governance.
We have seen the voluntarism in the area of corporate governance that was put forth by the TSE a number of years
ago. We do not believe that this is any longer competitive as an approach. It will require something more meaningful.
Certainly to be viewed as competitively meaningful by our friends south of the border, it will require something with a
more formal framework.
We would also like to raise the issue of jurisdiction. We would not like to see U.S. securities law stretching over the
border to impose solutions to situations in Canada that are purely Canadian. For example, the whistle-blowing rules in
the U.S., which could require purely Canadian situations to be subjected to scrutiny by U.S. regulators of the
Department of Labor.
We would like to see Canada move to help create an environment with compatible requirements — if not exactly the
same — which would allow Canadian corporations to be deemed compliant on the U.S. side. This would encourage
both Canada and the U.S. to work out reciprocal exemptions.
Senator Oliver: In your brief, you have a lengthy section dealing with various definitions of ``independent.'' Most
people feel that if you are to have a corporate governance system that works in large corporations, there must be
independence. Members of the audit committee and the board of directors must be independent. In Canada, the
United States, the TSE, and other places, there are all kinds of definitions of ``independent.'' Does it mean financially
independent, or you are not married to someone? I should like to know your definition, and what you think we should
have in Canada for definition of director independence?
Mr. Kazanjian: Perhaps I can respond to that.
We do reference the fact that there are several possible definitions of independence.
Senator Oliver: You have that here, and there are many different ones.
The Chairman: To help all of us, I believe it is articulated in the presentation.
Senator Oliver: It is item No. 8 in their presentation.
The Chairman: Could you take us through that? Would that suffice, senator?
Senator Oliver: Sure. I would like them to draw a conclusion. They have set forth what many other people say what
might be a definition of ``independence.'' I would like to know what they would recommend to this committee.
Mr. Kazanjian: Succinctly, we would recommend that the soon-to-be finalized New York Stock Exchange
definition, which is very close to the TSX definition, be employed as a single standard to be used both federally and
Senator Oliver: A single standard?
Mr. Kazanjian: There are special circumstances, for example, under Ontario or Quebec securities laws where there
are transactions for which you need a special level of independence. However, in terms of the independence that you
are addressing, which would be board composition, committee composition, and so on, it would be beneficial to have a
single standard that is compatible with the U.S. standards and the standards of the people with whom we have been
working up to now, which is the TSX definition of ``unrelated.''
The TSX definition and the NYSE definition are actually quite close.
Senator Oliver: What is the difference between the two?
Mr. McAusland: There is almost no difference. They are both based on the principle of no relationship that would
materially interfere with their independence. They are worded slightly differently.
Senator Oliver: It means that you could not be married with someone or be brothers. What about financially? Could
you be lawyers and work for the company and the law firm receive a retainer from the company. Is that independent?
Mr. McAusland: It is a question of judgment that should be left to the board as a whole to determine on a director-
by-director basis, which is a mechanism that is envisaged in the context of these rules. The board would have the
responsibility to review each director and make an assessment on that director's independence. They would put that
assessment in writing in a proxy circular and make the statement to the shareholders, to whom they are responsible,
indicating that they have determined that each director is independent. Where there are issues that could potentially be
viewed as of interest to the shareholders in relationship to the independence in question, those should be disclosed.
Let me give you an example. Our company, and other companies in our group, although we are not required to right
now, are taking a proactive approach on this. We make an independence determination for our directors and send it
out in our proxy circular, which will be going out for the current season. With a few of the directors, we will put in a
footnote saying, ``We have determined that they are independent, however, you may wish to note that this director is a
member of a law firm that does receive fees from time to time.'' We would do that as a matter of good disclosure.
Notwithstanding that, they are still independent.
I will continue to answer your question directly. On the question as to whether a lawyer who is working for the
company, or someone who is a consultant or a partner in a major consulting firm that works for the company in
question, can be an independent director, the answer is absolutely yes. However, it is a question of the order of the
magnitude of that relationship and the extent to which it is material and would be judged to be material on the basis of
three different tests. One is materiality to that consulting firm. You would have to look at the situation and say, ``How
big is the consulting firm? Are they 3,000 partners around the world?'' In that case, $500,000 in fees to them is totally
immaterial. You would then have to ask, ``How material is $500,000 for the company itself?'' For a company like ours,
it would be immaterial. For other companies, however, maybe it is not so immaterial.
Also — and this is where it would get a little trick — how would the capital markets see it? Would the capital
markets judge it as material or immaterial, or likely to influence the abilities of that person to stay independent?
Obviously, if the consulting firm in question were a lot smaller, then the situation would change. You cannot have a
hard and fast rule. You must rely on the judgment of the board on these issues, the judgment for which they will be
Senator Oliver: How do you avoid the problem of ``self-serving'' since it is no longer an objective test. It is a
subjective test. How do you get around self-serving decisions and conclusions?
Mr. McAusland: On this issue?
Senator Oliver: Yes.
Mr. McAusland: I disagree with you. I think there is some objectivity involved in this. There is some subjectivity
assessment to be applied. However, ultimately, I think it is an objective test on the issue of independence.
When a board is aware that, in the face of the capital markets and officially, in writing, in their proxy circular, they
have to go on record with an assessment on a director-by-director basis with respect to independence, they will be
cautious and they will be required to be objective. There is no question about it.
Senator Oliver: I should like to move to audit committees and auditors. In the U.S., and in many places in Canada, a
number of people have tried to define what is meant by being ``financially literate.'' In other words, in the Enron case
that this study is about, it was alleged that there were a number of people on the audit committee on Enron who were
not ``financially literate.'' What does ``financially literate'' mean to you, and what kind of financial literacy should there
be for people who sit on audit committees of companies the size of yours?
Mr. McAusland: First, I do not think this issue is limited to companies the size of ours. The difficulties and
intricacies around financial issues are not just owned by the large companies — in fact, they may be just as owned by
the smaller companies.
