Proceedings of the Standing Senate Committee on
Banking, Trade and
Commerce
Issue 15 - Evidence - March 19
OTTAWA, Tuesday, March 19, 1998
The Standing Senate Committee on Banking, Trade and Commerce met this day at 11:05 a.m. to continue its study of the governance provisions contained in the Canada Pension Plan Investment Board Act (previously Bill C-2).
Senator David Tkachuk (Deputy Chairman) in the Chair.
[English]
The Deputy Chairman: Honourable senators, pursuant to the order of reference adopted by the Senate on Thursday, February 12, the committee has before it the governance provisions contained in the Canada Pension Plan, Bill C-2.
I should like to welcome Ms Margot Priest from The Regulatory Consulting Group Inc.
Ms Priest, please proceed with your presentation and then we will have some questions for you.
Ms Margot D. Priest, Partner, The Regulatory Consulting Group Inc.: Honourable senators, I am pleased to have the opportunity to speak to you today on the issues of governance and accountability. I am not an expert on pension funds and investment policies. I understand that you have a number of such experts testifying before you, including the gentleman following me.
I should like to speak to the structure and responsibilities of the members of the board of directors of the Canada Pension Plan Investment Board and some mechanisms for improving accountability.
I recognize the importance of the bill to this committee because the board is the foundation for the administration of the Canada Pension Plan. It is a trust for Canadians and the fiduciary element must be recognized. When we examine the board, we want to ensure that adequate accountability mechanisms are built in.
The government has chosen to use a corporate form in order to structure the board. Most of the provisions are familiar, and counterparts can be found in either the Canada Business Corporations Act or the Ontario Business Corporations Act, just to name two with which I am familiar. Indeed, there are some areas where there have been improvements on the language in the ordinary corporations acts.
The board, however, is a unique corporation. Certain oversight or countervail mechanisms which come as standard equipment in a business corporations statute are missing. The sole shareholder, the minister, is relatively passive, in contrast to the provisions of the CBCA or the OBCA, where there is no equivalent of a sole shareholder or a majority shareholder exercising an oversight function. The relationship of the board and its directors to the beneficiaries of the fund, namely, Canadian pensioners, is attenuated.
The minister, and to some degree the provinces, are proxies for the public interest. There is no regulator to which recourse may be had and this is essentially a self-regulating entity operating within the confines of a prudential structure created by legislation.
I should like to make some suggestions on where I think the structure could be improved and strengthened to ensure that there is no failure of the legislative objectives of the act.
The first area I should like to look at is appointments. The steps that I outline are drawn from recommendations that exist in other areas, primarily with respect to other types of order in council appointments.
First, I would suggest that job descriptions be developed in greater detail than the criteria that are outlined in the legislation. These would take into account the mix of skills that will be required on a board so that you would in effect establish a "board profile". The Auditor General has recommended that this should be done for Crown corporations.
One of your witnesses, namely, Mr. Por, indicated a number of skills that would be required. That would be a good starting point. This would allow candidates to be evaluated and would allow the government itself to be evaluated against the choices that they made for their candidates on the board.
The second step is a more public process for seeking candidates. Some of you may have seen the recent adds in the newspaper under Caldwell and Partners for the chairman of the new Ontario Securities Commission, a position which has just been filled. That has an advantage of bringing in possible candidates. By using headhunters, they will have access to data banks that can aid in the selection process. They are used to searching for people. They can find people who they might not find under the ordinary course if word of mouth was the major source.
The nominating committee should consist largely of independent persons. I understand that there is an existing nominating committee, but it is composed primarily of provincial civil servants. This committee should be supplemented with some outside experts and should include people who might be representative of the general public -- that is, the beneficiaries -- and people with reputations of integrity and trust who could advise this nominating committee.
The independent nominating committee, following the lines of the act, could supply a list of acceptable candidates to what I call the political committee. Choices would be made from that list by the Governor in Council.
None of these procedures is in conflict with the current act. All of them could be used without any need of an amendment, but there might be some benefit to amendments to ensure that these powers were more rigidly established.
With respect to the duties of the board, it is important that the job description indicate that the directors are able to devote adequate time to their duties. There is a tendency in Canada for people to belong to too many boards. The responsibilities, compliance and due diligence requirements and the attention that must be paid to the work of a modern board is not something that can be done casually. This is particularly true to something as important as the Canada Pension Plan Investment Board. It will take a major amount of someone's time in order to take care of it properly. In the job description, it should be clear that this should be something to which someone can devote the appropriate amount of time.
The number of directors may well be too small. When the regional requirements and the other types of attributes, competencies and talents that might be necessary to make up the appropriate board profile are all taken into account, you might well need another three or six members of the board. However, there are advantages to having a relatively small board because the group dynamics tends to work very well with a smaller number.
The board of directors should develop a code of conduct. There is in there requirements for a code of conduct for officers and employees. It is important that there be a code that apply to directors themselves. This would be the most appropriate place to emphasize the trusteeship responsibilities of the board of directors. The code should address ethics, confidential information and insider trading.
The actual interaction and decision-making that goes into developing a code can be an important and powerful training tool for new directors. This code should be developed through an open process and promulgated as a regulation. Amongst other things, this would indicate that there is a precision of language that you might require in a legislative instrument. It might also be helpful if the issue ever arises concerning the meaning of "removal for cause". That can be a more complex issue than it sometimes seems at first glance.
The code of conduct for the board should include a conflict of interest code or a separate conflict of interest code should be developed. This should also be a public document and should be promulgated as a regulation.
It is not clear in the language of the act where it is required that the board of directors establish procedures to identify potential conflicts and resolve those conflicts, whether those procedures apply to the board itself or whether it is part of the directors' oversight function relating to a compliance policy of the Canada Pension Plan Investment Board. This is particularly unclear in light of the provisions in section 22, which apply the usual corporate provisions regarding conflicts to the board of directors.
The usual corporate requirements for declarations of conflicts are not enough. The fund is a major financial force and the directors must not be seen or appear to be seen to be in a position to derive personal benefits from their position. Certain conflicts must be forbidden outright and the directors should not be held to a lower standard with respect to conflicts than the officers or the employees. For them, mere disclosure of conflict would not be sufficient.
The duty of loyalty is outlined in the act but there is actually a sort of double fiduciary duty in place here because of the nature of the board being a trustee of the pension plan assets of Canadians. There should be some statutory recognition of the trusteeship responsibilities and a clarification of the nature of the board's interests and its relationship to the beneficiaries of the fund.
As I noted before, clause 22 is not sufficient to deal with conflicts. The language of proposed section 22(8) with regard to application to the court to set aside a transaction where a conflict has not been disclosed is too narrow. If you look at both the CBCA and the OBCA, the shareholder has the power to make a request of the court to set aside the transaction. The minister should have that power in this case, as should the Auditor General. If you look in the Ontario Business Corporations Act, you will see that there is also a provision for damages. The director who has made a personal profit on such a transaction would be required to account for it.
The Auditor General should have the power to audit the board itself, whenever and in whatever way he considers appropriate. The indirect power to examine the board in the context of the Canada Pension Plan is not sufficient to emphasize the importance of the Auditor General as the servant of Parliament in assuring accountability in these areas.
If it is determined not to give the Auditor General the regular power to audit when and if he sees fit, then he should be responsible for undertaking the special examinations that are carried out pursuant to clause 47.
With respect to public reporting, my colleague, Professor William Stanbury of the Faculty of Commerce of the University of British Columbia, who testified before you a few weeks ago, had a number of proposals for public reporting, including the use of web sites and reports printed in newspapers. Those proposals could be important. I would also suggest a few additions to the annual report to Parliament and to the public.
A description of the procedures in place to assess performance is required by regulation. There should also be included in that descriptions of performance measurements that are being used by the board. In addition to a discussion of objectives of the board, there should be a full management discussion and analysis, such as is required under securities legislation in Canada, to deal with the results of operations. You want a fairly full and blunt discussion.
