Proceedings of the Standing Senate Committee on
Banking, Trade and
Commerce
Issue 22 - Evidence
OTTAWA, Thursday, June 4, 1998
The Standing Senate Committee on Banking, Trade and Commerce met this day at 11:00 a.m. to examine the state of the financial system in Canada (the role of institutional investors).
Senator Michael Kirby (Chairman) in the Chair.
[English]
The Chairman: Our first witnesses are from IMASCO.
Many of you will recall that one of the reasons we are doing this study is because of comments that Mr. Levitt and his chairman made to us a year and a half ago, or thereabouts, when we were looking at the corporate governance provisions of the CBCA. We were led into this issue, in part, because of a number of comments made by people from IMASCO, Bell Canada, and others. So we are delighted, Mr. Levitt, that you are appearing on our last day of these hearings.
I know you have a short statement, and I would ask you to proceed with it, following which we will have questions -- as you know, since you have appeared before us on a number of occasions.
Mr. Brian Levitt, President, IMASCO: It is our understanding that the committee is interested in the role that institutional investors play in the Canadian capital markets, and we are pleased to be here today to describe IMASCO's investor relations practices and to share our experiences in this important endeavour.
To provide a context for this morning's discussion, I will start with a brief description of our business and the current profile of our shareholders. I will then summarize our experience with institutional investors and our investor relations activities. Following my remarks, Mr. McBride and I will be pleased to answer any questions the committee may have.
IMASCO is a leading Canadian consumer products and services company, with operations in Canada and the United States and 1997 revenues of about $10 billion.
Our principal businesses are: Imperial Tobacco, the industry leader in Canada with a 68-per-cent share of the domestic cigarette market; CT Financial Services Inc., the parent company of Canada Trust and a significant competitor in Canadian retail financial service; Shoppers Drug Mart/Pharmaprix, Canada's foremost and only nationwide drugstore group; and Genstar Development Company, which develops residential communities for home builders in selected markets across North America.
Our corporate mission is to build value for shareholders, and we manage the company with a view to achieving year-over-year growth. Excluding special items, our earnings per common share have increased at an annual compound growth rate of 14 per cent over the past five years.
In the context of the subject at hand, it is important to note that our shareholders have benefited accordingly. With dividends reinvested, the compounded annual total return on our stock over the same five-year period was 24 per cent compared with 17 per cent for the TSE 300.
The market value of IMASCO's common equity is currently approximately $12.5 billion, placing it among the largest non-bank capitalization in Canada. IMASCO's major shareholder is U.K.-based B.A.T. Industries, with 42 per cent of our common shares. The remaining 58 per cent constitutes the public float, which trades on the Toronto, Montreal and Vancouver exchanges.
It is worth noting that IMASCO enjoys a unique relationship with its major shareholder. We provide appropriate information to B.A.T., and we consult with them periodically to receive the benefit of their experience and advice. However, the ultimate decision-making authority in IMASCO is its board of directors, and B.A.T. has not had a nominee on our board for at least 50 years.
IMASCO has seen the percentage of its shares held by Canadian institutions increase in recent years. We attribute this to our attractive investment characteristics in combination with the growth being experienced by institutional investors in Canada and the impact of the foreign property rule, which somewhat narrows the options available to domestic investors.
Globalization and improving economic fundamentals in Canada are also causing foreign institutions to take a greater interest in Canadian equities. In IMASCO's case, our international shareholder base has grown steadily in recent years to approximately 20 per cent of the float.
Overall, we estimate that close to 80 per cent of IMASCO's float is currently held by institutional investors. Concurrent with the growth of institutional investors in Canada has been a tendency for them to rely more on in-house research as opposed to research provided by sell-side analysts. This has served to increase the amount of direct contact between institutions and publicly traded corporations.
I would like to underline at the outset that we have had no confrontational dealings with any of our major shareholders; our experience with them has been very positive. The interaction we do have generally falls within the context of our continuous disclosure activities and investor relations program.
We believe there are three main reasons that shareholder activists have not come knocking at IMASCO's door. First and foremost, our investment performance has been good. As I mentioned earlier, IMASCO has consistently outperformed the market in recent years. A common and appropriate motivation for shareholder activism is situations where a company's performance is unsatisfactory and the institution has a very large position in the stock, to the point where "voting with their feet" would be detrimental to their interests.
Second, we have a strong shareholder-oriented culture. This is reflected in our system of corporate governance and in our actions with respect to some of the more controversial subjects that institutional investors are interested in. We do not, for example, have a "poison pill plan" or multiple-voting shares. On the other hand, we do have confidential voting and an executive compensation system that is performance-based.
The Chairman: What do you mean by confidential voting?
Mr. Levitt: There has been a bit of movement in the last three years to a system where we, as management, cannot find out how shareholder A or shareholder B has voted. Absent special arrangements, the proxies just come back to the transfer agent. I would not do it, but I could call up and say, "How has pension plan X voted on this subject?"
The Chairman: They would not tell you.
Mr. Levitt: It is organized so they do not tell us. There are some limited exceptions, which do not come to mind.
Senator Angus: You can find out.
Mr. Levitt: No, I cannot find out.
Senator Angus: I thought you could phone up.
Mr. Levitt: No, I cannot. We put in a system so that our shareholders could vote with the knowledge that we would not be able to find out how they voted.
The Chairman: Please continue with your statement. We will come back to that point because I want to understand what the benefits of that are.
Mr. Levitt: In particular, IMASCO's executive compensation emphasizes stock ownership, thereby closely aligning management interest with those of shareholders.
Finally, we believe that institutional investors have a right and duty to be interested in the development of our business. As such, we take care to accommodate them through our investor relations activities.
It might be helpful if I expanded upon the preceding point by briefly reviewing what we are trying to accomplish through investor relations, and how we go about it.
We see ourselves as competing with other publicly traded equities for a share of investors portfolios. This implies that in order to be successful we have to establish long-term trusting relationships with our investors. Hence, we strive for transparency and evenness in our disclosure practices.
We understand that if we are less than fair in managing our relationships with institutions and analysts, we will quickly lose their trust and support. More specifically, we aim to engender effective two-way communication with the investment community. Continuous contact with institutional investors and analysts is therefore an integral part of our program.
Through dialogue with the investment community, we endeavour to attract shareholders who have realistic expectations about IMASCO's future performance and who want to own the stock on that basis. That is the only sure way to avoid disappointing shareholders, and in our view is both proper behaviour and good business practice.
The cornerstone of IMASCO's investor relations program is our disclosure documents. We have come to learn that it is well worth investing sufficient time and energy to ensure that the public documents are as complete and useful as they possibly can be.
Another IMASCO practice is to limit the number of spokespersons. Mr. McBride acts as our primary contact and handles most of the enquiries. Beyond that, only IMASCO's chief financial officer and myself are authorized to speak to the investment community. This is a simple but effective way to control the information that is being given out.
As a group, we meet with buy- and sell-side analysts every quarter. The purpose of these meetings is to review the results and comment on important issues. We favour face-to-face meetings over conference calls because we think that personal contact is helpful to building good relationships. Hard-copy versions of the slide presentation and my remarks are distributed at the meetings. Those who do not attend the meetings receive the material either by fax or mail. It is also posted on our Web site.
We also welcome the opportunity to speak with the institutions directly. As I have already indicated, this is as much to hear their views as to tell our story. Last year we participated in roughly 20 such encounters. Given the private nature of the meetings, a degree of caution is called for. We are very careful to avoid disclosing material information selectively and, if at all possible, IMASCO is represented at these meetings by two of our three authorized spokespersons. A brief meeting log is kept so that all three of us can be made aware of what was discussed.
One last point on meetings. It is our policy not to meet with institutions or analysts during quiet periods. By quiet periods I mean those times when IMASCO and IMASCO insiders are not permitted by corporate policy to trade in our stock. In most cases, quiet times are related to the upcoming release of financial results. There can, however, be other times when important news is pending, and we avoid meeting in those circumstances as well.