Senator Oliver: Enron was a big company; yours is a big company.
Mr. McAusland: You can have the same degree of risk and complication around financial statements in smaller
companies. Indeed, I would say it would be a bigger challenge for the smaller companies to get qualified financially
literate people on their board than it would be for large companies.
On the question of financial literacy, they initially went for a very rigid view of this in the U.S. You have seen it.
They say they are backing down from that and they have tabled a new draft that is somewhat softer. They have not
gone quite far enough, though. Unless they soften it further, they will still end up unduly restricting the pool of people
who will be eligible for these kinds of things.
I think that ``financially literate'' is a question of having significant experience, either as an accountant, a financier
or a financial analyst, in dealing with and working with financial statements. Clearly, you do not have to be an
accountant to have that kind of experience. Not all chief financial officers are accountants. Not all bankers are
accountants. A lot of people who work in the area of taxation as tax professionals, for example tax lawyers, must have
the ability to work with financial statements and understand them and have financial literacy. You want to avoid a
situation where you unduly restrict the pool of eligible directors. On the other hand, you want to impose a relatively
high threshold in this area. I think the way they have been pointing themselves under the border under Sarbanes-Oxley
is too restrictive.
To go back to your previous question on independence, they have been very aggressive there. They are requiring a
heightened level of independence at the audit committee level, where they audit over and above all other independence
tests. No member of the audit committee can receive any compensation whatsoever. There is zero tolerance from the
company. That will be very awkward to work with.
The Chairman: I think you said that there should be one independence standard for both provincial and federal.
Mr. McAusland: Yes.
The Chairman: We are not quite sure you how you pull that off.
Mr. Kazanjian: By recommending a standard that is so compelling that both the provinces and the federal
The Chairman: We understand that, but it is only the powers of persuasion. The CBCA is our only entrée to doing
Mr. Kazanjian: Yes, but we also noted Minister Bevilacqua's request for guidance on the topic. If this committee
were to come up with a clear and strong recommendation on a definition of ``independence,'' it would be very helpful.
We know, for example, that sometime later this year the Ontario Securities Commission will be developing an
independence standard for audit committees under Bill 198. Depending on the timing of your report, I would think
that a statement by this committee would be helpful and a recommendation that we have a single standard would be
helpful as well.
The Chairman: We would certainly be prepared to do that. Do you think Quebec will listen to us? That is not a good
question, but I throw it out into the air. Did you watch the television about health care the other night? There is a real
adversarial posture that develops in these kinds of things.
Mr. McAusland: I would like to pick up on a remark that came out of the last exchange in terms of the independence
standard that may be forthcoming with respect to audit committees and the comment I made about the Sarbanes-
Oxley legislation. Imagine a situation where you have regulators saying that there is a general test of independence for
the directors — that is, no material relationship, as we discussed. Let us use that example. You then say, ``Well, for the
audit committee, there is a different test of independence.'' For instance, that may be the case under Bill 198. Although
it is not in force yet, they are leading that way under the Sarbanes-Oxley legislation. It begs the question as to whether
or not there is such a thing as relative independence. How can you be relatively independent? You are independent for
one committee and for the board but not for the audit committee. That is nonsense. It does not make sense. There
should be one straightforward, clear independence test that is applied by the board and communicated to the
Senator Kroft: I should like to pick up where Senator Oliver was on the issues of independence. I have been trying to
find a specific reference to standards. You are relying on the fact that it is the responsibility of the board of directors to
attest as to independence of the members of the board of directors. When you start out, the act comes into effect. Are
they, then, going to give statements of confirmation or independence of themselves? Is that the process? I am trying to
understand where the objectivity comes into this, and I will move to what constitutes standards for judgment after that.
I am trying to get the process clear.
Mr. Kazanjian: On the question of subjective versus objective, the rule says that the directors have no material
relationship with the company. It is up to the board to conclude and disclose that that is the case. While there is an
assessment, it is measured against an objective standard that there is no material relationship with the company.
Whether there is more detail added as these rules evolve or not, that is the fundamental test.
Senator Kroft: Let us take the widely reported Disney case, for example. It is very instructive and interesting on a
number of levels. It was a situation of where a number of directors had relatives — children or others — working for
the company and this violated one of the rules under which they were operating.
Let us say that is a rule, namely, that you cannot have family working for the company. This report would then say,
``We have examined and found that none of the directors have relatives working for the company or we have assessed
it. Some may or may not have, but in the case of a particular investigation, we have determined that it does not have
negative consequences for the independence of this director.'' Would it be within their scope to make that kind of
Mr. McAusland: Yes, absolutely, and they would have to stand by it.
To fully understand this, I will tell you how we approached this. We have acted proactively, and I believe the way we
are approaching this is the correct way. We do a review of each director. We send out a detailed questionnaire and
examine the records of the company and put forth a report to the board in respect of each director, that report having
been submitted to the director for completion, or correction.
Senator Kroft: What is the ``We''?
Mr. McAusland: The management of the company.
That final report is given to the board. The board will then look at it and determine whether or not there is any
relationship that would be viewed as material.
Procedurally speaking, there is a decision on a director-by-director basis. The director in question then leaves the
room, comes back, and then the next one leaves the room. That is the way you must do it because they cannot be
involved in the decision of their own independence. It is not that heavy duty a procedure, but it is done that way.
In a company like Alcan, if a director has a son or daughter working in a smelter in northern Quebec, it will not
interfere with his or her independence just because a relative is employed in the company. On the other hand, if they
have a son or daughter who is a senior officer in the company — well, they cannot be on the HR committee, that is for
Senator Kroft: Is it your understanding that the rules now in place and coming into operation in the sense of people
getting used to them and living with them in the U.S. will provide that kind of environment in which boards can
operate? I am not saying they should, but is that latitude given to the best of your knowledge?