I have also included with my testimony a paper that Professor Stanbury and I have been working on. It is in its earliest stages, but it deals with some issues of accountability that we are trying to explore. At the moment, it deals in the context of tribunals and regulatory agencies, but it will be expanded to deal with other arm's-length bodies and self-regulating bodies, in the government context.
Senator Oliver: I have three questions: one about directors, one about conflict of interest, and one about proxies.
On page 3, you indicate that you think that the number of directors -- that is, 12 -- is probably too small, but there is a trend in Canada for major corporations to reduce the size of their boards so that they can become more manageable and that most of the work is not done in boards but in committee. If that is the case, would 12 not be sufficient?
In addition to commenting on the size, could you comment on the fees that these directors should be paid and the term of office they should have? Those are my questions regarding directors.
In relation to the voting of proxies, yesterday, we were in Halifax. I asked a number of witnesses there whether they felt this board should vote their proxies or whether, when they hire outside managers, those managers should vote them, and how active this board should be vis-à-vis exercising certain rights over the companies in which they invest.
Some of us have spent a lot of time studying conflict of interest for parliamentarians. Your topic is of great interest. Could you be a lot more specific about what should be forbidden outright and why is a declaration of conflict and not voting and recusal not sufficient? What is so different here?
Ms Priest: With respect to the number of directors, I agree there is a trend to smaller boards. In fact, I would support it. I think that smaller boards can get greater involvement and greater commitment, and it is more obvious if someone is not pulling his or her share.
However, with this particular board we are not just trying to find the appropriate group of people with the appropriate skills. We are also trying to manage and be conscious of regional considerations, and perhaps some other factors such as language, gender, nationality, and so on.
To work it all out, you might have a little difficulty with 12 members. My preference would be probably around 15, and 18 would be the absolute maximum. As you note, a lot of work is done in committees, which happen to be smaller groups, so you do get the dedication and the interaction going in the committee level. In general, I would agree with you that smaller boards are probably a good trend, but I would have some concerns regarding this particular board.
With respect to how active the board should be -- and, this may ultimately end up being somewhat of a political opinion -- my personal opinion is that institutional investors can play an important role in corporate governance. Operating appropriately, I think the investment board could play a role in improving the quality and calibre of corporate governance in Canada. That is not its first objective, but I do not see it as being an incompatible objective. My tendency would be to say that it probably should choose its fights carefully, but that it should be aware of where they are and not hesitate when it is appropriate.
With respect to the conflicts of interest, frankly, to some degree I would defer to people who have more familiarity with practices of investment, certain things with respect to the use of confidential information and material information. Because this is such a large fund and will be investing fairly widely, it may raise questions of conflicts. Again, this goes back to the question of how many boards someone should sit on. It may be that, for this board, they should not be sitting on any other boards, either because of the burden involved in properly fulfilling their responsibilities on this board or because of the issue of potential conflicts. That is something that can be worked out more in detail, but certain types of situations and conflicts should be forbidden.
Senator Oliver: Could you name one?
Ms Priest: Insider training, using your confidential information.
I am not precise on this because I am not so closely involved with the activities of the investment world. However, I have a strong feeling that there probably are such situations.
When the disclosure provisions were first put into corporate statutes, you were dealing primarily in 19th century, fairly small, basically family operations. You just wanted to know what people did. If you go through the case law, some of the situations the directors were taking advantage of and simply declaring and not voting were unseemly. I should like to see this being held to a higher standard, but I am sorry that I cannot give you a more precise answer than that.
Senator Meighen: On conflict of interest, the legislation says that directors and officers of the board are required to disclose an interest as a party to a proposed transaction with the board or a director or an officer of any other entity, and so on.
If you look at OMERS -- and you maybe familiar with their requirements -- there, they are much more far-reaching. For example, it says that the board members, senior officers, are required to disclose securities held, and investment agents with whom they deal must report trades in their securities. Board members cannot vote on investment decisions that would give rise to a conflict.
Is that the sort of toughening up that you had in mind?
Ms Priest: It is getting close, yes.
Senator Meighen: You indicated that you thought that perhaps directors should not even hold any other directorships and that they should have the time available to devote to this task.
Do you see this board, as opposed to any other board, as being particularly time-consuming or are you being particularly conscious of the public fiduciary nature of this board?
Ms Priest: As a general trend, there are, in Canada, certain people who sit on too many boards. You open up The Globe and Mail and there is that face again. I am very concerned about the compliance requirements, the due diligence requirements, and the oversight requirements of a modern board.
I do not think that seven, eight, 10, or 12 boards is appropriate, and I have written that in my book on directors' duties.
With this board -- and this is why I would probably look to the job description -- it would depend on circumstances. Are we talking about someone who sits on a couple of non-profit, local community groups, or are we talking about someone who sits on another major, complicated industrial company?
I do think this board of directors in different. It has some major responsibilities. I do not think it is unreasonable to expect people to be sure that they can commit the appropriate amount of time.
I did not actually answer Senator Oliver's question with respect to remuneration. I would not want to name exact figures, but I have no difficulty with the idea of ensuring that the directors, particularly those who might be giving up other directorships or opportunities, are being appropriately compensated. This is not an area where one would hope to save a few dollars. I would not want to use dollar figures, but I would expect adequate compensation.
Senator Meighen: Do you think it is possible to go too far in the other direction? I would share your view entirely that 26, 16, 12 or eight directorships are probably far too many.
To follow your line of thinking to the ultimate, with the greatest of respect, the only people who would be eligible would be academics.
Ms Priest: Yes, or retired people.
Senator Meighen: What is wrong with being involved? What is wrong with having the experience? Conflict, surely, is only invidious if it is not declared in most cases.
Ms Priest: I am speaking here from my background in the administrative justice community where some believe that declaring oneself is simply not good enough; you simply cannot operate with them.
In terms of being involved, I think it is a balance. That is why I suggested that it would be a factor when considering job descriptions and vetting people. I would hate to see only the academics, the elderly or the independently wealthy available to sit on modern boards in Canada.
There must be a recognition of the dedication of the time that is required to do so. That is my major point.
Senator Meighen: Do you foresee board members playing an active role in the investment decisions of the Canada Pension Plan Investment Board?
Ms Priest: I would see them as playing an oversight role. Their job is not to deal with day-to-day management. They need to be involved in ensuring that there are adequate systems in place for assessing risk and making decisions. Their job is to ensure that other people are doing their jobs properly, that the stories are coming back to them when there are problems that they hear about, and that there is an adequate reporting system in place.
Senator Meighen: I may have missed this, but did you express any view as to whether or not there should be one fund dealt with as a whole or whether it should be divided into multiple funds, notionally or otherwise?
Ms Priest: I did not express any view. I was discussing that in the hallway with the next witness from the Caisse de dépôt, who was explaining to me the benefits and advantages of the subsidiaries, because I was trying to figure out what that would be. I will leave that to him to pursue; however, I found it to be very interesting and I found his description compelling.
Senator Meighen: Did Senator Oliver ask you about the term?
Ms Priest: No, I did not answer that question.
Senator Meighen: Three years was provided for in the bill.
Ms Priest: I see three years as being reasonable, particularly when they can be reappointed. There will be a learning curve, particularly in the early years when codes of conduct are being developed and structures are being set up. I do not see any necessary reason to put limits on the number of terms.
Senator Stewart: We have been told that it is desirable that some of the directors be relatively young. We have been told that they are not to have other directorships.
Suppose someone is asked to be on the board for three years and she is 45. She must give up her other directorships and the prospect of reappointment is uncertain. It seems to me that she will need to be paid a lot of money or else be given a grand pension. How do you get around that? That is a real problem to which I am quite sensitive as the age to become a member of Parliament has been reduced in the House of Commons. This is a parallel example of the problem.