In conclusion, I would summarize IMASCO's experience and position in the following way. As institutional investors have grown in size and number, so too has the proportion of IMASCO's shares held by institutions. We believe that the managers of these funds have both the right and a duty to take an active interest in the affairs of IMASCO and that generally they do so in a way that is both responsible and constructive.
In our experience, the needs of institutional investors can readily be accommodated by effective corporate governance and investor relations practices. Overall, we believe that the growing influence of institutional investors is making a positive contribution to maintaining the integrity of Canadian capital markets.
My colleague and I are happy to answer your questions.
The Chairman: I was sort of stunned by your 80-per-cent figure.
Senator Angus: Except that it is consistent with the whole capital market in Canada.
The Chairman: Right. In that 80 per cent -- and I understand 80 per cent is just an approximation -- do you have a rough idea of many institutional investors own that 80 per cent?
Mr. Peter McBride, Vice-President, Communications and Investor Relations, IMASCO: All of the usual major investors are there -- the Ontario Teachers, the Caisse de dépôt, OMERS, and so on -- and they would be the biggest shareholders. They publicly disclose their holdings once a year. OMERS have five to six million shares; Teachers have close to seven million shares.
The Chairman: What percentage is that?
Mr. McBride: It depends whether you look at the float, which we should probably be looking at. In other words, excluding the B.A.T. shareholders, it is five or six million on 130, so it is 2 per cent to 3 per cent.
Mr. Levitt: One of the things that is a bit of an -- I will not say it is an issue, but there is a problem here in knowing who has what stock, because there is no reporting requirement unless somebody owns more than 10 per cent. Peter spends a fair bit of his time nosing around, trying to triangulate on these numbers, and they move around.
The Chairman: Just a comment on the nosing around on numbers. That problem will be helped a little bit since the government has adopted a recommendation, which came both from this committee and from the group of companies that were lobbying for changes with respect to the Canada Business Corporations Act, to enable the company to find out who its shareholders are. Thus, that problem will be solved when the legislation is introduced later this year.
Mr. Levitt: Just so I can expand on what Peter said. The reason that it is important to know who your shareholders are is that it tells you, first of all, who you should be keeping informed; it also tells you who your shareholders are not.
As I was trying to make clear in our opening remarks, financial markets are like a supermarket. There are a lot of products in that supermarket; we are just one product on the shelf. We look at the maintenance of our shareholder base as all the things I was telling your about, in terms of being fair, open and transparent, and all the rest of it, but it is a marketing function.
Our shareholders benefit if we have a broad group of shareholders that have realistic expectations about what we can do. So the real objective of our investor relations program is to ensure that we have a group of shareholders who bought the stock based on expectations that we can deliver on. As well, we look for other people who do not own the stock, but who might not be aware of it. We want to market them.
The Chairman: They might share the same expectations.
Senator Angus: A couple of preliminary questions, if I may, which arise from your comments, Mr. Levitt. CT Financial Services, Canada Trust, being a major financial institution in Canada is obviously of particular interest to this committee. Is CT Financial Services a subsidiary of IMASCO? How does the public get into that?
Mr. Levitt: We own a little more than 98 per cent of the CT common, because it is a regulated financial institution, and frankly it is in keeping with our management system, which is decentralized and focused on a few key issues. We have structured the relationship with CT where it is really operated by its board.
We have 3 of 24 or 25 directors now -- I just cannot remember whether it is 25 or 24, but we have three directors. They are myself, our chief financial officer and our chairman. Our non-executive chairman is also the non-executive chairman of CT, so we participate in the governance of CT through the board of directors as opposed to our other companies, which are wholly owned and with whom we have a direct management relationship. There is no board because there are no outside investors.
Senator Angus: What is the other 2 per cent of the voting common or the class -- I think you mentioned IMASCO owns 90 per cent.
Mr. Levitt: IMASCO owns 98-plus per cent.
Senator Angus. Is there some anomaly there?
Mr. Levitt: At the time that we bought it, the float was out there, and we did not see any real point in taking it in. Because it is a regulated financial institution, even if you owned per cent of it there would be the same governance relationships. It would have to be managed at arm's length, because unlike the other businesses, where all the money in the business is our money, in a financial institution we own the equity but it has an independent presence in the financial markets, which makes for a slightly different governance arrangement.
Senator Angus: I take it there is a complicated structure of other kinds of shares that perhaps are held by the public directly?
Mr. Levitt: Yes. CT Financial Services is a holding company which owns several regulated financial institutions. Under the Trust and Loan Companies Act, there is a requirement that there be public participation in the voting for directors. As such, a series of shares is issued out of the mortgage company carrying 35 per cent of the votes which can be cast for the election of directors of the regulated companies.
The public participates in the governance that way, but they do not participate in the equity.
Senator Angus: This leads to another obvious question which has to do with Mr. McBride's nosing around and the problems of determining. Am I correct that there would be a 10-per-cent rule with respect to the ownership?
Mr. Levitt: No.
Senator Angus: Not in the case of the CT, unlike a bank.
Mr. Levitt: CT is not incorporated under the Bank Act.
Senator Angus: Could anyone, in effect, own it?
Mr. Levitt: Right. Except that we own it.
Senator Angus: For the moment, you own it. Having said that, though, you have described rather succinctly the investor relations program as part of your governance at the parent company. You have made the point that CT has, with the exception of the three representatives of the big board, its own board, its own governance structure and its own CEO.
Mr. Levitt: Yes.
Senator Angus: Who are basically accountable to the same body of shareholders, I suppose.
Mr. Levitt: It is slightly different. First of all, they have their own investor relations program, but they do not have much of an equity following because the float is insignificant, but they are very active in the debt markets, with assets, securities and debentures. In other words, they are raising tier-two capital for regulatory purposes in the debt markets, so it is important for them to maintain themselves as an independent name in the financial market in support of their access to those markets, and that is what they do. They hold a quarterly analyst meeting. They have a program not unlike ours.
Senator Angus: Would you go?
Mr. Levitt: No.
Mr. McBride: For a sell-side broker, for example, who follows IMASCO, a consumer products analyst is the primary contact -- and this is probably the same within an institution -- and there is also a banking analyst who looks at the CT financial part of the business. The two put their heads together to come up with research and recommendations on the stock.
When CT has a quarterly analyst meeting, all of the major bank analysts attend. In part, they attend so they can be informed about the CT part of IMASCO's business and, in part, so they can be informed about what is going on in the banking industry, because CT is a major player.
That is how it works from a research point of view but, if an investor wants to invest in CT, he would probably do so through IMASCO rather than through the 2-per-cent float.
Senator Angus: I take it you do not have special preferred shares or something to attract investors.
Mr. Levitt: If they want to invest in CT they can buy into IMASCO.
Senator Angus: That is what I thought.
It is interesting that you have come here to discuss the subject of the governance of institutional investors because, as you said, you are not a institutional investor, you are, in effect, an institutional investee.
Mr. Levitt: That is right.
Senator Angus: Did you attend our earlier study on corporate governance of public companies? I certainly remember Mr. Crawford being here.
Mr. Levitt: A group of companies made a joint representation. I think Purdy was the spokesperson.
Senator Angus: You are absolutely right. Out of those hearings came a clear picture of what is going on. There are many non-accountable entities. There is a huge influx of capital into these institutional investors, including mutual funds, for example. I am not only talking about private and public pension funds, but also other institutional investors that come under that kind of a rubric. There is a great variety of governance or non-governance fact patterns.
We have garnered some very interesting facts which indicate that there is a role for some government intervention. It may not necessarily be direct legislation, but something to add to your own governance provisions and your investor relations program. Do you have any opinions to offer on this? You say positive things about institutional investors and their role in our financial system in Canada, but in terms of tightening up and/or changing the current landscape of their governance, have you any directives for us?