Mr. McAusland: Yes. What I just described to you is in line with the current U.S. legislative framework, subject to
the remarks I made with respect to the rules in the audit committee, which, in my view, need work. They will create
unnecessary complications at the level of the audit committee in the area of independence because they have this extra
test on independence that creates a notion of relativeness.
The Chairman: Are you a committee that, if you made it more precise, this would open the door to all kinds of
lawsuits and conflicts?
Mr. McAusland: I would certainly not advocate precision around this.
The more precise these things are, the more artificial they become by definition. It takes away what I think is a
fundamental principle that a lot of people lose sight of, namely, that good corporate governance is not an issue of
form, it is an issue of substance. A lot of people have lost sight of that in the current environment. They believe that all
of these problems can be repaired by creating precise new rules, little forms, and boxes to be checked off: ``Are we
compliant with this specific rule or that specific rule? If we check all the boxes, we will ipso facto have good corporate
governance. I am sorry but that is not the case. Corporate governance is an issue of substance, not form.
Senator Kroft: In the language of today's debate, you move on the principle side more than the rules side of the
regime? I do not mean to put it too strictly.
I am trying to get a clear concept. You begin overall by calling for a rigorous regime to follow. I am not trying to
overstate that, but that is roughly what you are conveying. You say that this regime must be consistent and not look
like we are taking a soft route as compared to our most important neighbour market. I am trying to get below that and
see what that means; what would the application of a rigorous environment mean in specific cases?
Mr. Kazanjian: The issue that you have been discussing, which is independence, and the standard that has been and
will be applied by the New York Stock Exchange and to a large extent the TSE is more of a principles-based rule.
However, it carries with it two pieces that are essential. First, it tells the board to take responsibility for the decision,
for the assessment, if you like. Is there a relationship that is material between this director in the company or
management? Second, it requires disclosure.
On the specific question you asked, it was not whether this is a finely detailed rule that says that you cannot be a
director if there is a first, second, third or fourth cousin. That would be a rules-based standard. According to what Mr.
McAusland said, we are expressing a principles-based standard of independence and backing it up by saying ``take
responsibility for the decision and disclose it to the public.''
Senator Kroft: I thank you for that. That is very helpful.
The Chairman: Are you not still confused? I am.
You seem to be of the opinion that we should legislate everything, or did I read everything wrong? It seems that you
are suggesting a philosophical discussion: for example, ``please ensure they are independent, but you decide what that
Mr. Kazanjian: I thought we were clear in saying: Please make sure they are independent and please use the New
York Stock Exchange standard.
The Chairman: When you articulate the standard, it does not sound particularly rule-based. I am not debating with
you but I am trying to understand it.
Senator Kroft: It comes down to no material relationship. You are saying that that is when the board exercises the
judgment as to materiality
Mr. McAusland: That is correct. By the way, Mr. Kazanjian is referring to the NYSE. However, the legislative
framework in the U.S. — forget the NYSE rules — follows that. With respect to this particularly narrow rule on the
audit committee that I referred to, the Sarbanes-Oxley, SOX, legislation largely leaves the issue of independence alone
and leaves it to the NYSE.
We do not want to have a confusing set of principles around this issue because it will leave boards perplexed. In
terms of applying their judgment on independence, it will leave shareholders perplexed and it may incite shareholders
to act unnecessarily. We have to give guidance to boards and to the capital markets such that this is the standard that
we expect people to live by. It is a single standard but the boards have to apply it. It is up to the boards to make the
assessment within that standard.
I do not know if that is any clearer but somehow I do not think that it is.
Mr. Kazanjian: On this issue, we have described what the Americans do and a definition that is consistent with what
the TSX has done from a definitional standpoint. We have said: ``We think you should do what they are doing on this
Senator Kroft: With regard to your point number 16 about fines and the sanctions for misrepresentation of financial
position, I do not know what has been in place, in theory. In terms of the courts, there have been substantial numbers
always theoretically possible. Do you expect that the authorities and the corporate marketplace will accept this? If
somebody were to come down with a $1-million fine, do you think that is the kind of environment to expect? In other
words, we are not talking just theory. Do you think this will become the reality?
Mr. McAusland: If you were asking whether corporate Canada is ready to live in a world where the sanctions for
misconduct are substantially more severe than they have been historically, I would answer, unequivocally, yes.
Our company and our group would strongly endorse that. We believe that we have always done things correctly and
we have tried to rise to the highest possible common denominator. We believe that our colleagues do that and we
believe that, to an overwhelming degree, corporate Canada does that. There are people who do not because there are
bad apples in every basket. By all means, we endorse that vigorously.
That may be part of the problem we are living now: There has not been aggressive or rigorous enforcement. Some of
the fallout we are seeing now is undoubtedly, in part, due to that. There have been fines that have not been that serious.
Senator Kelleher: When I read your first three proposals, I get the feeling that you are saying, when you cut through
all of the blather, that we have to keep up with our neighbours. We have to be competitive and make sure that we are
as strict or up-dated as they are.
Our chairman has already thought of that and so we are headed to New York and Washington around the end of
March. In fact, we hope to meet directly with Mr. Sarbanes and Mr. Oxley. Apparently, there are two people that have
these names and we want to pinch them to see if they are real and we will have a chat.
I get the feeling that you would like us to move as closely to the Americans as we possibly can. That presents a bit of
a problem for us in that the Americans seem to operate on a rules-based system, whereas we operate more on a
principles-based system. Somehow, we will have to compromise. I do not think that the Americans are in a mood to
compromise on too much these days.