Ms Priest: As a former chairman of a tribunal to which I was appointed when I was in my 30s, it is a matter to which I am also sensitive.
You have taken, in a sense, the extreme case. Let us say this is a person who has a fairly high-powered, responsible job that gives her expertise that would make her attractive as a member of the board of directors. Presumably, this will be occupying a great deal of her time and she probably has a pension associated with it. Perhaps she has one or two other directorships. Perhaps that is sufficient. She still has enough time and energy to put into this directorship. That is something that must be evaluated. However, if she had eight other directorships, I would suggest that she might not even be doing her job right now, even without the addition of this board in order to do it properly.
I do not think you need to put in pensions for directorships.
Senator Stewart: You will pay them adequately and they will create a private scheme for themselves?
Ms Priest: Yes, you pay them adequately. Generally speaking, in this country we do not have too many people who are sort of professional directors, although they presumably exist. It is usually seen as an adjunct to one's other activities, whether you are retired or on the executive.
Senator Meighen: I should like to get from the witness some sense of where the priorities lie in selecting members of the investment board. You may have said it and I may have missed it.
Forgetting for the moment about some of the questions that Senator Stewart asked about remuneration, and so on, and forgetting that you would like the individuals to have very few, if any, other directorships, to what extent is a balanced committee -- that is, in gender, geography or whatever other considerations one can name -- to supersede competence? What is the first criteria?
Ms Priest: My personal inclination is to come down on the side of competence and then something which, in the administrative justice world, we talk about in terms of an aptitude for adjudication. In this case, I would suggest an aptitude for the type of oversight and fiduciary responsibility and an awareness and sensitivity to those responsibilities that are inherent with this particular kind of board.
Senator Meighen: Is there anywhere in particular that you look for that sort of beast?
Ms Priest: You must talk to people. You must interview them.
Senator Meighen: You mean that they are found everywhere?
Ms Priest: There is a broad place. I would not suggest that, for example, you would only find them in bank managers. One of your other witnesses pointed out the importance of training the boards of directors and how, when you took a group of basically competent, intelligent and willing people, you could get a fair distance in turning them into a good working board with good training.
That gets me back to the codes of conducts. They are important as a way to guide the board and the development and the interaction in creating them and working with them is extremely important in getting people to appreciate their responsibilities and the nuances of their responsibilities.
Senator Callbeck: I have some questions in regard to the board of directors. Most of them have been answered, but you said that the job description should indicate that directors should be able to devote adequate time to their duties to the board. I take it from what you say that you feel this is a very time-consuming position. How much time would be involved?
Yesterday, we heard from a witness who felt strongly that public servants should be eligible to be appointed to the board of directors. I should like to have your view on that.
Regional representation has been mentioned. Do you think that that is a must, or is that a secondary criteria?
Ms Priest: In terms of time consumption, you could easily, particularly if you were involved in one of the major committees, be spending 10 or 12 hours a week on something like this, maybe more. I have only sat on non-profit boards, never on any major industrial boards. I know people who devote many hours a week to their work and who, combined with a responsible senior executive position, basically have little time left for anything else. That is one board and one executive position. They take their responsibilities very seriously.
It probably varies. Some people sitting on some of the committees will be extremely active. I would not like to think that this was a board that people viewed as an honorary position where they showed up occasionally and that was that.
My inclination would be not to have public servants. That is just a personal view. It is important that you get some people who are out in the real investment world. There are public servants who are involved in investments and are doing fairly senior investing in financial activities but, on the whole, you should look outside. You are also looking for independence here in terms of the capacity of directors. I would be inclined not to have public servants, but I do not feel strongly about it.
Regional representation is a political decision that has been made. I think it is appropriate, given that beneficiaries are Canadians across the country. How tightly you define "regional" -- whether it is province by province by province or whether it is east, west, Prairies -- that is a decision that will have to be made as you are going through your mix of possible candidates. Regionality is probably appropriate, given the nature of the assets being managed and the concerns of Canadians.
The Deputy Chairman: Those of you who were not in Halifax yesterday should read the testimony of Mr. Van Loon, who is on the advisory committee advising on the nominations. He mentioned a number of points that concerned us as to how these people were being chosen. It is interesting testimony, and that might give us a bit of background.
Senator Austin: Thank you, Ms Priest, for your presentation. You raise a number of interesting items. I find it quite a good check list of things to think about.
I believe that there is a somewhat different vision of the board of directors of the Canada Pension Plan in the act and around the committee than you are presenting. I think the Canada Pension Plan Investment Board is to hold the senior managers of the funds accountable for what they do. The board puts in place the rules -- many of which you have touched on -- for their performance and sets up a governance code and a conflict of interest code.
You have referred to clause 22 of the bill, which is the conflicts section. Essentially, the board is an instrument for setting down the code for accountability and for overviewing the performance on an accountable basis. When you come, therefore, to the accountability of those who are responsible for accountability, the standards in the industry today seem to recognize that the kind of expertise you want is that which comes with experience and with participation.
The number of people who are familiar with the responsibility for the systemic way in which funds are to be invested rather than the transactional way is not large in this country. If we are to get some of the best of those people, then we cannot ask them to pay an inordinate personal price for being there.
That comes back to Senator Meighen's question. You have one of two systems. One is approbation -- that is, thou shalt not. You will give up everything else you do and you will now perform as a priestly class, for which you will be paid whatever is required. It would be different from the way the industry operates in Canada and in the United States today. The other is: You shall fully disclose. That is the system in proposed section 22. It is a disclosure in which the responsibility is on placed on the individual. The failure to respond properly brings severe sanctions.
I have gone through this description to ask you the following: Are you suggesting something more in substance such that you would change the act? There are two kinds of language in your presentation, and I am not sure which one is the emphasis. Are you saying this should be put in place under the rules and regulations under this act -- that is, do not change the act but emphasize these things specifically within the context of the regulations that will be put into place?
Ms Priest: I would suggest that there be codes of conduct and conflict codes and that the directors be given more guidance through these codes than simple declaration.
Senator Austin: More than is contained in clause 22 today?
Ms Priest: Yes. Should those codes have the force of regulations? I suggest that that be the case. That gives them a force and importance. It also has some benefits if you ever have the misfortune to have to try to remove someone for cause, which I would hope would never be an issue.
Perhaps I came across as being too absolute. I was not suggesting that the sort of narrow, well-remunerated, priestly class that had no other contacts with the real world would be appropriate. I do not think that would serve your purposes well. My emphasis is that this be seen by them as being an important job for which they are prepared and have the capacity to devote whatever time might be appropriate, depending upon how strong a role they play on the various committees, and so on. These are things that can be worked out in job descriptions.
There are situations -- and, unfortunately, I could not go into great detail with Senator Oliver -- where simple declaration of interest may not be sufficient. There are certain things you simply should not be doing.
Senator Austin: For example, you should not be running your own RRSP? Here, we have a fund which will be an index fund for three years under the existing federal-provincial arrangement. It will simply buy the index There is not much discretion. Therefore, if you are buying the index, any formal and prudent investor, in their own investment policies, is probably owning shares of companies that are in that index. It is almost impossible to miss them.
So that we understand what you are saying, is there a conflict in your mind about the members of the board of directors owning personally-directed RRSPs?
Ms Priest: No; I do not think so.
Senator Austin: What about holding shares of companies that may be bought and sold by the fund?
Senator Oliver: What about shares in the Royal Bank, for example?
Ms Priest: This fund will be very large.
Senator Austin: Is that just the normal course of investment?
Ms Priest: That is the normal course of investment. For that, I would suggest a declaration would be sufficient. However, in other cases, you might have material information where it would be inappropriate for you to go out and be buying or selling.
Senator Angus: In other words, the normal insiders rules would apply?
Ms Priest: It is useful to have them in here explicitly.