Mr. Levitt: Earlier you mentioned that Mr. Crawford indicated that there was a non-accountability problem. It would surprise me if he said that.
Senator Angus: It came out that there was a need to look into non-accountability, conflict of interest.
Mr. Levitt: I would be surprised if he identified those items as problems. They might be issues that you might want to look at, but that is different from saying that they are problems.
Senator Angus: Fair enough.
Mr. Levitt: We do not get very much involved in the governance side of these institutions. I have enough trouble with my own area, so I try not to comment on other people's business. I cannot offer any specific suggestions. You have a submission from the teachers on the table. It seems to me that they have it pretty well figured out.
What is most important in any organization is to have a clear sense of what it is you are doing. You then organize yourself around that.
I am afraid I can offer you no specific suggestions.
Senator Angus: We had the fortuitous occasion recently, parallel to our specific study on the governance of institutional investors, to take a close look at the new pension board which has been formed under the new legislation. It would become the ultimate institutional investor in this country.
We got into all kinds of issues, including the 20-per-cent rule, and whether or not it should be relaxed or phased out. Of course, the minister made the statements that he has made. Most of the witness felt that it probably should be removed and the market would take care of it; that it would settle at 33 per cent or 29 per cent as it has in the U.K. What are your views on that?
We also heard about the institutional investor receiving preferred treatment as opposed to retail investor. When you talk those who manage the CN pension plan, and to Tullio Cedraschi in particular, are you satisfied that they are performing a service for the retail investor?
Mr. Levitt: We are very careful about preferred access or selective disclosure. It is not fair and it might be illegal, so we are careful to ensure that we do not tell anybody anything. If the information is important enough for somebody to want to know it, then everybody should know it. Although we are under no legal obligation, occasionally we will issue a press release disclosing what is not, technically, a material fact. We do that because we want to ensure full disclosure.
Senator Angus: It is a matter of transparency.
Mr. Levitt: That is also why, after our quarterly annual meetings, we put the slides and my remarks on the Web site so that they are accessible to anybody who has an interest. Again, it is the right way to do business, so that is what we do. These are matters of reputation and, ultimately, there is a value to it, so we are quite careful about that.
The Chairman: Is your company unique in making this information available to everybody through the Internet?
Mr. McBride: It is relatively rare at this point, but I suspect it will increase. Approximately 50 per cent of the companies recently surveyed on this question now have web sites. That number is rapidly growing.
I am not sure that, at this point, they all make this information available. We are probably unusual in that we still hold face-to-face meetings with the financial community. The majority probably do conference calls at this point in time which, of course, is easier on management.
The Chairman: It may not necessarily be easier, especially when they are reported in the newspaper, as they were last week in the TD Bank case.
Mr. McBride: This package is sent to the media the same day. I do not know if it was the last meeting or the one before but, by the time we got back to the office from meeting with the investors, the text of Mr. Levitt's remarks were already on the news service. There are ways to deal with that.
If I could just add to what Brian was saying earlier, these people have hundreds of millions of dollars invested with us. If you start playing favourites and give information to one and not another, that soon gets around.
To some extent, the whole system is self-regulating. It is all about relationships. You have to manage them fairly because, if you do not, you will lose all your support. That is what it boils down to.
Mr. Levitt: Face-to-face meetings are better than conference calls. They work for us because we only have the Canadian listing. People who have listings in New York or on NASDAQ use conference calls, because it is just not feasible to meet face to face. People will not fly to Toronto, Montreal or Calgary from 59 cities in the U.S. Therefore, conference calls, I would say, are the norm in the U.S. capital markets.
Mr. McBride: They are even the norm in Canada now.
Mr. Levitt: We prefer face-to-face meetings because it enables us to see people and them to see us. However, many practices have to change because markets change. I think this is a diminishing practice.
Senator Angus: What would happen if one of your major institutional shareholders called you and asked, "Can we come in and discuss the proposed selling off of your financial services?"; or "We notice that B.A.T. has done a deal with Zurich. Will you give us a briefing on that?" Does that happen, or do you tell the caller that you want to hold a meeting so that you can talk to everybody at once?
Mr. Levitt: We held 20 of these meetings last year, and people did attend. Everybody focused on something different. These are all individual firms with individuals who can offer a particular slant. That is what makes a market. Everybody has a slightly different idea.
We are careful that we do not go past a certain point. We try to ensure that any individual or any individual firm or shareholder does not get any important information that is not generally known. We do it because we think it is the right thing to do but, as Peter said, once it starts to get around that somebody got information that everybody else did not get, then everybody starts to worry about whether they know the whole story, including the person who got the tip. If one is ever tempted to do something like that, which we are not, I would point out that it is a very short-sighted practice, and it will hurt you. Reputations take a long time to build up and a short time to lose.
Senator Meighen: I was interested in your passing reference on page 2 of your presentation to the foreign property rule, the 20-per-cent rule. I was not quite sure whether your reference was a monetary one or not. You indicated that it does, in your view, explain to some extent the characteristics of your investors.
Mr. Levitt: Yes.
Senator Meighen: Do you think the 20-per-cent rule should be maintained, eliminated, or phased out gradually? You indicated what the effect is on IMASCO, but does it have any other effect?
Mr. Levitt: Let me expand on what the effect is. We are for competition and open markets. I do not have a view about whether it should be maintained or changed. I just do not know enough about it, to be frank.
We offer a particular kind of product. We describe ourselves as a growth stock with a good dividend. Portfolio investors will put together a portfolio with a certain profile and they may have a place for growth stocks with a good dividend. Then they must choose which one to buy. Given the 20-per-cent rule, the ability to buy foreign stocks is a scarce commodity. Therefore, you must assume that, if you have a good growth stock with a good dividend in Canada, you would not use up your foreign property space to buy a competing U.S. or European product, you would probably buy the Canadian one and save your foreign property space for a foreign property stock that you cannot buy in Canada.
We do not believe that, if you eliminate the foreign property rule, no Canadian institutions will want to own our stock. We do not think that for a minute. However, we think it probably leads them to conclude, for the space they have in their portfolios for stocks with the characteristics of IMASCO, given that they can buy IMASCO, they will not buy a foreign stock.
Senator Meighen: You indicated in your presentation that your relationship with B.A.T., who is your largest shareholder, is pretty hands off.
Mr. Levitt: Yes.
Senator Meighen: Do you think that can be reasonably explained to some extent by your good performance?
Mr. Levitt: I think so.
Senator Meighen: If the tide goes out a little bit, do you think they might become a little more hands on?
Mr. Levitt: Business is all about performance so, if we stop performing well, they will not be the only shareholder seeking an explanation.
Senator Meighen: No, but they are your biggest shareholder by far.
Mr. Levitt: In that sense their interests are completely in line with those of other institutions, so I would expect we would hear from them, but we would also hear from other institutions. Performance is the beginning and end of this whole story.
Senator Meighen: You touched on CDS, and the fact that, as presently constituted, it is not helpful in letting you know who your shareholders are. Can I take it from that that you would support some sort of transparency with respect to who owns your stock?
Mr. McBride: We definitely would. Most representatives of institutions we talk to are content to tell us what they own. In fact, they like us to know that they have a major position in the stock. Government-related pension plans and foreign pensions plans have certain policies about disclosure, but other money managers are happy to tell us what they own.
The problem stems from the custodial system. If you take the trouble to get your CDS list, you will find listed there a number of banks and brokerages. Most of the brokerages are holding stock for retail accounts, and most of the banks are holding stock for institutional investors. Getting to that level is the complicated part.
In our experience, they do not mind telling us that they own the stock. They may mind telling the brokers that they own the stock because the brokers then know whether they are ripe for selling or buying, or whatever. I think there is more reluctance on that side.
Senator Meighen: You say that money managers, generally, are happy to tell you they own your stock.