Do you have any advice for us as to how we are to realize this objective? I am not quarrelling with the objective or
the principle that you are enunciating, but how will we do it? I am sure the committee would welcome your thoughts or
Mr. Kazanjian: I think it would be important for the Americans to understand that we currently have a solid system
of corporate governance in this country; that we have over 180 of our largest companies that have now been put in the
position of having to entirely comply with the work of those two good senators; and that, for the most part, we are or
can be in the same ballpark. Once they believe that we are in the same ballpark, we should be in a position whereby
they would recognize some of our laws and, to use Mr. McAusland's example, to let Canadian labour agencies resolve
whistle-blower complaints instead of the U.S. Department of Labor. To get there, the Americans will have to feel
comfortable that the purpose or principles that they are trying to achieve will be satisfied by our regime.
Mr. McAusland: I would like to add something that needs to be stated when you have your chat.
While we have had some notable problems in Canada, they have not been as sizable. Even though the Canadian
capital market is significantly smaller, proportionately viewed, the problems are smaller and less dramatic. Related to
that is the fact that in three key areas, the Canadian regulatory framework has historically been ahead of the U.S.
framework. There are three key areas: Insider reporting has been tighter and more complete covering more people than
the U.S. Timely disclosure rules have historically been, and remain, more demanding. The rules of timely disclosure are
far more rigorous in Canada than they are south of the border. Finally, an extraordinary example, they are clamouring
to have auditors named by the independent audit committee as opposed to management. As you well know, Canadian
corporate law has since time immemorial required that auditors be elected by the shareholders.
We do not have anything to be ashamed of coming out of the box. That being said, they cranked it up to a higher
degree. We do not want to have an actual or apparent discrepancy in terms of corporate governance standards between
the two capital markets, because the smaller, more vulnerable capital market — which is undoubtedly the Canadian
capital market — will end up suffering.
The bottom line in all this is the issue of cost of capital for Canadian companies. If we do not stay competitive and
do not get ourselves in a situation where we are viewed as being competitive from a corporate governance perspective,
the cost of capital to Canadian companies will ultimately go up.
Senator Kelleher: I do not think any of us disagree with your observations that we are a bit ahead of the curve vis-à-
vis corporate governance and regulation and things of that nature. A recent OECD study confirms that Canada has
been leading the pack here.
However, we will run into something similar — God help us all — to the softwood lumber dispute. We have a
fundamental problem there because the American lands are 90 per cent privately owned whereas in Canada it is
reverse. The lands belong to the Crown.
In effect, the Americans are telling us that they want us to change the system under which we handle lumber. I am
afraid that we will be met with the same argument in the sense that they are going to tell us to change to their system. If
they insist upon that, it will be a problem for us.
What arguments are we going to use that we can continue with our principles-based system? While it may be
different, it will still result in good management and protection for the companies and government in the States. How
do we accomplish this? It is hard to tell them that our system is better and that it is working well and that we do not
think that we should have to change it.
Mr. Kazanjian: I appreciate the concern as well as the sense that the Americans currently may have even less
patience than they had a while back. I also appreciate that what you have pointed to in the softwood lumber case is an
issue — whether it is trans-border movement of goods or people or whatever — among an ever-increasing set of issues
regarding how well we get along with our neighbours that we, as Canadians, will have to confront.
The difference here is that they have already acted. They have already legislated with respect to 180 of our biggest
Senator Kelleher: That is what worries us.
Mr. Kazanjian: They have already put the stake in the ground. The question is, ``What do we propose to do once
they have put the stake in the ground?''
It is different than other issues that are more fluid. Mr. McAusland's company and other clients already know that
they have to deal with a set of rules over the coming year. Those rules were not made here.
Senator Kelleher: This is certainly the problem, as we see it. We will to have to confront this. Obviously, we want to
do that with which our corporate clients can live.
Senator Kroft: If we had a choice of inter-listed companies being subject to Sarbanes-Oxley and New York Stock
Exchange rules, what do you think would be a typical company's selection? It seems that everyone is figuring out a way
to become exempt from these rules. It is not clear to me that there would be any advantage for a company to do that.
They still have to function in the marketplace. Is exemption an issue?.
Mr. McAusland: It is not only an issue for American capital markets; it has become an issue for the Canadian capital
markets, as well. There is a history on a variety of issues where Canada has been ahead of the curve. Canadians are
looking to see something here to reinforce their confidence.
Senator Kroft: If a Canadian company had a choice to get exempted from U.S. regulations, would they choose to do
Mr. McAusland: I am sure some of them would. Viewed in a vacuum, the answer to that question must be ``yes.''
However, we do not live in a vacuum.
The question is a bit too hypothetical: The reality of the situation is that companies will not have that choice. If
Canada can somehow create an environment that gives the appearance of being competitive from a corporate
governance perspective, then companies will be able to access the U.S. capital markets to a certain degree with some
sort of exemption under SOX, by virtue of the fact that their compliance with the new Canadian competitive regime is
I imagine that kind of access will end up being limited to some degree. Companies that want to be full, active,
regular players in the U.S. market will have to be SOX-compliant.
The Chairman: I thought that the senator was attempting to find out if Sarbanes-Oxley was too onerous for us.
Senator Kroft: I am reading everywhere that the European companies are seeking exemptions. I have not read much
about what Canadian companies are doing. Could you enlighten me on this? Is an exemption in their interest?
Mr. McAusland: You cannot compare the Canadian capital markets to the European capital markets. We have
become an appendage to the U.S. capital markets. The Europeans are more distant. There is a big distinction between
While it is desirable to think that we could get some exemptions, I think that the U.S. legislators will be looking to
see a competitive regime in Canada before they go that route. The issue is much trickier for Canadian issuers than for
European issuers. It is quite obvious.
The Chairman: The name of your committee is the Advisory Committee on Corporate Responsibility. It would seem
to me that one of the major problems that we are faced with from a corporate responsibility perspective is
compensation, but you do not want to seem to get into it. I am curious about that.
Mr. McAusland: Would you like us to get into it?
The Chairman: Absolutely.
Mr. McAusland: If so, would you like to ask a specific question?