Senator Austin: I appreciate that. You also talked about the importance of the independence of the board. You make a suggestion on page 4 of your brief that, perhaps, under clause 22(8) the minister or even the Auditor General should have the right to make an application to the court in the case of a conflict of interest. Under clause 22 (8), it is the board itself which acts against anyone who has been found to have an undisclosed conflict of interest. You wanted the minister to have that authority as well?
Ms Priest: Basically, the minister is the shareholder. In corporate statutes such as the OBCA and the CBCA, the shareholder also has that right. It is not limited to the board of directors to go to the court.
This is one of those areas where they have removed some of the oversight or creative tension that you have with a shareholder. I would suggest putting it back into that clause, in this case with the shareholder being the minister. That would make it consistent with corporate statutes.
Since the Auditor General might play a particularly important role relating to oversight in these matters, I would suggest that he might be included there as well, but that goes beyond normal corporate statutes.
Senator Austin: It would be beyond the role of an auditor to take action. The auditor's job is disclosure and then others take actions.
Senator Kelleher: Thank you for appearing here this morning. It is a pleasure to receive a brief that is directed to the issues that we are examining.
However, there is one area of concern that some of us have which you do not discuss in your paper, namely, the area of political influence. Political influence can take two turns here. First, there is political influence in the choosing of the board. Second, there is political influence that could or might be exercised once the board is in place to direct the board in some way to invest in certain types of businesses or in certain locations or to satisfy some socially-driven philosophy.
Since you have examined the appointment process and how the board operates, do you think there are adequate safeguards within these sections as now promulgated to protect against these two areas of concern?
For example, with respect to the minister himself, we have a nominating committee that starts out well but it becomes pretty vague as to what happens after the first go-around. It would appear that, following that, the residual powers lie with the minister as to who does or does not get on the board. It does not matter which party is in power; politicians, from time to time, seem to have a desire to get involved in things that perhaps they should not be involved in.
Ms Priest: Under present political realities, I do not think we will get beyond the idea that, at the end of the day, the appointment is a political appointment; it is a Governor-in-Council appointment and the minister plays an important role. I was suggesting making the front end more transparent by calling in candidates, setting out criteria and out job descriptions, and having people review them.
I return to my experience in the administrative justice system. People do not generally care too much whether the person appointed belongs to any particular party, but they are very concerned about whether they are competent and whether they are appropriate for the position.
If you get this more diffuse vetting and calling in of candidates, so that any of the candidates being presented to the minister would be a good choice, then the political element at the end does not concern me as greatly.
The ministerial advisory committee of the provinces will have their regional input. I also suggested this more independent committee. My model there was partly the judgeships. It would be naive to say that judgeships did not have a political element in their appointments. On the other hand, the Canadian Bar Association and other groups play a role to ensure that they are competent. That is the real concern at the end of the day. There will be a political element, but let them choose from a competent group.
Senator Kelleher: What about the second aspect of my question? Once a board member is sitting there on the board and is doing a great job, he or she may be suddenly approached in one way or another with a suggestion to get a few more investments out west or to concentrate more in the Maritimes or on a particular group of industries which need some help. These subtle pressures can be applied.
Ms Priest: Their responsibility is, first, to the board and to the beneficiaries of the fund as well. There is a double fiduciary responsibility.
Investing in the Maritimes does not necessarily mean that you are not fulfilling your responsibilities to the board, but that must be their first consideration.
With luck, the training and the ethics issue around that will allow them to say, "That is most interesting. I will be discussing it with my colleagues. Let us see what good investments we can find. Of course we want to invest in different areas of Canada."
Senator Kelleher: Do you think the existing provisions are adequate to protect board members from that type of influence? Are there things that we should be adding to make it easier for the board?
I always find it is easier to resist "pressures" if I can point to something in the act or in some legislation which states that I cannot do a particular thing under my mandate. I can say that I will consider it, but that it will be difficult.
Are there sufficient provisions to which board members can point to make it easier for them to resist?
Ms Priest: I think they are implied in there. I do not recall any language that states, basically -- although someone could correct me on this -- "hands off." There is no directive power, for example.
It is certainly implicit in the duties and care of the director that the board and the integrity of the fund is maintained as the primary responsibility.
Senator Kelleher: I think it is implicit, but sometimes I like a bit more than implicity. I wanted to know your views on that.
Ms Priest: It might be helpful to have something more explicit, given that it is always up to the government to change legislation, priorities and objectives in the legislation or the regulations.
Senator Angus: Ms Priest, I, too, compliment you on your presentation, on the document you filed with us, and also on the draft paper on accountability.
I should like to pursue what Senator Austin was getting at in his first question; namely, the difference between the board and management. We probably all appreciate that this board, and the board of any major institutional investor, is not exactly the same as the board of a publicly traded industrial corporation. On the other hand, there are certainly strong analogies.
I have always understood and am aware that, both in theory and in practice, the role of a director is a supervisory type of role. This committee did a series of studies last year on corporate governance and issued a report. We found nothing to contradict that. The main role of a board is to ensure that good management is in place, and to ensure that the strategic direction of management is appropriate for the enterprise.
By analogy, although this board is looking after a big fund which will get bigger and it still has all the fiduciary duties that directors normally have, I envisage a huge bureaucracy or a huge management team. I think that the board's duties are being blown out of proportion.
I should like your comment on that. I cannot see that a director of this fund or, indeed, a director of any other company would be spending the numbers of hours a week that you indicated. I can see it happening for one week, perhaps, when there is a meeting of either the audit committee or the investment committee and, perhaps, a board meeting. That will be an intense period. I sit on the board of a large public company, Air Canada, which has fairly big assets to manage, but management looks after all those things.
Ms Priest: I see your point. Starting at the corporate level, we have become much more sophisticated over the past 20 years in putting in place information systems, compliance systems and feedback systems to ensure that things are working, whether it be following regulatory requirements or putting in place compliance.
That being the case, the board's responsibility becomes, first, not to design these things but to ensure that they are in place; and, second, to take selective feedback from this, partly to ensure that things are still working in this information compliance loop and partly because, since it is information which the board itself should be taking in, it now has the capacity for some better information in terms of its own diligence and activities.
There are some changes in terms of a board at that very high level of information and fine tuning. There is probably more going on there than there used to be.
Senator Angus: In terms of this board, you are not suggesting that the board would micromanage the fund?
Ms Priest: No.
Senator Angus: And you are not suggesting that the board is substituted for management?
Ms Priest: No.
Senator Angus: How do you see the management of this fund? With full respect for the work you have done, I found your earlier comments a bit naive. It is contemplated that there will be good, professional, competent management in place. We have been told that the Canada Pension Plan will have a huge management team and that there will probably be a multiplicity of professional investment managers -- perhaps as many as five or six firms -- which will be responsible for investing, in accordance with whatever guidelines, segments of the fund.
I think the director will show up once a month for a meeting and do the other normal things. What you described earlier seemed to be completely out of touch with my vision. You got my attention. I am now wondering whether this is totally different from normal corporate practice.
Ms Priest: No. Management is responsible for the day-to-day workings of the operation. They are responsible for investments and for ensuring that this works. The board of directors has a much more high-level function.
I am concerned that there be the necessary competence and the necessary attention paid here. When I hear of people holding 10, 12 or 15 directorships, I am concerned about them devoting the appropriate attention to each of them. I would like to be assured that, in the vetting and the choosing of the candidates, there a process to ensure not only that they have the necessary competence but also that they can give the proper time and attention to the job.
Senator Angus: You would want that for any corporation in which you held shares.
Ms Priest: Absolutely.
Senator Angus: Therefore, you are not saying that this is any different from any other serious organization. The key is the competency and the various other criteria that you outlined.
Board members should apply. It should not be a bunch of political hacks who are on the board for the glory but do not read their file or understand, or whatever. That is what comes through. This is not different from being on the board of, say, the CNR, is it?