Mr. McBride: Yes.
Senator Meighen: Are they happy to tell you whose money they are representing?
Mr. McBride: Frankly, we do not ask that question.
Some of that information is available. We know about the dedicated pension plans such as the teachers' plan, OMERS, and so on. An outfit like Connor, Clark & Lunn Group, which is a major shareholder of ours, is managing both mutual funds. We know they are managing Northern Telecom's pension fund. They are doing many different things, but they are doing it with the same analysts and the same portfolio managers, and what is important to us is communication with those folks, not necessarily the ultimate beneficial owners.
Senator Meighen: I would be interested in your general comments about how the system, institutionalized or not, because both elements are present in Canada, is working for you and for your shareholders. There is a somewhat different system in the United States.
I am thinking of CalPERS and the more aggressive institutions that tend to shake the industry by the way they operate, rather than perhaps proceeding in the fashion that you described in your testimony in your dealings with the institutions that own your stock.
Do I take it that you are satisfied with your system. Do you see it continuing? Is there anything that you could recommend, by way of legislative change, that would enhance it?
Mr. Levitt: The teachers' brief I was flipping through makes the point that, until recently, they did not participate in the equity markets. Their equity ownership is a relatively recent phenomenon. All the large pension plans used to be captured by government debt. My experience, and not just through my own company since I am on the boards of some other companies, indicates that Canadian institutions are not shy about making their views known. When Peter and I meet with them, they are forthright in expressing their views about what we ought to be doing and what they would be doing if they were in our place. Where there are performance problems, there is a Canadian way of getting the message through, and it does get through.
These people are carrying out their fiduciary duties, and they are very responsive. Because you do not shout does not mean you do not get hurt, and so whereas CalPERS and the U.S. funds take an approach that is completely in context in the U.S. culture, which is a little more in your face, the Canadian institutions, in my experience, have no hesitation in making their views known when they are not satisfied with performance or something else. They are the customers, and an institution which does not pay attention to its customer is not being very astute.
Senator Meighen: In your experience, is there a growing confusion in the minds of institutional investors between proffering their views and trying to run your company?
Mr. Levitt: We do not find that to be an issue. We are in the fortunate position of having had good performance, and so I would say that entitles us to have more strongly held views about what we should do than someone who has not had good performance. People tend to give us the benefit of the doubt because their experience with us has been good. Institutions may be given advice about things, but I have never seen any indication that those offering that advice want to be in the position of making the management decisions and taking the responsibility for them.
This is an evolving process. A professional group of managers now runs these funds, and they have a pretty good understanding of where the line is between advice and what might come next. My own view is that there is not a problem.
Senator Kelleher: I was interested to hear about the meetings you have with the analysts, if possible. on a quarterly basis. I commend you for that. Analysts have been somewhat more in the news lately than they have been in the past. However, we will not get into that.
Since you have gone about trying to meet with them and discuss your company affairs with them, when they prepare their reports, do you believe you are getting an accurate, comprehensive report on the affairs of your company as they are presently being managed by you people?
Mr. McBride: In our experience, by and large, they do a good job. Probably a dozen analysts follow us and report on us. They are all Canadian because we are not listed in the U.S., so they are from all the major brokerage houses and some of the smaller ones. From my perspective, some do a better job than others; and probably from the investors point of view, some do a better job than others. Overall I think you know what you are getting. Some of the better analysts will give you pretty good coverage, whereas some of the less known analysts will probably give you scantier coverage, less thoughtful and so on, but I think they do a pretty good job.
In reference to the media stories, and so on, I think there has been a change in the relationship between institutional investors and sell-side analysts. We touched on that in our opening remarks. Some of these funds are getting big. These managers have a lot of money to manage, and they are doing more research on their own. They are using the so-called "broker analyst" to keep track of the details, earnings models and things like that but, when they come see us they are more interested in meeting with management, getting a sense of who is running the business, what motivates us, and so on.
We have had, for example, shareholders come in and ask Mr. Levitt about his compensation scheme. They want to know how that is tied to performance, and satisfy themselves that it is reasonable.
Senator Kelleher: What you seem to be doing, given your regular meetings with analysts, is something that does not appear to be a general pattern yet in the business community.
Do you believe that, while you are being treated fairly and accurately, other companies, of which you have a fair amount of knowledge, are also being covered by the analysts comprehensively and accurately?
Mr. McBride: It is difficult to have an opinion on that.
We hold a quarterly meeting come rain or shine, and I would say most major TSE 300 companies are in that mode as well but, as we said earlier, primarily by conference call. Analyst specialize according to industry sectors. My contact is directly with the consumer products sector analyst, and somewhat indirectly with the banking analyst. In my view they are very professional and they do a very good job overall, but beyond that I really could not comment.
Senator Kelleher: I am, naturally, asking you to comment about the sector of which you have knowledge, because you must have a better knowledge of what your competitors are doing than many people, so you obviously are in a position to know whether the analysts are doing a fairly good job with your competitors.
Mr. Levitt: If the question is: Do we think people are being fairly or adequately covered, my response is that, if a company does not feel it is being fairly or adequately covered, then they should do something about it. There are no victims here. This is just a question of managing your business, and this is a part of the business that has to be managed, just like purchasing and manufacturing and all the other parts of a business. I do not hear this complaint very often, but I would not have too much sympathy for a company representative who claimed the company was not getting a fair shake from the analyst. If that is the feeling, the representative should do something about it. If you hear people saying that, you might bear that in mind, because this is not something that is out of their control.
Senator Kelleher: I ask the question not so much because of my concern for any company, but because of our collective concerns for the consumer markets, that is, the investors out there.
Mr. McBride: We are trying to attract shareholders who have realistic expectations, and manage those relationships. We do not want to disappoint people. What have been reported in the media are the huge disappointments, in some cases bankruptcies. Mr. Levitt and I would say that they did not manage their communications very well. If there was a major disappointment, then something was not managed properly.
Senator Kelleher: Perhaps the analyst did not dig quite deeply enough.
Mr. McBride: If an analyst issues a report that is totally unrealistic in terms of what you know and the way your business is being run, then you must do something about that. Otherwise there will be a major disappointment.
Senator Kelleher: As an individual investor in the market, I have a tendency to rely on those people. I am trying to get some gauge on how good a job they are doing for the general investing public.
Mr. Levitt: I come back to questions of individual responsibility. It is inherent in the nature of the market that reward will be correlated to risk. People just have to accept that you cannot regulate these markets to the point where nobody ever loses any money, because if you do, they will be so regulated they will not be able to function.
I am not in any way commenting on any individual circumstance. I think it is a testimony to the strength and efficiency of our capital markets that we can have the occasional accident, sometimes a substantial accident, and the markets are not disrupted by it.
I am not in any way minimizing the importance of fair disclosure practices and professionalism, but there is a balance to be struck here between the benefits of regulation and the detriments of regulation. If you try to regulate to a zero-accident standard you will have paid a huge price in terms of the efficiency and attractiveness of the markets, and their ability to provide capital.
It is a personal view, but I think there is a place for a high-risk small capital market as a vehicle for small companies to raise money. I think it is very dangerous to focus on the high profile failures. However, they do have to be investigated and, if there is any wrongdoing, it has to be dealt with.
On the whole, we have an efficient and strong capital market here, and a market for equity, certainly for the big cap equities, and you want to keep it competitive
Senator Kelleher: I certainly agree with you that you cannot over regulate. That would take all the fun out of it. I would not be losing any money.
Senator Oliver: My questions have been pretty well answered, and so your response will probably be quite short.
I am interested in institutional investor activism. In your paper you indicate that you had approximately 20 encounters with institutional investors in one year. I was interested in your use of the word "encounters." Your paper has been very carefully drafted, and you did not say a "meeting" and you did not say a "briefing," you said an "encounter."
Mr. Levitt: It is a "meeting."