The Chairman: No. The point of the matter is that one of the companies that you represent is BCE. They used to
own Nortel. Mr. Roth walked away with $135 million just before the whole thing collapsed. Canadians somehow find
that very distasteful. I do not know if it is right, wrong or indifferent.
We are faced with the kind of challenge that I do not think we cannot face up to. In other words, how on earth do
you legislate matters like that? I thought that perhaps you could shed some light on this.
Mr. Kazanjian: As a group, we have not addressed compensation issues. Our mandate in terms of representing this
group does not extend to compensation issues.
The Chairman: Why not?
Mr. Kazanjian: We wanted to develop a consensus on the issues that we considered to be most pressing. On
compensation, I think everyone will accept and see that the issues of certain executives in the United States or
elsewhere receiving huge amounts of compensation while employees and pensioners and others lose their jobs and so
on politicizes this issue in a difficult way. That is not on behalf of the committee; that is recognition of the political
tension that has been created by the Enron situation and by high levels of compensation.
The Chairman: I am not sure I understand your answer.
I read somewhere that the top man compared to the bottom man is now 411 to 1. I do not know if that is good, bad
or indifferent. It used to be 40 or 50. Perhaps that was too low.
We are a government here. We are keenly aware of the fact that the public thinks that the whole notion of greed has
certainly gone through the roof. By the way, this is not new. I remember Trudeau's chief of staff coming to talk to me
about this 25 years ago, and even then, they were considering legislating it. I said you cannot do that and it is not
possible. How do you stop it?
Mr. McAusland: This is really a market issue. It is a market from two perspectives. At the end of the day, we cannot
lose sight of the fact that on some of these issues the shareholders have to take their responsibility as well. If they do
not like what is going on, they can vote with their feet or otherwise, and they can vote management and directors out.
The Chairman: With respect, is that not slightly naive? Who puts the shareholders together to vote out management?
Mr. McAusland: I will complete this with a little story that is directly on point. I was in a restaurant earlier this week.
As I was leaving, right beside me was Stephen Jarislowsky, one of the most aggressive people on this issue in the
country. He was discussing the question of the compensation of Mr. Pierre Lessard, the CEO of Metro, who is getting
compensation valued at $26 million annually. Some people view this as scandalous. Mr. Jarislowsky's view was, ``He is
worth every penny of it.'' Why? Because he is creating the value for his shareholders. It is a value creation issue. He is
delivering the value.
The other remark I should like to make goes back to the question focusing on the independence of the board and
independence at the committee level. If you have a compensation or HR committee that is properly independent, then
those board members will do their duty and dictate their requisite levels of compensation. At a certain point in time,
the government and the regulators cannot, on issues as narrow as compensation, become the curator. The shareholders
have to take their responsibility. If they do not like it, they have to vote against it and change management.
The Chairman: I hear you.
Mr. McAusland: We never wanted to get into the issue of compensation.
Senator Prud'homme: I am always troubled me when I hear about bonuses for exceptional talent. Let us go back to
my field, the political field, and the bureaucracy. We give bonuses to bureaucrats from time to time for exceptional
duty to the country or to their minister or whomever. When you are an employee, are you not supposed to give the
maximum of your ability to either your ministry or your company so it can achieve the highest success, and do you not
do it for the money you receive?
As an example, would you not be worried about someone who never gets a bonus being the one who is advising
you? Am I under the obligation now to ask, when someone comes to advise me, before I listen to the advice, ``Has this
man been given the maximum? Did he get a bonus last year? No. The year before? No. The third year before? No.'' He
never gets a bonus and he still is there. Is he the right man for the job? You turn around and say, ``You better take the
advice of this guy. He is exceptional.'' Was he not employed for that purpose?
I believe I give the maximum that I can to the Senate, as I did to the House of Commons. I have the same salary as
everyone else. Some produce better than me, most likely, but we all have the same salary, and I have never heard of
bonuses of any kind. You then arrive and you say, ``For exceptional talent, there will be bonuses in the millions.''
If you could comment on that, I would appreciate it very much.
Mr. McAusland: I think my response to this will be based on two words: competition and incentivization.
Senator Prud'homme: The second word is?
Mr. McAusland: Incentivization. The fact is, like it or not, the Canadian labour market for the best and most
capable people is competitive. People will pursue talent aggressively. We do not live in a world where all people are of
equal talent; talent varies as we all know and there is a war for talent. You can have talent taken away from you easily.
You have to be able to retain talent. You retain talent through incentives. Incentives for many people are in the form of
cash. They also can be in the form of the work you like to do and the environment you like to be in. For some people,
cash will not be the necessary incentive. It will be what their job description is. For some people, it is cash, period.
For most people, at the end of the day, it is a blend of the two. You have to like where you work, whom you are
working with, what you do — and you have to have the sense that you are fairly paid. If you are not being
competitively paid, and someone is willing to offer you a similar job in an environment that is at least as good, then
you are not going to feel as good about yourself and where you are working, and you will move. It all boils down to
The HR committees of this country must determine the right balance and the right level of incentivization so that
they can retain the talent and grow the business for the good of the shareholders, employees, all the stakeholders and
the government coffers.
Senator Fitzpatrick: I want to follow up on the question of compensation. I heard what you said about getting
compensated on the basis of value. Part of the problem we have is how do you measure that value?
Let us take the Nortel situation that the chairman mentioned. That value was measured on projections and
optimism and not a whole lot more. Perhaps spending more money than they should have been acquiring other
businesses added to the projections and the optimism of where they were going. Obviously, that did not bear out in the
final analysis. It has always been a puzzle to me how you can get an appropriate and fair measure of value on a long-
I guess I come from the old school. I thought that the appropriate thing for businesses to do was to build assets that
would last. More and more, we are seeing this option business being driven by projections and media and financial
institution promotion. I have no problem with large compensation being provided to executives if they are creating real
value. I do have a real problem when the shareholders think that they have created value when, in fact, they have not.