Ms Priest: Basically not, except that some of the accountability mechanisms that the CNR has with respect to interaction with the shareholder will not, in practice, be there in that case. That may place a greater burden on the directors in terms of being accountable. I am not sure if that, in itself, requires extra time and care or requires additional mechanisms.
As I said before, things such as publicity, letting people and Parliament know what you are doing and being more involved and making sure that happens -- and, I am not saying that you do not have communications people putting all this stuff together -- may involve some extra time because of the nature of this, which makes it a bit different from CNR. Basically, however, it involves the same kinds of responsibilities.
Senator Angus: The significant difference is that here we do not have shareholders in the corporate sense. The shareholders are really the beneficiaries of the fund or the citizens, if you will.
Ms Priest: Absolutely.
Senator Angus: In this case, we do not have the normal mechanisms such as shareholders, information, flow or their ability, through one agent or directly, to get the information about annual meetings, annual reports, overview by the securities commission, overview by the stock exchanges, and so on. Those things are not present in this case, so we need a higher level of competency in, involvement by and accountability of the directors.
Ms Priest: You said that very nicely.
Senator Meighen: Is there not something contained in the act specifically designed for public meetings and shareholders' input?
Ms Priest: Yes. You have public meetings every two years.
Senator Meighen: Do you think that is important?
Ms Priest: Yes, I do.
Senator Meighen: Do you think that is enough?
Ms Priest: No. How many people read annual reports of Crown corporations?
Senator Meighen: Very few, but at least they are on the public record.
Ms Priest: Many of them are on web sites now. You can pull a lot of them down from the government web sites. You could have one-page information sheets set out in people's income tax forms, or something like that, which would tell them what is happening in that year. There are lots of other mechanisms these days. The quality of the information that is contained in these reports is important.
The Auditor General had some interesting things to say about the quality of annual reports of Crown corporations which apply equally here. You can write a fairly boring, non-communicative annual report or you can really get into some serious analysis and talk about what you are doing. It is important that that be done.
The Chairman: The board is responsible to the shareholder, which is the Minister of Finance in this case, is that correct?
Ms Priest: Technically speaking, the board of directors is responsible to the board. You rather lose the beneficiaries in this aspect.
The Chairman: That is right. In my view, Crown corporations are sometimes set up to do business for the government in a more businesslike fashion, but sometimes they are used to escape responsibility.
I think all parliamentarians are concerned about how we hold Crown corporations accountable. When you are running a railroad, the Crown corporation may not be as important. I do not ride a train, but I know it is important to the people who ride trains.
In this particular case, what this Crown is doing is important to every voter and every citizen in the country. The ordinary citizen will not be that interested in the assets here. Who cares? What they will be interested in is: Will they be able to pay me the pension that I have been promised. Is that correct?
How do we make the board accountable to the members of Parliament who are dealing with these citizens?
Ms Priest: The annual report comes before Parliament. There already is some information in the regulations as to what goes in annual reports. You could expand what is contained in those regulations and make sure that even more information is given to you in the annual reports.
I do not think it would be inappropriate to bring the CEO and the chairman of the board before appropriate committees to explain what is happening.
The Chairman: What about the directors?
Ms Priest: Sure. Normally, they operate in a collegial fashion and you might have problems dealing with that. They are sort of anonymous. You probably do not have access to minutes of directors' meetings. No, I think you focus more on the chairman and the CEO.
The Chairman: Thank you very much for your presentation this morning.
Our next witness is Mr. Jean-Claude Cyr. Welcome, Mr. Cyr. Please proceed.
Mr. Jean-Claude Cyr, Vice-President, Development and Planning, and Coordinator for Quebec economic matters, Caisse de dépôt et de placement du Québec: I have a few notes to begin with, but I will try to be brief to allow time for questions.
First, I wish to thank you for taking the time to listen to our history.
[Translation]
I will first comment briefly on the Caisse's mandate, on its aims, its management approaches, its way of dealing with its contribution to Quebec's economic growth, and on its interests and objectives about corporate governance. I will also try to clarify shortly some comments which were made in response to your questions or your questioning concerning the legislation which is before you.
In short, the Caisse's mandate is to manage the funds of 19 depositors, eight pension funds and eleven insurance and reserve funds of public organizations. That is a major distinction. We have several depositors. We are accountable not only to our board and to the National Assembly, but also to the pension committees or to the management committees of each of those 19 depositors. The Caisse's mission is to achieve an optimal financial return. Its number one mission has been the leitmotiv of all our activities in the past. God knows how complex is the job of investing and creating added value, while preserving the integrity of funds. Good investors never try to become stars in the upper quartile and consequently never take high risks with the moneys which are entrusted to them. They rather seek to maintain investment returns consistently over average.
We must also contribute to the economic growth of Quebec -- I will come back later on that subject -- but I insist that this second aim has always been secondary and dependent on our first objective. Our historical results in terms of returns are there to prove it. We essentially try to achieve returns which are better than the indices in each class of shares. We focus on targets in each categories of assets because the allocation of the Caisse's total assets relies on a rather restrictive legislation concerning, among other things, our percentage of equities. Ninety-eight per cent of the Canadian pension funds had at the end of 1996 a larger proportion of equities than what we had. Thus, we had a greater proportion of bonds than most Canadian pension funds.
Our depositors' needs are not necessarily standard. When reserve funds of insurance companies and private and public pension funds have to be managed, it is clear that the range of financial and actuarial needs may require investment policies which are not necessarily homogeneous. The Caisse is the place where all those investment policies are consolidated. Viewed from that angle, since the overall results are very dependent, among other things, on the allocation of shares and bonds, what is most important for us is to look at the Caisse's performance in its way of managing each group of assets. Our financial results are made public every year. I gave you a copy of our annual report.
It is clear that our bond portfolio systematically beat the ScotiaMcLeod indices. As for Canadian equities, we typically achieved higher returns than the yield of a stronger index than TSE 300. Our short term holdings always beat the 90-days ScotiaMcLeod index.
In the case of our foreign stocks, it was more difficult, but we obtained equal or better returns than indices. The American equity market was the most difficult for us. On the other hand, the American stocks were those who had the best performances on the nominal market. Generally speaking, we are satisfied with our performances which we always try to improve.
How does the Caisse approach fund management? First, we establish our groups of assets, we allocate between them the funds which are entrusted to us by our depositors, and then we do active management. Therefore, we have internal experts who do make the selection of stocks.
We were talking earlier of index investment. Our Caisse occasionally makes index investment when it has not yet developed the necessary in-house expertise. For example, when we did our first investments on the international stock markets, we appointed investment firms and gave them the mandate to get index returns or index investments. We asked them to invest in the SNP 500 index or in the Morgan Stanley International EAEO. As long as we developed in-house expertise, we hired some capable investment managers and gave them the appropriate training to do active management. There is a necessary learning process. Our objective is to develop an internal fund management capability. Usually, it is less costly than appointing management experts from outside.
We appoint external experts when we don't have the know-how internally. We also use modern management techniques, that is strategic and tactic approaches through derivatives. We also developed -- I will come back later on that issue -- private investment capability.
Before addressing more specifically the question of surpluses, I would like to draw your attention on the fact that, whatever management techniques we use, because we have the fiduciary duty to protect the funds which are entrusted to us, we have to control very strictly our market risks, our credit exposure. We have credit committees involved and we do manage our operational risks. We also have a very conservative policy on exchange risks which helps us to reduce our exposure on the international markets.
Both our private and public investments are assessed with an extreme care. Our calculation methods are in accordance with those of AIMR, an institution which sets the highest standards in terms of strictness and performance evaluation.
As for our private investments, we began making private investments during the eighties. Of course, at the beginning you can't take advantage of diversification, it is therefore at that time that you take the highest risks. One or two bad returns on investment are sufficient to make you feel at some point under enormous pressure. You wonder if you were right to take such risks. But the Caisse kept on. Today, we have more than 700 private investments. Nearly 20 per cent of our equity holdings are in the private sector. With time, we have developed the appropriate expertise. Also, in the last few years, we have established affiliates to realize those investments. The reason of that decision was questioned by many. When you make private investment, when you look for the best placements possible, you are necessarily competing with other stakeholders in the market. When you compete, when you are managing an enterprise, you must, above all, have a sectorial expertise and be able to make quick decisions.