Senator Oliver: I would be interested to know just how far some of these encounters have gone; how much farther you think they will go; and, if they start to go farther, what you, as a company, would do. For instance, have any of the companies said, "You have several operating divisions under your umbrella and we do not like division number three. We think it is poorly managed. Your vice-presidents there do not seem to be doing their job, and we do not think they are doings things to enhance shareholder value. Here are some of the ways we suggest you correct your management problem"? Have some of them gone that far, and if they have, how have you reacted? Do you think they will continue to go farther, particularly if your performance starts to drop?
Mr. McBride: I think one way to respond to that would be to recount the situation we had with our restaurant business that we sold last year, which was in a situation similar to the one your describe. We were under a lot of pressure from the markets.
Senator Oliver: From institutional investors?
Mr. McBride: Yes, and sell-side analysts and so on. This was a major asset that was under performing, was not earning its cost of capital. That is how we measure things: everything has to earn its cost of capital. We were under a lot of pressure. The problem is, it is not a question of whether you should be doing something about it, but what you should be doing about it.
We had a standard statement, a position on that situation, which was repeated almost every quarter in these quarterly meetings, because we were constantly confronted by the same questions. The statement was to the effect: "We recognize we have a problem. We are working to achieve the maximum value for our shareholders. That is all we can say."
Senator Oliver: You keep a log of these meetings. Do you take a summary of these 20 meetings back to the board to let them know what the institution investors have had to say?
Mr. McBride: There is an annual report to the board. The board gets a quarterly report on share price performance versus peers versus the market, a summary of what the sell-side analysts are saying every quarter. On an annual basis they are given a more detailed presentation which outlines the number of meetings we have held and some details.
Mr. Levitt: If something significant came out in the course of these meetings, then you can be sure it would be reported to the board.
We have been in a fairly steady mode for the last few years. Over the past four or five years we have just focused on the businesses we have and improving them, so we were not involved in continuous change. Therefore, an annual report was timely. The question is not how frequently you do it, the question is: Are you doing it on a timely basis? If something arises, we report in a timely way.
While the focus on your enquiry is institutional investors, I would say, by and large, they are distinguishable from the general market by their size. They are big players. They do not just buy 1,000 shares. They make big investments and they have big positions, but their views and orientations are not very different from the general market. They have a different perspective, a different way of coming at it, a different way of analyzing it, but what it comes back to is: Are we getting the right shareholders? The right shareholders are people who want to own a stock that will have a performance that we can deliver. If you work at getting that kind of a group, developing that kind of a shareholder profile, then they will have a fair degree of commonality in their views, even though the size of their positions will be different.
To put to bed the question of selective access, we are not saying that no institution has ever asked a question that, if answered, would have furnished them with some piece of information, but we feel quite at liberty to say "I think we have gone as far as we can go with that."
Senator Oliver: They accept that.
Mr. McBride: That is quite an acceptable answer and, as I said at the outset, I think a reassuring answer, because then they know that we are not only saying that to them, we are saying that everybody. Then they can rely on the public record as being the whole record of available information.
Senator Oliver: The number of institutional investors is growing, and the numbers that invest in you is large. Yet, you only held 20 meetings last year. How would you respond if you got a request for 60 meetings next year? How will you handle it? Will you start to become selective?
Mr. McBride: We are a little selective in the sense that you could spend all your time, obviously, meeting with these people. First of all there are three of us, and major shareholders normally would only meet with Mr. Levitt once a year. You have to sort of ration a little bit. Of course, he attends every quarterly meeting and many take advantage of that.
Our quarterly meetings are not only with sell-side analysts, all the institutions are invited as a group, so they can listen to what he has to say every three months.
Mr. Levitt: This is Peter's full time job. However, our chief financial officer and myself regard this as a substantial part of our time allocation, because this is an important job. Peter is the marketing director for this part of the operation. We think that people who have a lot of money invested with you have the right to come in and tire kick. These people generally accept that. However, they have many other commitments as well, so they cannot spend all of their time at these meetings.
The Chairman: Senators, our next witnesses are from the OPSEU Pension Trust, Mr. Grant MacGillivray, Vice-Chairman, and Ms Colleen Parrish, Plan Manager.
Mr. MacGillivray and Ms Parrish, perhaps you would proceed with a brief opening statement, and then we would be delighted to ask you some questions.
Ms Colleen Parrish, Plan Manager, OPSEU Pension Trust: We feel that the OPSEU Pension Trust offers a fairly unique perspective to this committee. We are a large pension plan, but we are not a huge pension plan. As of December 31, 1997, we were at $7.7 billion, which made us thirteenth in Canada.
The Chairman: I thought it was tenth, but that is about right.
Ms Parrish: We are in tenth place among the public sector plans. We are a significant institutional presence, but we do not have the presence of a bank or of a very large pension plan that people often talk about.
The Chairman: I would not call $7 billion insignificant.
Ms Parrish: We are a significant player in the market, but some interesting things happen when you are in that middle niche.
We serve unionized Ontario public servants in low-to-middle income positions, and the pension that we provide is a very critical part of their future. Our members and pensioners often say that they have worked their whole life for two things: their home and their pension. Our investments exist to pay that pension promise. We are not a financial institution first, we are a pension plan first. That gives us a certain perspective.
Further, we are a joint trustee plan. Our trustees are equally appointed by the two sponsors: the Government of Ontario, and the Ontario Public Service Employees Union, or OPSEU. We feel that this arrangement of joint trusteeship has inherent checks and balances, characteristic of superior self-governance.
Good judgment and decision-making are fundamental to any organization. A law cannot be passed to create that, but the kind of structures in which it is more likely to happen can be created.
I will talk a little bit about our investment influence, because it is obviously a focus for your work. Our model of governance serves not only our plan members, but also serves the public interest. In short, we think Canada needs more plans like ours.
OPT has a very widely diversified portfolio: Canadian equities, foreign equities, fixed income, and we have a small investment in pooled real estate. We are currently neither a venture capital nor a direct investor, and this distinguishes us from some of the other large pension plans. We are generally what is called a "large cap" buyer of equities. We tend to buy in the top 100 or 150 of the Toronto Stock Exchange, for example.
Earlier on, you spoke about how market investment for public sector workers is a relatively new phenomenon in Ontario. Indeed, prior to 1990, the pensions of government workers were underwritten entirely by long-term, relatively low-paying government debt.
The OPSEU fund itself has only existed since 1995. We entered the market in 1995 with $4.5 billion in assets; we split away from our sister plan, the Public Service Pension Plan. By the end of May of this year, our plan exceeded $8.5 billion.
Our investment approach has been policy driven. Our trustees direct policy and options development, and they choose a policy. Our policies are written in our Statement of Investment Policy and Goals, a public document that we have provided to you, and we invest according to this public document.
In the long term, we believe that a policy-driven approach will generate a steady and reliable return. It also means that our investment posture is very principled and measured. There is not a lot of room in this process for cowboy activity. We are very strong on disclosure because we want disclosure for the companies in which we invest. We are prepared to act the way we want others to act.
Our annual report shows our holdings in every single company in excess of $5 million. That is a lot of disclosure, because $5 million is not that material in our plan.
You may be interested to know that we own over $62 million worth of IMASCO. We have also taken a very open disclosure position when things go wrong. For example, we held Bre-X. We immediately issued information to our members via our newsletter; how much we held, and how much money we lost. It is their money, and they have the right to know.
We also have proxy voting guidelines, and we have given you those as well. Our policy is to vote all our shares. It is part of what we pay for when we buy common shares. We have a fiduciary obligation to our pension plan membership. That includes upholding their interests when shareholder value is at stake. We really think that the way to do that is to vote, and to think about how you are voting. Our guidelines deal with a wide range of issues.
For middle-ranked investors of our type, it is also very useful for us to have talked to other kinds of investors. A lot of our voting guidelines come from the PIAC Investment Guidelines, because, working as a group together, we can have more influence than just by ourselves.