It is not with respect to your company — I do not want you to think that it is directed there — it is just a question of
how do we fairly determine value on a longer-term basis?
Mr. McAusland: I have no problem with any of these questions. None of them is taken personally.
If you have transparency and good financial reporting and responsible directors, who are duly independent,
working at the level of the HR committee, you have a combination that should work. I am not here to comment on any
particular case that has been mentioned, but I will say that it is very unfair and unwise to evaluate any of these
questions based upon the lowest common denominator. Some egregious situation may have occurred; it is
inappropriate to tar everyone with the same brush and assume that everyone is out there to give it to the shareholders
and get unfairly compensated for no value created. I think that is an inappropriate assumption. I think it is appropriate
to assume that the overwhelming majority of boards of directors are trying their hardest to do the right thing: make the
company grow, keep it competitive, keep the right talent on board and create value for their shareholders. That is a
reality and we tend to lose sight of it.
The question is: How do we create the right competitive governance environment so that we create the right
atmosphere of confidence, be comparable and competitive with the markets south of the border, and be fair to the
people who have always done it the right way in good faith, with due respect for their fiduciary duties?
The Chairman: I should emphasize that this committee agrees with you. We know that the large preponderance of
corporations is honest, decent, hard working and everything else that you would like them to be. Our problem is with
the larcenous few that try to get rich too fast.
Regarding the Enron thing, it has been said that there are enough laws already existing to catch everyone who did
anything wrong there. Perhaps we should do nothing; but, as a government, I do not think we can.
Mr. McAusland: There are two issues. One is the ``orange suit theory,'' which we fully endorse. That is just part of
the conundrum. The other issue is the health and competitiveness of the Canadian capital markets and the workability
of the environment for Canadian companies that are destined to work with and access both capital markets, so that
they can have an environment where they can effectively function. We are saying that we have to ensure that the
Canadian capital markets remain functional. .
The Chairman: We buy that. You are right. There is no argument.
Senator Fitzpatrick: I agree, I think most companies are responsible and I think most directors are responsible,
especially in our major companies. I think that we have tried to practice good corporate governance.
My question was: Was your comment on the fact that most of these incentive programs and compensation
programs for chief executive officers are based on a measure of value, which is a stock market measure of value that
can be abused? Do you think there are other ways in which a measure of value could be more properly established for
Mr. McAusland: First, I disagree with the statement that most of the compensation packages are driven by the stock
price. Stock options form part of senior executive compensation packages. However, there are almost always cash
bonus regimes that are driven by different factors, things such as economic value added, EVA, which is much more
profound and longer term.
In terms of the stock option issue, stock option is not by definition bad and not by definition counter to the interests
of the shareholders — far from it. It is how those option regimes are administered that is important.
The Chairman: You re-price them.
Mr. McAusland: We are not here to advocate anything on compensation, as we said. We do not have a position on
re-pricing. There has been some abuse but the stock exchanges are there to regulate that and they have to approve re-
pricing. You cannot re-price options unless it is with the accord of the stock exchange or the approval of your
shareholders. That is very clear.
Senator Hervieux-Payette: I have a question concerning value and the relationship with compensation. I will give
you an easy example. Everyone now knows that the shares of Bombardier went down. When the shares are going down
because of the market situation — and, I guess, Mr. Milton is in that category — how do you evaluate these people?
The market has made some people very rich at a certain point with false economic results. When it comes down, I guess
Mr. Tellier will work hard at Bombardier. How do we assess that? When it goes up, it is fine. You send cheques,
options, and everything. However, when it does go down, nothing happens or we send a bonus or things like that.
I have difficulty with that. It sounds well and good that you sent a $26 million check to Mr. Lessard, but when it is
not going well what do you do? It is a system that works only up and never down.
Mr. McAusland: Is your question how do we make sure we can always pay bonuses, even when the stock is going
down? That is the way I understood it.
Senator Hervieux-Payette: No. I am sure that Mr. Milton is working more than 35 hours a week and he is trying to
get his airline in good shape. However, a lot of factors are intervening. They are not all factors related to him
personally. When the stock rises, it is not related to the person. Where do we make the assessment that the factors are
not the marketplace situation compared with the talent and devotion of the executive? That is where I have a problem.
As far as I am concerned, if the evaluation is based only on figures, sometimes the context has nothing to do with the
skill and talent of the person. Some people at Nortel were great evidence of that.
My question is: What do we do when it goes down? How would the formula work?
The Chairman: I do not think there is an answer to that. I think that things will go wrong and you cannot help it.
Senator Kelleher: You will be happy to know that I want to get you back to my original concern. I will not discuss
compensation with you.
This is my own opinion at this point, but I think it is extremely unlikely that we will end up with something that is
almost identical to the American legislation. We will end up with a Canadian system. I guess we will try to get it as
close as we can to the American system because we all agree that we must remain competitive. However, we will have
to learn, as happens so often, to live with two different systems here.
You will have to work closely with us to try and see how closely we can get these two systems and convince the
Americans that our system, while different, is something with which everyone can live. I would like to see you focus on
that problem that we are facing because I do not think we will end up with the same system as the American system.
Mr. Kazanjian: You only have to get close enough so that there is no discount for being Canadian in capital
Senator Kelleher: Is this something you can help us with and give us guidelines on?
Mr. Kazanjian: We would be happy to continue to dialogue with both the government and the Senate committee.
Senator Kelleher: You know better the capital markets than we do.
The Chairman: Maybe.
Senator Kelleher: Well maybe, except for our chairman.
Mr. Kazanjian: That is the issue that Mr. McAusland was referencing in terms of capital markets which are essential
to Canadian job creation, and so on.