On the other hand, a trustee is not ready to delegate the same level of responsibility in the area of private investment as he would be in the area of stock market investments. The Caisse employees who make transactions deal with already known prices and with brokers on the stock markets.
In the case of private investment, you deal directly with the one who benefits from the investment you make. Hence the importance of having a process to ensure that those decisions are made by independent boards.
The process requiring that every decision be first submitted to the board had become so strict and time-consuming in terms of stages that the establishment of affiliates offered us three advantages: it allowed us to shorten the waiting time before a decision to access to the most interesting investments is taken; with the setting up of boards within affiliates, we were able to take on other people from outside, who had an expertise more in line with the sector in which each of those affiliates were operating; and finally, it allowed the board to transfer to affiliates those people who were the least likely to be linked to some of our activities.
As you are aware, some of our board members are trade unions representatives and Mouvement Desjardins spokespersons. You know that nowadays, trade unions are investing in venture capital, sometimes in competition with us. It was therefore important that we establish affiliates whose boards were having the necessary expertise and independence to handle our operations successfully.
The role played by the Caisse for the promotion of Quebec's economy has always been subject to our performance objectives. One could wonder how we do manage that. It is relatively simple. We primarily manage it through targeted investment programs. In the sixties, funds were required to finance the tremendous effort which had to be done for the development of our road infrastructure and for our energy, school and health care networks. Huge sums of money were needed. At that time, the Caisse had an important portion of its deposits invested in provincial, Hydro-Québec and municipal bonds. You should note that, initially, three of our board members -- associated members without voting rights -- represented three borrowers who had capital requirements to finance the infrastructures needed in Quebec. Those members were the deputy minister of Finances, who represented the department of Finances, a senior financial officer from Hydro-Québec, and the president of the Commission des affaires municipales du Québec. However, as those people were non-voting members, they ensured that the Caisse meet financial requirements while maintaining its independence in its dealing with those organizations.
Times have changed. With the emergence during the nineties of the globalization of markets, the creation of a lot of small enterprises and networks around large enterprises, the development of the knowledge economy, the increasing importance of SME's and of their capital needs, meeting the capital needs for the economy of Quebec is today more synonymous of investing in enterprises than investing in see bonds.
It is not through personal investments, but through targeted investment programs, which involve a willingness to put some money into certain sectors and to acquire the necessary expertise to make some profitable investments in each of those niches, that we can succeed in making the capital of people serve, as it must, to encourage personal savings. That is the approach we use to achieve that objective. Of course, we also have our own way of operating and we don't see any reason why we should not try to promote Quebec enterprises and the Montreal financial market. It is a matter of approach.
Essentially, what is important for us is that it is not only a legislative concern for the Caisse to contribute to the economic growth of Quebec, but that it is above all a social obligation for any investor not to forget where that investment money comes from.
I will now briefly switch to another level of language to address the issue of corporate governance.
[English]
I should like to go through the main principles by which we guard ourselves in terms of corporate governance.
The first objective of the Caisse is to have optimal return and act in a prudent way. This implies that we take time to ensure that corporate governance in the corporations in which we invest is taken care of seriously. Our return is linked to the returns of those businesses. Therefore, it is essential for us to take a good look at it.
We believe that a board of directors should reflect who owns the company. We believe in proportional representation on the board. We focus on competence and independence of the board members towards the management and affairs of the company. This also implies that the board of directors knows exactly who stands where. We insist on the respective responsibility of the shareholders, members of the board, and shareholders of the company. These are basic principles that we state in our policy, which has been recently reviewed and approved by our board.
We want to ensure that no action having a negative impact on the company could occur from any conflict of interest. We ensure that our representatives on the board receive comprehensive strategic plans for each of those businesses following a thorough analysis of their environment and precise, clear orientation for the company.
We believe that the board members should have sufficient tools through the different committees and the information system and information dissemination to be able to do their job properly. We also promote a regulatory environment which favours the exercise of the rights and responsibilities of the shareholders.
That concludes my presentation. I could have spoken for hours, but I will restrict my comments to that. I would be happy to entertain any questions that you may have.
[Translation]
Senator Angus: Welcome to our committee on banking and commerce and thank you for your presentation. As I take it, you are not member of the Caisse's board?
Mr. Cyr: No.
Senator Angus: You are member of the other management team?
Mr. Cyr: I am one of the Caisse's executives.
Senator Angus: In that capacity, are you involved, for example, into investment decisions in enterprise or are you more concerned with general strategic issues?
Mr Cyr: As member of the executive, I sit on every internal investment committees. Now, in most sectors, internal investment committees don't take decisions on specific investments. Their role is to establish investment policies for each sector, either in bonds, shares, or mortgages, at the level of international stock markets, American market, real estate securities or else. So, we are mostly involved in the development of sectorial investment policies. We decide what will be our philosophy and our management approaches, how we allocate funds between our different sectors, which performance targets must be reached by each of them, what amount of venture capital each of our fund managers will be allowed to invest. Therefore, yes, in that capacity, I take part in the decisions made about the investment policies of each of the committees.
I am also member of a number of boards of affiliates, and as such, I also participate in some individual investment decisions.
Senator Angus: How long have you been with the Caisse?
Mr. Cyr: Since 1984.
Senator Angus: As you are very well aware, one of the questions which are often asked in Canada concerning the Caisse, is about your contribution to Quebec's economy. I know you already commented on that issue this morning. In line with what you just told us, would you say that your position about Steinberg and Mr. Gaucher was an exception to the general rule?
Mr. Cyr: The Steinberg case was not exceptional, and if you don't mind, I'll take two minutes to explain the context in which the Steinberg transaction occurred. It is true that it was several times mentioned that that transaction was a political one. From 1984 to 1990, I have been vice-president in charge of real estate investments at the Caisse. Our depositors wanted to have 5 per cent of their portfolio invested in real estate securities. From 1984 to 1989, after we had invested more than one billion dollars in private properties, our ratio was only at 2 per cent. In 1988, that is 18 months before closing the Steinberg transaction, we had adopted a strategy based on the assumption that the most efficient way to increase our proportion of real estate investments was to buy company shares rather than properties one by one. In February 1988, Ivanhoe was already targeted as one of those companies in which we were interested to invest. However, Steinberg was not in the position of selling Ivanhoe. Moreover, for some reasons of pure business and complementarity nature as they saw it, Steinberg could not sell Ivanhoe, because of the enormous fiscal impact the sale of its title would have on them.
The only occasion for the Caisse to purchase the Ivanhoe company was the possibility that Steinberg be sold itself. That is not what can be called a political objective. Our aim was rather the diversification of our holdings, and that acquisition was anticipated 18 months before the events that everybody interpreted as political events. I was primarily responsible for that, and it is with passion and vigour that I could argue today that it was not a political decision.
In the Steinberg case, we invested about 900 million dollars, of which 820 millions were funds required for the acquisition of Ivanhoe, Steinberg's real estate affiliate.
All things considered, I can tell you that not only it was a good deal, but the Ivanhoe portfolio, in the following years, that is from 1990 to 1995, resisted better than most real estate portfolios in Canada. The stability of shopping center revenues was maintained while other real estate companies, particularly in the office buildings sector, saw their revenues drop to such an extent that most of them found themselves faced with bankruptcies or were forced to rationalize their operations.
Therefore, not only it was not a political decision, but, given the context, it was a good business decision for the Caisse and the occasion to diversify its investments into the shopping centers' sector. It is worthy to note that, if you can remember, the price paid by the Caisse was below the offer. Therefore, not only did we pay a good price, but it was an investment which was made strictly according to our business and return objectives.