Our investments exist to serve our membership. We do not receive deposits in order to invest. We are first and foremost a pension plan.
Our membership consists of unionized workers, and they actually voted to create the OPT. We are a little bit concerned about the rumours that public sector pension plans are too generous -- that they are sort of gold plated. The reality is that an OPT pension offers some dignity in retirement, but it does not offer extravagance. The average OPT pensioner receives $17,000 a year after 20 year of service. An OPT member earning our average salary of $40,000 will retire after 30 years with $24,000 annually in combined OPT pension and CPP; and for this he or she pays eight per cent of his or her salary. This pension has been earned, and there is nothing extravagant about it.
In terms of the public interest, public sector plans such as ours are a bulwark against poverty in old age. Some of you who have been working on the new seniors benefit will know how close some of these numbers are to the proposed senior benefits for couples.
If plans like ours did not exist the demand on the public purse would certainly increase. The OPT is very proud of its governance structure. We have five OPSEU appointed trustees, and five Government of Ontario trustees. Mr. MacGillivray is our vice-chairman, and the chairman of investment committee is an OPSEU appointed trustee. They all serve in a voluntary capacity, they receive no honorarium whatsoever from the OPSEU pension trust. A decision of the board passes with a majority, but at least one vote must come from the union side or the employer side.
Our trustees represent a very diverse range of personal and professional experience. They have backgrounds in investment, law, auditing, pension administration, communications and senior management. They have personal experience in union positions. They have been public school trustees, they have been in professional organizations, and they are members of this pension plan.
There is an incentive to make the OPSEU pension plan work, because the OPT shares risks and rewards. When our pension plan has a gain, half of that gain goes to the employer who can use it to reduce contributions, either for unfunded liability, or for current contributions. The other half goes to the employees, and OPSEU, on their behalf, can choose to reduce their contributions or to increase their benefits. The reward is shared.
The downside is also shared. If the plan has insufficient money to support its pension liabilities, contributions from both employers and employees must, according to the terms of the pension plan, increase. That creates a tremendous incentive for the relationship at the tables to work, and that is what I mean when I talk about some of these inherent checks and balances.
The trustees ensure that they can fulfill their duties to the 62,000 people who rely on them by having this policy based investment approach. They have external investment managers, independent professional advice, delegation and supervision of senior staff, and very strict conflict of interest policies for themselves, for staff, and for investment managers.
Since our plan's inception three years ago, the return has averaged 18.1 per cent. The fact that this can work, and does work, testifies to the success of a model. We are also an extremely efficient marketplace investor. We spend less than $.09 per $1 to invest. That compares very favourably with some numbers you received from Keith Ambachtsheer, in that the average pension plan is sixteen cents, and we are under nine cents. Not only do we provide good return and a good pension plan to our members, but we provide it as efficient market participants.
Having told you why these kinds of governance models are in the public interest, I will go on to say that the kind of governance model that we represent is relatively new, and in some cases tax laws simply have not caught up to our reality. For example, on a GST basis we are the most heavily taxed pension plan in Canada. We get more heavily taxed than our public sector counterparts, who are solely government -- they do not get taxed at all -- and we get more heavily taxed than our private sector counterparts who get input tax credits.
We pay full GST -- we receive no relief at all -- and that is partly because the phenomenon is so new that no accommodation has been made for us. We are hoping that will change. For some time, we have been contacting officials from the Ministry of Finance about that, but I would point out that it is ironic that good governance processes like ours are not recognized. Frankly, it is an indication of the fact that this is a relatively new process.
We would be glad to answer questions. We have also provided some material, and, if there are any questions in the future, we would be glad to talk to them as well.
The Chairman: Thank you for a comprehensive brief and a good overview. You said that, when the plan makes a gain, the gain is shared equally. I assume that you mean a gain beyond the required actuarial surplus.
Ms Parrish: An actuarial gain.
The Chairman: Beyond the actuarially requires amount?
Ms Parrish: That is right.
The Chairman: I was sure that was what you meant, but someone might take a gain to simply be an increase.
Ms Parrish: It is only when you have more money.
The Chairman: When you have a surplus.
Ms Parrish: Only when there is more money than the actuaries say is needed to pay the pension plans.
The Chairman: Your board, as described in your brief, gives people titles which do not always reflect their knowledge base. Your board seems to be a halfway house between Teachers', which is a 100-per-cent professional board, and the OMERS board, which is an almost 100-per-cent lay board. Your board seems to be halfway in between. Is that a fair characterization? Second, even though a lay board represents the members philosophically, do you believe that such a board can genuinely contribute to the decision-making process?
Ms Parrish: Absolutely. I will start by saying that I am not completely comfortable with that distinction between a lay board and a professional board. I can tell that you all of my board members are very professional in their contribution to the OPT. Some of them have specialized expertise in investment, but, as I said earlier, we are not just a financial institution -- we are a pension plan.
Lots of decisions have to be made at the board, and they are not just investment issues. There are issues about communications and about plan administration. More than one kind of person is needed to make the right kind of decision. If everybody at the table thinks the same way, the issues will not be considered in a well-rounded way.
In terms of investment, I have found that the members of the board know that they need to know things. They do not rely upon others; they research. If they do not know something, they educate themselves about it. They take the time to thoroughly consider the issues. They do their homework, and they bring a well-rounded viewpoint to the table.
The Chairman: Do you have any objective for the plan beyond maximizing return?
Ms Parrish: Of course. Our main task is to provide service to the members and to the pensioners. We need to communicate effectively, so that they will have a pension.
The Chairman: You said that you have 62,000 million shares of IMASCO.
Ms Parrish: We have $62 million worth of IMASCO, and we have 62,000 members and pensioners. That is a coincidence.
The Chairman: Imagine that your members are ardent anti-smokers, and they say that it is wrong for you to buy tobacco stock. Your investment committee has obviously decided that an IMASCO investment is a good investment. What would the reaction of the board of trustees be to such a situation?
Ms Parrish: I will back up a little bit, and pick up on one thing you said. The trustees do not decide that we will buy IMASCO. They set policy, and then they select investment managers. Within that investment parameter, the investment managers then decide whether or not to buy IMASCO.
The Chairman: Would it be a legitimate policy to exclude tobacco stock?
Ms Parrish: Our board is currently dealing with the issue of social or ethical investment. It is being dealt with just as other issues are. The board starts our be doing research; they research the issues around social and ethical investment. Then, the board communicates with the membership to find out the membership's position.
We do not currently have a policy at the board that says that, since we do not like certain aspects or products, we will not buy the stocks of companies which reflect those aspects, or deal with those products. It is not impossible for that to occur, but the board does not currently have a policy of that nature. If it did, it would be dealt with in the same way as everything else is. The process would be very measured, and there would be lots of consultation and consideration. Consideration would be given, first and foremost, to the fiduciary obligation that we owe to our members and pensioners. It is not our money, it is their money.
The Chairman: I understand you do not have policy on that, thank you, and that is helpful.
The spokesperson for the teachers' unions urged that fund to sell its shares in Maple Leaf when Maple Leaf was on strike. The board said that it would keep the money in the plan, because it believed it to be a good investment. Have you had similar types of experience? Have your members told you -- particularly in the event of a labour dispute, but also for some other reason -- that you should sell your holdings in a particular stock?
Ms Parrish: We are not a venture capital purchaser, and the relationship between the teachers and Maple Leaf Food, as I understand it, is more of that nature. It is a different kind of relationship. We have not yet had that kind of incident occur in the plan. Of course, we have only been around for three years.
The Chairman: I understand that. What is your governance process for handling such a situation? I realize it is a theoretical question.
Ms Parrish: We have voted against certain kinds of things in the past, based on our proxy guidelines. For example, we have voted to say that we think the positions of the chairman of the board of a bank and the chief executive officer should be separate. We have voted on that. That is in our proxy guidelines.