Our companies are not just competitive in goods markets, they are competitive in capital markets. They raise money
from foreign investors and domestic investors. If the foreign investors want to charge more because they do not feel
secure and they apply, in effect, a Canada discount, then we have not done our job as lawmakers. The test is to get as
close as you must, to the people who account for 45 per cent of the capital market and have put a stake in the ground.
The Chairman: Gentlemen, it is nice to have you with us, two such bright, articulate fellows. We very much
Mr. McAusland: On behalf of our group, I would like to say to you, Mr. Chairman, and to all of your colleague
senators, that we very much appreciated the chitty chat.
The Chairman: Our last witness is from the Centre for Collaborative Government.
Mr. Lenihan, welcome. Please begin your presentation.
Mr. Donald G. Lenihan, Director, Centre for Collaborative Government: Thank you for the opportunity to make a
presentation before this committee.
I am here because, at the beginning of last summer, I was approached by a number of people in a discussion to bring
together a group of people to discuss, from a slightly different point of view, some of the issues that you have been
The project was sponsored by the Certified General Accountants of Canada. I think Guy Legault was in here a
while ago and mentioned the report that we produced out of this. In fact, I think it was tabled before you. It is entitled,
``A Question of Standards: Accounting in the 21st Century.'' That is what I am here to talk to you about today. I want
to give you an idea what it is we thought we were doing in this project, what we heard from people and what
conclusions, if any, we came to in the study of the report that we did.
The purpose for the project was to connect current discussions around accounting standards to other issues relevant
to the Canadian public policy community. The idea was to connect this to a broader discussion in the public policy
I am not an accountant, and I do not have a lot of expertise in this area. I am a public policy person. I have written
on a variety of issues, including standard setting, but not particularly of accounting.
We wish to say something about the public trust aspects of this discussion. If there is a immediate link with the
public policy debate, it is the concern over public trust and how is this perceived more broadly in the community, why
should it be of interest to people who are not accountants and who are outside the accounting profession other than
concern over the trust that they will have in others. We want to contribute to the broad lines of the stakeholder debate
and provide fundamental points of reference for further discussion without drawing any big conclusions out of the
There were approximately 15 participants who met at meetings and on one-on-one interviews. The group included
an IASB trustee, the International Accounting Standards Board chair, politicians, accountants, government and
business representatives. You can see from this cross-section that we were trying to have a broader kind of discussion
from a number of points of view about what the issues were and what we could learn.
In terms of the context for writing, certainly the big backdrop is obvious to everyone; Enron and WorldCom and the
fallout from that. It seemed like a good time to talk about the broader implications here.
Globalization is important. It was a large part of our discussions. What can we learn from that and what does it
mean for the future of standard setting in general and in the accounting profession? The importance of public trust and
financial reporting and the need to take a public policy point of view were certainly at the centre of our discussions. I
wish to speak about this later. I would invite you to ask the question, ``what does it mean to take a public policy point
of view on this issue?'' What are we trying to ask ourselves?
In respect of the debate over accounting models. I am not an expert in this field. When I came into the project, I did
background research and I heard this committee on many occasions and I heard discussion about the two models, the
principles versus rules model. I thought our discussion would be focused on the questions, ``Should we move to a
principles based system?'' or ``Should we move to a rules based system?''
Ultimately, we heard many points of view on this issue. I fully expected that we would have almost no agreement.
The discussion seemed to dissipate. It seemed to me that there was more smoke than fire there. It is not that I do not
understand the difference between principles or rules or that the other members of the group did not. Rather, much of
the discussion was focused on what you read in newspapers, journals or conversations you hear between people tends
to be polarized in a way that misses what probably the real issues are. As we talked this through with the group, we
heard that people who had started out on fairly divergent sides of the issue seemed to end up converging on a few
fundamental principles about the discussion, itself.
First, every system combines rules and principles, not only accounting, but also the justice system and many other
systems. It is not a rules versus principles debate in the final analysis; it is a question of which ones and which balance.
Systems change over time. This is what we are going through now. The system is evolving and changing. That must
be factored in. The question ``Where do we want to go?'' is probably more important than where have we been or are
we on one side or the other?
Over the long-term, the FASB and IASB will likely converge in an on-going process. If that is the case, it may mean
that the debate of rules versus principles may be exaggerated or something of a red herring.
Canada does no have to follow the U.S. It seemed to us in the early stages of the discussion of rules versus principles
the argument was that on one side, part of the reason for sticking with the rules system or essentially moving to a more
rules-based system was the need to remain and ensure we had the access to capital markets in the U.S. On the other
hand, it became very clear that almost no one wanted to say we had to follow the U.S. I suspect that I have heard
similar things presented at this committee, as well.
Finally, insofar that this is an evolving and changing system, the real question is where are we going? Canada's role
is not to be a follower; it should be — as it always has been — to be an honest broker between the rules and the
principles, the left and the right, and to help strike a balance that is in Canada's interests and the interests ultimately of
a better system at the global level.
In summary, I came away from this as someone who was not deeply versed in the subject to begin with. However,
after having many conversations with the group, it seemed to me that this is an important issue, but the importance
given may be misleading or overrated.
Where did that take us? By the end of the discussion, part of what the group faced was where do we go from here?
We thought we would be discussing this a long time. Because of the emphasis on the future and the idea of convergence
and ultimately globalization, we took up a thought experiment. We asked the participants to imagine that they were
the minister responsible for creating a new institution, a new standard-setter for the 21st Century and imagine what it
would be like to sit down and to write the Charter for that or to provide a framework in which such an organization
could be built. We asked them to think for a while into the future, forget about what is in the past in terms of an
existing standard-setter, and think about how they would start from scratch. What would this thing look like?
Our conversation went through three different levels. We looked at expertise and democracy, the principles,
mandate and mission, and capacities.