Senator Angus: It is a good thing to have that explanation. The transaction between Steinberg and the Caisse is often mentioned elsewhere because of concerns about the future of the Canada Pension Plan and its Investment Board. That is why we want to emphasize on the prudent decisions made by people like you and insist on the fact that those investments were made independently from the government and regular influence.
[English]
Senator Angus: When you are investing in other companies -- and you have already described that you are concerned with the corporate governance of these companies -- do you get involved in that before the investment is made? In other words, is the corporate governance of the company in which the caisse invests a key factor in the investment before you make it?
[Translation]
Do you understand?
Mr. Cyr: No.
Senator Angus: Are the quality of management and the corporate governance practices of the companies in which you decide to invest an important factor before you make an investment?
Mr. Cyr: No, it is not. It is an element that might be considered in as much as the nonobservance of some corporate governance principles could have a negative impact of our ability, as shareholder, to optimize our performance. We adopt in that respect a pragmatic approach, and you are no doubt aware that corporate governance practices are steadily evolving.
Senator Angus: Yes, recently.
Mr. Cyr: Therefore, the principles I indicated to you earlier are constantly reminded to everyone, but mostly to the shareholders annual assemblies. Our positions are made public. We talk to members of the boards who, in our opinion, are primarily the main shareholder representatives. We also discuss our corporate governance principles with enterprise managers.
[English]
We also believe that the way we apply them is as important as the principles themselves. They need to be adapted to the situation -- that is, to the specific requirement of the corporation.
We are involved with a convincing process rather than a strict, hard-stick rule on any of those policies.
Senator Angus: Another question arises in connection with the institutional investors such as the caisse: Do you see yourselves as having an obligation to protect the smaller investors? In other words, if the caisse takes a position of 15 per cent in a company which also has hundreds of retail shareholders out there, the caisse will be in daily contact with management and corporate governance and may have their own representatives on the board. Is there a role for you, as an institutional investor, to see to the interests of the little people, les petits épargnauts?
Mr. Cyr: The answer is "Yes". I can probably best express it in the following way. We believe in representative representation, which means that if someone owns only 25 per cent of the company, he should not have more than 25 per cent representation on the board. That means that all the minority shareholders should be represented by independent members. We are also against what we call multi-voting or subordinate shares.
With practical exception, when a small entrepreneurial company goes public for the first time, we may allow the majority shareholder, who is now accessing capital, to keep control of the share through multi-voting shares but under strict conditions. First, there is a limited period of time for the transition, and he should hold at least 30 per cent of the company in terms of capital investment.
We apply certain rules on a practical manner, but we do not participate in the purchase or the new issuance of subordinated shares or shares where the majority shareholder dilutes himself but keeps control through multi-voting shares. We will not get involved on the primary issuance of those shares.
Where a company has a good prospectus -- and, because of our diversification on an important portion of the index -- we might buy some shares of it on the secondary market. We will not shoot ourselves in the foot, but we have been exercising that policy for many years.
Senator Angus: That raises the other question I was going to ask about "shooting ourselves in the foot." Sometimes it occurs that an institutional investor with a big position in a company becomes aware of a downturn or that "capital depreciation" has set in. Does the investor then feel at liberty to sell, or does it feel that it is locked in sometimes? What is your policy in this regard?
Mr. Cyr: There are companies listed on the Montreal or the Toronto Stock Exchange which are part of the index and in which we hold nothing. That means that we are buying and selling shares of companies and some companies are just not listed there. We feel free to sell shares of that type of company.
Senator Angus: Is that a general rule?
Mr. Cyr: The underlying question is: Would you rather try to influence the management of the company to correct the company or leave them out and let the stock drop tremendously?
Senator Angus: That is my question.
Mr. Cyr: We are a mid- and long-term investor.
The first responsibility of a shareholder is to try to make sure that the board looks at the prospectus of a company and tries to make the best strategic decision for the company. The board should be able to independently review the management of the company. Certainly, we may be involved with other board members in reviewing whether the president or other top managers of the company are doing their jobs. If required, we will get involved with the board members to do our job.
It may not be because of the governance or the management, but sometimes we may leave or sell a stock because we feel the price is too high and we have a good opportunity to cash in the profit. Selling is not abandoning a company. Selling is either you think that you have a good price or that the market will go down on that company and you should sell now rather than later.
Senator Angus: As an investor, you feel at liberty to buy or sell these companies as you see fit, to sell your stock?
Mr. Cyr: Generally, we own less than 10 per cent of a company, so we feel free to buy and sell. However, if we sell the stock too quickly, we might affect our own value and selling price. We must manage in a prudent manner, according to the rules of the market, so that the performance of the caisse is optimal.
Senator Angus: You are one of the biggest institutional investors in Canada and are a good example to look at when we are studying the future of the Canada Pension Plan board. In fact, as a Quebecer, we are quite proud of you.
One of the things that the federal government has set up as a new board of the CPP is that for the first three years they would be passive investors in the indices.
What do you think of that? You are probably aware that we have asked that question to many people and they seem clear about the view that it is not such a good idea.
Mr. Cyr: There are two aspects to that. As I mentioned before, at one point in time we used index investment in some markets because we did not have the expertise and we took time to develop that expertise. We then developed the expertise. I would blame the idea of progressively going into the market while the expertise is being developed.
The concerns were more in terms of the importance of the investment compared to the size of the market and whether or not that could create disturbance in the market.
My understanding was that the board of directors of l'Office de l'investissement du Canada could, from time to time, change that policy and address those issues when they are creating a problem. If they are acting in a responsible fashion, they will react to any disturbance their policy can create and adapt accordingly.
Additionally, if the Toronto Stock Exchange 300 was fixed, there is no great disturbance in being indexed. You progressively buy the stocks at a certain percentage pro rata and then sit on it. There is no impact on the market. You are not playing the game. You are just there; you do not sell or buy.
Senator Angus: That is the passive role.
Mr. Cyr: As has been identified, the problem is that the index is changing in terms of pro rata or weighting of the different stocks. Some stocks are out and some are in.
If you are indexed and you must sell a stock the day it is leaving the index and buy the other stock the day it comes in, then you are in a bad situation.
A passive investment or the index investment policy that has been contemplated for the office should at least leave the possibility and be clear on the fact that it could actively manage the index process, which the teachers' union is doing. In their last annual report, they mentioned that 80 per cent of Canadian stocks were indexed. However, they also said that they actively manage the adjustment that is required to develop those indexed positions.
Proceeding progressively seems to be natural and this should progress as the expertise progresses. This process will need at least a minimum of flexibility to be able to adapt itself in terms of how the index is changed.
Senator Stewart: Mr. Cyr, you were here when the previous witness was talking about the board of directors of the Canada Pension Plan.
Great emphasis has been placed on the need to insulate the board from interests -- whether those interests be private or public -- that might distort the thinking of the board.
I look at your board and you do not seem to worry about that kind of distortion. For example, you have the chief financial officer of Hydro Quebec, the president of the commission of municipalities and the deputy minister.
Mr. Cyr: Those three are non-voting board members.
Senator Stewart: Yes, but I still assume that they are listened to when they speak at the meeting of the board. The people who set up this system did not feel that that was a concern.
Obviously, these people were put on the board because it was felt that they could make a major contribution to the operation of the case.
Would we be going the wrong way if we tried to produce a board of directors that was insulated from public considerations such as your deputy minister has done, or from people with private concerns? Would the Canada Pension Plan suffer if we did not come closer to your model?
Mr. Cyr: The question is speculative. However, the objective is to get some equilibrium or balance. The main focus or preoccupation of the board is a mix of expertise that can work together.
The board of directors of the caisse has been very useful because it has a mix of expertise: le président du Mouvement Desjardins, labour unions, two public officials representing the employees and cadres du gouvernement du Québec, and representatives of the business community.