We have a proxy guideline system, and that represents our policy. If somebody wants to vote against management, or if it is a contentious issue, they refer it to the trust. We have a subcommittee of two trustees; a representative from the union, and one from the employer. The issue comes to them, and they review the proxy voting guidelines. If it is covered, they debate the issue.
We do not just say yes or no, we look at the whole context of the issue. How that share should be voted is then decided. If there were contention on the issue, then it would go to the full board, and the full board would decide.
The Chairman: Your committee of two trustees reviews all proxies. That is such a huge number; I cannot imagine you doing that.
Ms Parrish: That is why we have proxy guidelines; they allow you to express the things about which you are worried or concerned. This only occurs if it is an unusual situation, or where something comes forward that is contentious.
The Chairman: Otherwise you just apply the guidelines?
Ms Parrish: PIAC has a shareholder alert program, and upcoming contentious issues are faxed to their membership. The issues can be picked out, and how they will be dealt with can be decided in advance.
Mr. Grant MacGillivray, Vice-Chairman, OPSEU Pension Trust: I may be appointed by the OPSEU sponsor, but I do not represent OPSEU at the table -- I represent the members of the plan. It is important to make that distinction.
In my activities within the union I have certainly faced questions on Maple Leaf Food, and on many other issues. People can be very vocal at an OPSEU convention. As much as that happens, when I go to the table I must think of the entire membership of the plan. I do not take my direction from the sponsor, I am merely appointed by them. The same also applies for the government sponsors.
The evidence before you show that this structure has worked remarkably well over the last three and a half to four years. This is even more extraordinary when you realize that our two sponsors, in virtually every other field, are somewhat akin to North and South Korea. In my opinion, that in itself shows that the governance structure of checks and balances does work for us.
The Chairman: Have you ever had any votes on the board that are evenly split?
Mr. MacGillivray: Not yet, no.
The Chairman: You cannot forecast the future.
Mr. MacGillivray: Something is bound to happen eventually.
The Chairman: Is it fair to say that you are able to reach a consensus on all major questions?
Mr. MacGillivray: Oh, yes.
Senator Meighen: How does the appointment process work, in terms of the board?
Mr. MacGillivray: When a term is up or a vacancy opens, OPSEU advertises it. This is done very much as it would be for a position in a private company, through OPSEU publications that go out to the entire membership. A special standing committee of OPSEU staff and executive board members is struck to examine these applications, conduct reviews, and ultimately, through an interview process, select the people most capable of doing the job.
We are appointed to three year terms, but of course we serve, as do the government representatives, at the pleasure of the sponsor. We are not in a position where we have a guaranteed three year term.
The making of an appointment is quite a rigorous process. It is eventually confirmed by the executive board of OPSEU, and this is how it is done for all of the pension plans on which we are joint trustees.
Applicant are questioned about what the would be expected to do: fiduciary responsibility, investment knowledge, knowledge in administration. We have over 120 employees directly working for OPT. To be fair, they are asked whether they know what the Ontario Federation of Labour is, for example. That type of question is asked, but it is not a political process.
One of the reasons we structured the trust without honorariums was to ensure that neither side would tempted to use them as patronage positions. Quite frankly, unions can use patronage quite as well as the employer can. That is why we do this without honorarium. It tends to mean that people are more interested in the process, and what participation in it can mean, than they are in a free trip to Toronto every three or four weeks.
Senator Oliver: I have a couple of questions on your asset mix and how corporate governance works in relation to choosing that mix, which is about 60 per cent in equities. Who makes that decision, and has the asset mix changed since 1995? I notice, for instance, that you have 4.5 per cent real estate, and yet your 15th largest stockholding is in Trizec Hahn.
Could you explain what real estate means and what Trizec means, and how you arrive at your asset mix? I also noticed that there was no cap shown, so you have a policy of not holding any cash, but being fully invested.
Ms Parrish: We have a full investment policy. Sometimes, in certain market conditions, our investment managers will move to cash. It is within their mandates to do so, but we do have a full investment policy. I will start at the very beginning.
The trustees ultimately choose the investment policy, but of course there is a process, and that includes significant investment. You start out with the liability structure of your pension plan. One of the things about our pension plan that makes us think about what asset mix we should have -- and every pension plan should do this -- is that we compare the proportion of active lives to retired lives.
When we started out, we had 2,000 retired lives and over 60,000 active lives. Looking at the ages, it was a very young plan. The average age was 40, and the average pensioner was 60. In our plan now, the average pensioner can expect to live to be 82 years old. We have fully indexed inflation protection in our plan. What does that tell us? It tells us that our investment horizon is 40 to 50 years long, and that we need a fairly heavy growth orientation. An asset mix decision is made based on that information -- that decision is mostly about how much of the mix should be in equities.
Senator Oliver: Have equities always played a significant role?
Ms Parrish: We started at 50-per-cent equities, partly because we had a significant amount of unmarketable Ontario Government debentures, so we had some constraint. We have subsequently moved to 60 per cent. Our plan has 9,000 retired lives and 53,000 active lives. The average pensioner is still 60 years old, so we have a very high age group coming up. We are still investing for 30 or 35 years, so we need a fair bit of equities. That is really what goes with the decision.
In terms of real estate I would say a number of things. Real estate tends to do well in periods of rising inflation and fear of inflation. We are very well aware of that profile. We need to think about where we are in real estate now, and therefore much real estate we should have versus equities. Real estate companies tend to perform very similarly to other equities. They tend to be a growth stock. They do not tend to perform similarly to real estate. Interestingly, what tends to respond similarly to real estate is real return bonds.
We look at all of these issues when we set the investment mix. The trustees spend hours on this, and I think that is where they should be spending their time. They should not be spending their time figuring out whether they should buy one stock or another; this is what we have investment managers for. They do spend a lot of time on that policy driven decision, however. When we talk about the success of our plan, the process that the trustees put themselves through, which is highly disciplined and policy driven, has been our success.
Senator Oliver: In terms of corporate governance and your asset mix, then your trustees sit down and spend a lot of time on this, and it is done by consensus within the trustees?
Ms Parrish: Yes. They get the research, we talk about other kinds of issues such as the ones that we just talked about now, and we make changes over time. We had one policy in 1995, it has changed gradually every single year, and the trustees are very active in that policy setting function. They govern that part of our activity.
As you know, in the world of investment, policy is 80 per cent of your return. Picking the right stocks is not as important as setting the right policy.
[Translation]
Senator Hervieux-Payette: That was an excellent presentation of your report. I thoroughly enjoyed it. We can see right away that we are dealing with government officials because you use acronyms. It took me several minutes to figure out what OPT meant. Governments always seem to have their own unique language.
On page 11, you refer to the rule whereby 30 per cent of the fund is invested in Canadian equities and 30 per cent in non-Canadian equities. Further on, you state the following:
[English]
OPT's foreign content limit is 20 per cent of assets on a book value basis.
[Translation]
Regarding pension funds, several witnesses have asked us to increase the limit on foreign holdings from 20 per cent to 30 per cent. I am inclined to believe that you would support raising the limit to 30 per cent as well. How do you feel about the 20-per-cent foreign content limit?
[English]
Ms Parrish: I will start out by correcting the record. The OPSEU Pension Trust is a private organization, not a government agency. It is true that we use lots of code words, but it is also true that IMASCO refers to Canada Trust as CT Financial Services. It is a bad habit, but I do not think that it is a habit exclusive to government people. Shame on us, but shame on lots of other people, too.
Senator Hervieux-Payette: The rule applies to everyone.
Ms Parrish: First of all, I point out that the current rule on foreign investment says that it is 20 per cent on a book value. What has happened to many plans that invested in foreign equities is that the market value and the book value vary. It is possible to hold more foreign equity on a market basis than on a book basis, and that happens in our plan because the asset mix is based on market, not on cost. That is part of the reason for these differences.