With regard to the public policy perspective, we asked our participants to try and identify the principles by which
they would be guided. It was an interesting exercise. First and foremost, I think it is clear to everyone that if you were
creating a standard-setter and you had to set basic principles for that standard-setter, that in an area like accounting,
expertise and evidence is critical. Interestingly, as we talked to people, we found that there tends to be a belief this is
largely what it is; it is based upon expertise and evidence. In any area, this is clearly not true. We found out there is
much more than expertise and evidence involved; very often, there are controversial judgments involved. This is
something that, in many areas, we do not pay enough attention to.
Two additional principles surfaced from that discussion: what we called the democracy and the transparency
principle. It runs something like this: What we mean by the public policy perspective is that when things move beyond
what can be decided by expertise and judgment, we move into a new area. We move into an area of controversy over
whose interests should win, over what interests matter and how that should be decided. I am not here to make a
decision or tell you or to advise you on ultimately what standards should be chosen, that would not be in the field of
my expertise. It seems to me we agree that if we are to create a new body, it must take account of those kinds of
differences in an effective way. This is what we meant by democracy principle. It is what underlies this institution. It
means there must be decision-making procedures in place that allow for a fair discussion and what is seen to be a fair
and legitimate decision on controversial issues.
The Chairman: I do not understand this. I do not know if the others do. This seems more of a philosophical paper.
We are hoping to end up with something practical. Could you lead us in that direction please?
We have had accounting experts here that point out certain things that have to be ameliorated or changed or thrown
out. There is a lot of motherhood in what you are saying, and I agree with you, but I do not know how this helps us.
Mr. Lenihan: If it is true that we set principles and that ultimately from principles we move to is a set of capacities. I
shall inform you about what we thought were the essential capacities that such an organization would have in the 21st
Century, how it would realize those principles.
The organization should have the capacity to assess the interests of Canadian users of the system and to balance
them. It should have the capacity to assess the interests of the global village and balance them against those of
Canadians. It should operationalize standards in a way that is seen to be impartial and fair. It must provide leadership
internationally, playing the role of honest broker. It must have the capacity to review and pronounce on how standards
are used — this could be an outside organization. Finally, it must have the capacity to be a learning organization and a
centre of excellence.
The real issues here are the challenges to compare in contrast with various organizations around the world and the
extent to which we really do have those capacities embodied in the standard-setter that exists or the standard-setter
that we want for the future. We need to understand what difference it would make in terms of the challenges that
globalization and other things will provide for standard-setting.
Senator Kroft: I am thinking about the fellow and his wife who are late middle-age, have lost 50 per cent or 60 per
cent of their savings, are trying to put together something else, and are terrified of where to make their investment
because they have lost all confidence in their capital markets. They do not know where to go. What do we say to those
Mr. Lenihan: I think this is an issue of public trust. I would want to say that I have some reason to believe that the
organizations that are making those decisions for the future are organizations in which I can have confidence. We
probably feel that a lot of that public trust is lost. How do we rebuild it? How do create organizations that people see
they have confidence in?
Senator Kroft: If they have lost confidence in organizations, and let us say they have lost confidence in brokerages
because they see that people have been arrested and fined and taken away for improper use of information. They may
also have lost confidence in companies because they have seen their executives behave badly and take advantage for
personal gain. Does it all add up to the fact that the last haven for their confidence is government?
Mr. Lenihan: Well, I hope not. That would be a question for a standard-setter for the 21st Century. It need not be
just in accounting. What role should the government play in that? To what extent will people have confidence because
they see that government is involved in a way that they have confidence that government can do something. Surely as a
regulator, government will be involved in much of this.
Senator Kroft: In your sense coming through this, will people find their confidence in a structure where there are
rules that are clearly articulated and set down? I am back to rules and principles, which is where you expected to start
and said you really did not. Is it rules or is it principles that will bring confidence back?
Mr. Lenihan: My guess is that the average person is never going to get to that level. The average person will find his
or her level of confidence in the fact that this is part of broader public debate that appears in the media and at cocktail
parties and whether or not the people whose judgment they respect feel like something is being done that restores what
went wrong. Whether that is rules or principles will not make much difference to the person you are talking about.
Ultimately, the public policy question is: ``What do you do to get the public policy community involved in such a
way that it sees that progress is being made and it communicates that message back to people on the street, in the
media and elsewhere?'' It is not to ignore the important higher level expertise questions, it is only to say that at some
level, it must be filter back out to the man on the street.
The Chairman: Our problem is how do you do it?
Mr. Lenihan: The small contribution, I think, a discussion like this is meant to have is that if it is high level
philosophical at one level, it is because that is the way the discussion will be had out there in the media and elsewhere.
In the newspaper articles, I read that the industry or the professional organizations were divided on some very
fundamental questions. It seems to me that part of the message we want to send back to journalists and others is maybe
the divisions are not that great, maybe people can cooperate and that maybe some of the issues we are focused on are
not as divisive as they seem to be.
Senator Mahovlich: The previous witnesses represented six large corporations who were also represented on the U.S.
exchange. They had to follow the rules of the U.S. exchange. They were also responsible to the federal, provincial stock
exchange in Canada. In softwood lumber, corporations are being taken over by the Americans — almost up to about
50 per cent now.
We must draw up our rules very similar to the United States. Do you follow that line of thinking?
Mr. Lenihan: I certainly think that by going through this project is that if we were to drift too far from the
Americans, there would be many difficulties. We cannot afford to do that. I understand that argument, yes.
Senator Mahovlich: There is nothing else we can do.
They are coming in, and they are buying our corporations. If we are going to make the rules, we have to cooperate,
and we have to follow them.
Mr. Lenihan: My point is how do we communicate to the broader public policy community, and ultimately to
Canadians, whether progress has been made, and why these decisions are, and that they will restore confidence in
public trust. I hope that in the end, that is one of the ultimate tasks.
The Chairman: Thank you for being with us. I wish you success in your endeavours.
Mr. Lenihan: Thank you.
The committee adjourned.