There was this equilibrium so that, in any circumstances, the chairman and the president -- that is, the management -- could count on the support, the expertise, the comments and the pertinent questions that this group or person on our board are in a position to ask because of their expertise, background and level of information. Whatever solution you choose, you should look at making sure that you get a good balance in terms of the expertise and preoccupation that you will provide to the board.
Senator Austin: I feel like a small boy with five cents in front of a candy counter with 300 choices and I can only buy one. There are so many topics. I would like to ask you, first, to put on the record what the performance of the caisse is in terms of the quartiles of the industry. In what quartile does the caisse fit?
Mr. Cyr: I would probably tell you that you are asking the wrong question, but we have been doing not so badly. When talking quartile, I presume you are speaking about the pension plan industry. As you know, 20 per cent of our money is insurance money, so we have a tendency not to compare our global fund to only one area. I have two figures here. From 1987 to 1996, the Caisse's return was 10.2 per cent. The median return of SAE, which is all the pension fund managers in Canada, was 10.7 per cent. We were half a point below the median for that period.
For the period 1981 to 1990, we had 12.37; the median was 12 per cent. We have been above and below the median, and the main reason has been the performance of the bond market compared to the stock market because we were overweight in bonds. There are situations where we can beat all of our specific benchmarks but still be below the SAE benchmark because we are overweight in bonds.
Senator Austin: As a factual background, of the total funds for which the Caisse is responsible, what percentage of those funds is invested in Quebec-based financial instruments or equities, either debt or equities? How much of the total investment is Quebec-based?
Mr. Cyr: Approximately 55 per cent is Quebec-based, of which probably 40 per cent is governmental bonds and 15 per cent of the total assets are invested in Quebec companies. However, try to identify what is a Quebec company. Seagram's is a Quebec company. It is a Canadian company, but it has 97 per cent of its assets in the United States. Those calculations are difficult to make. I will give you a rough idea, but do not ask me to pinpoint how we have identified in which category each of those companies fits. The rough number is 55.
Senator Austin: The answers to those two questions suggest that your special characteristics have not affected your investment performance and that you have been successful in targeting performance in the social policy area -- that is, in the economic stimulation within your province.
Unless you disagree with me, I would go on to my next question.
Mr. Cyr: Please continue.
Senator Austin: As you are aware, the profile of the Canada Pension Plan, as it is currently established, is quite a different one in those aspects. We have heard from professional managers who say that you cannot introduce anything but objective, arm's-length investment standards, and that you cannot and should not consider issues that do anything that might logically distract from the maximum benefit to the beneficiary, as distinct from maximum benefit to a series of beneficiaries, which would be communities, regions, industries, sectors, and so on.
I will now move to your accountability to the National Assembly. Could you take us through what overview role the National Assembly plays with respect to the performance or operations of the caisse?
Mr. Cyr: Each year, we present our annual report, which is our financial report and activity report, to the National Assembly. There is a subcommittee where we have hearings every year and discuss our performance, strategy and where we are. The Auditor General of Quebec not only audits our statements but also reviews the contents of our annual report in terms of all the information that we provide, and he also makes confirmation or verification that every investment we make is made according to the act. There are some differences in your own regulations compared to what we have developed in Quebec, but the Auditor General is reviewing those three aspects and makes his report to the National Assembly.
Last year, for the first time, we were asked to present ourselves to a special committee of the National Assembly just to present our report. We were there for two days, just telling them what we were doing and why we were doing things and answering all the questions.
Senator Angus: Is that a committee like the Finance Committee of the House of Commons or a committee like the Senate Banking Committee?
Mr. Cyr: Yes.
Senator Angus: It is a standing committee, is it?
Mr. Cyr: Yes.
Senator Austin: My final question is: Do you have an internal code of corporate governance? In other words, has the board of directors established a code of conduct for the directors, dealing with things such as conflict of interest, issues with respect to the performance of the chief executive officer, the normal code that is required by, say, the Toronto Stock Exchange and the Day Report? Have you adapted those?
Mr. Cyr: We have our own code, le code d'ethique et de déontologie, which covers every level of the caisse, the board, the different committees of the board, the top management and everyone involved. We must abide by the strictest rule in terms of conflict of interest, basically in terms of full divulgation of all our assets and transactions and timing of our transactions.
Senator Austin: Those are given to whom?
Mr. Cyr: They are given to the corporate secretary who is reviewing that and reporting to a special committee of the board which is reviewing the ethics committee. The ethics committee of the board reviews all reports made by the employees and the board members, and those are reviewed on a very confidential basis by this committee.
Senator Callbeck: I have one question on the area of accountability. You mentioned that there are differences between legislation and regulations in this regard; what you work under and what is proposed here. Are there provisions regarding accountability which you feel should be added to what is already laid out for the CPP?
Mr. Cyr: Comparing your document with the way we work, I find a big difference. We have 19 depositors. I personally present the results and the strategy at two or three meetings with most of our large depositors. Those boards are becoming more and more knowledgeable so that you must be very clear in terms of the information you provide and the answers you give.
In this case, you have only one client, but you have substituted the public presentations I make with public hearings which could, if well managed, represent a nice way to account to the shareholders. It implies that in those assemblies you have a code of procedures that will permit people with good knowledge of the investment to participate effectively in a significant manner, because those large assemblies can tend to be non-productive if they are not well organized and well managed.
Senator Kelleher: How does the caisse deal with the proxies it holds?
Mr. Cyr: We group proxy usage in two cases. One is on decisions which have major impact in terms of the financial return, such as immediate acceptance of an offer in case of a takeover bid or such things. These decisions are usually taken based strictly on what our best financial interest is in terms of transactions. Do we accept the bid or not? Do we accept the merger or not? This is a business decision. Usually, the managers of the portfolio will make a recommendation in terms of the business decision and we will use a proxy in line with the business decision taken by the proper authority within the Caisse.
The other side of the question is how we use the proxy in terms of corporate governance. We have our own corporate governance policy. We will use proxy to ensure that what is happening within the company is in line with that policy. However, nothing is white or black. We will probably publicly issue any position on controversial issues, for example, and we will inform the board and then inform management.
With regard to the recent bank problem, at each of those shareholders' assemblies we published a position point by point and explained why we took that position in each of those cases.
If you ask what our position is on the Bank of Montreal/Royal Bank question in terms of ineligibility of service providers on the board, I can tell you in four lines exactly what we think.
If it is publicly divulged, and that person can provide a good contribution to the board, and the conflict is clear, we believe that could be acceptable. In each case we go public in a very practical manner, always relying on ensuring that the principles are put forward. That is how we use the proxy. The caisse uses it; the caisse decides on the vote. We report to our board on all those issues in terms of proxy.
For example, we have informed our board of directors what our policy will be in terms of those specific proxies, and it was an interpretation of our corporate governance policy. When the issues are more delicate, we amend and review our corporate governance policy with the board.
Senator Angus: What is the general position of the Caisse on high salaries of bank CEOs?
Mr. Cyr: We believe that remuneration should be split between base remuneration and remuneration based on performance. We believe that performance remuneration could be high and is important, because that means that the top management is working toward optimizing the return of the shareholders.
We are sensitive to and concerned about the increasing spread between the salary of the average worker and the salary of top management. However, being concerned does not mean that we would not ensure that the company gets the best man for the job and, if we need to pay because the market requires it, we will do so.
We believe that the total remuneration package for the main directors should be fixed by a committee of the board which is composed exclusively of outside and independent members. That is our policy.
On each of those, we go public and try to find the line between the principle and what we think will not have a negative impact on the performance of the company in the short term but will provide incentives to improve and change in the long run.
Senator Kelleher: That is very commendable.
Mr. Cyr: I have mentioned to the clerk of the committee that I can make available to you this corporate governance policy.
The Deputy Chairman: Please do.
Thank you, Mr. Cyr. We appreciate your testimony before us.
The committee adjourned.