I would go on to say that our plan has not taken an official position on the foreign property limit. We do, however, recognize that the taxpayers of Canada provide a tax sheltered environment for pension plans, and that is important. We recognize that truth, and it is a consideration in public policy debate. At the same time, for plans to do well they to need some reasonable foreign equity investment. This is because Canada is still a relatively small market, and also because diversification is a desirable risk spreading mechanism -- geographic as well as investment type diversification is needed.
Mr. MacGillivray: It is also true that one of the reasons we were formed as a trust was to be able to better manage communications with our members. Again, they pay a very significant portion of their weekly salaries into the fund, and our predecessor plan had a reputation among our members for not being responsive.
Trustees have spent a great deal of time improving communications to our members. We communicate with them in a plain language format, so that people can really understand some very complex issues. We communicate to both members and pensioners at least quarterly. We send out our annual reports. We have redesigned most, if not all, of the pamphlets. This is so that every member can pick it up, regardless of the job that he or she does, and see how something applies to him or her. We consider that to be a very significant part of the services offered by any pension plan.
The members have a right to know. This is not just the right to know that we are making money, but how we are making money, and what they can expect. In an age of downsizing, when thousands of members are paying critical attention to their pensions, it is extremely important to be able to communicate successfully with them; to explain their options, and tell them how it would be handled.
Thus far we are getting excellent reviews back from the membership, and that is something of which we are very proud.
[Translation]
Senator Hervieux-Payette: Do you apply your proxy voting guidelines and restrictions equally when it comes to all of your foreign investments? Trade unionism is not very strong in Asian countries. Moreover, administrative practices are not necessarily as stringent as they are here in Canada. In such instances, do you abstain from voting or must your trustees be more flexible in enforcing standards that you apply to markets of non-OECD countries?
[English]
Ms Parrish: Once again I point out that you are asking me a question about social or ethical policies on investment. The trust is working in this area, but has not formally adopted policies.
Let us consider foreign investment. We have relatively little investment in Asia, and we tend, as I said before, to be a large cap investor. That is, we tend to invest in very large companies, rather than smaller ones, so some of the issues do not come up.
The question of how to deal with these kind of issues is a complex one, and it takes a lot of work. It is characteristic of our board not to make a decision on the policy before we do the work that underlies it. That is, before we talk to our membership and ascertain its views.
[Translation]
Senator Hervieux-Payette: Regarding your guidelines, you indicated that you prefer it when boards of directors are not too large, that is no more than 12 to 16 members. Does this mean that you do not invest in banks? What happens when a conflict arises with respect to these guidelines?
[English]
Ms Parrish: When you have a rule you do not just say: "Here is the rule," whether it makes sense in that context or not. We say: "We prefer that," but overall we look at how the board is organized.
A corporate governance structure which is capable of actually governing is highly desirable. We want to see that the work is being organized in order to actually get done, and that the organization is actually governing. It is unlikely that nobody is running the place; if the board works together in some reasonable way, the staff will run the organization. That is just the way that life works. We are looking for some sense of that. Expressing our preference does not mean that we would automatically say, "This board has 18 people; vote no." We would look at the whole structure.
[Translation]
Senator Hervieux-Payette: Since I just mentioned banks, on page 6 of the guidelines section, you state that you prefer the positions of CEO and chairman of the board to be held by two separate individuals. In the case of banks, have you had occasion to vote in favour of the separation of responsibilities? There are two schools of thought on the subject; one holds that banks are an exception and that the chairman of the board should also be the CEO, whereas others believe that in the case of other industries, it is preferable for these two positions to be held by separate individuals. Since banks have been a prime investment area in recent years, what position has your organization taken on the issue?
[English]
Ms Parrish: We voted for separation.
[Translation]
Senator Hervieux-Payette: Do you have a policy on the percentage of shares the fund can hold in a public company? Is the limit 10 per cent or 5 per cent? Perhaps this information is contained in your report, but I did not come across it. Do you have a strict limit on share holdings in a company?
[English]
Ms Parrish: Yes, we do, and it is in our Statement of Policy and Goals. We will not invest more than 10 per cent. We tend to be a large cap investor, however, and the reality is that we do not get very close to that figure. We would never invest more than 10 per cent, though, and we would never invest more than 1 per cent of the total fund in any one entity. This is a two tiered kind of task, and it is in the Statement of Investment Policy and Goals.
[Translation]
Senator Hervieux-Payette: Have massive layoffs in the Ontario Public Service in recent years affected the operation and performance of the fund? When a government lays off 10,000 employees and contributions to the fund cease or when more people start collecting pensions, this has to have a major impact, would you not agree? Have employee premiums increased?
[English]
Ms Parrish: No one had to increase their contribution as a result of the restructuring in the Ontario government. It did have an impact on us, however. For example, we did forecasting when the plan was first developed, in order to determine things such as where our retirements would come from. We started with 2,000 retirements -- we now have 9,000. Retirements are running 2,000 or 3,000 ahead of where we thought they would be at this time.
There has been a very large increase in early retirement as people look to take a good pension from us, and to avoid being laid off. Let us consider the Factor 80 program, which is an early retirement program. Initially about 20 per cent of the people who were eligible for it took it. Now, about 60 per cent take it, which is a very large increase.
There has also been a decrease in active membership. It has not affected liquidity in the plan. Obviously, for many of the individuals involved it has been very difficult, and our hearts really go out to our members who have suffered job losses.
These changes have not affected the plan financially. The plan has been very robust in its performance, and we still are a very liquid plan. It has phenomenally affected the demand for service, however. The plan has had to move very quickly to provide a very high level of service.
The very last page of our annual report lists pensions paid, and the termination payments that come out of the plan. In 1995 we paid $16 million in termination payments, last year we paid $154 million. Our pension payroll has also doubled in three years, from $73 million to $141 million. The product activity that is necessary in order to meet these demands is very high. We have to move very quickly in order to provide the necessary services.
Senator Callbeck: Your board is voluntary. From your comments, it seems to me that it is a very active board. Roughly how many meetings do you have a year, and how long do they last? How many hours are we talking about?
Ms Parrish: They give a lot of their personal time, frankly. The investment committee meets 10 to 11 times a year, and the administration committee does the same. The audit committee meets five times a year. The adjudication committee meets on demand, and the board must meet a minimum of six times a year, although it usually meets eight times a year.
Mr. MacGillivray: Sometimes things come up in these meetings which require an ad hoc committee. These are to work on a particular project, and often one representative is required from the government, one union employee, and one trustee. It is very much an active board, and that is what it was designed to be.
Senator Callbeck: Is there a term?
Mr. MacGillivray: The union sponsor has three year terms, although it is at pleasure.
Ms Parrish: The employer, to my knowledge, does not set terms; it is simply at pleasure. They tend to have a mix of public servants and external people, most of whom have experience in investment. They do not have a fixed term to my knowledge.
Senator Callbeck: So can you have two or three terms?
Mr. MacGillivray: Yes.
Senator Callbeck: You talked about voting, exercising your proxies. In your brief, you said that you believe that public knowledge of what institutional investors do on certain matters -- poison pills, for example -- can have a moderate affect on corporate management.
Ms Parrish: Yes.
Senator Callbeck: Can you give an example of that?
Ms Parrish: It is always difficult to say what the influence is because, of course, people rarely make that explicit. I do think that you will often find companies who say that they do not do something. You have to believe that they say that because they know that the shareholders do not like it, and therefore will not buy their shares, or will vote against them.
If it were just from self-interest, they would all have these things. A corporation recognize that certain things are going to be opposed by shareholders, and it slowly stop doing them. I think that there has been a change in corporate Canada; certain things that were very common before are far less common now, because there is a recognition they will not be accepted. It is a slow process; that is why middle-ranked organizations such as ours have to work with others to have a real impact on the market. We are not big enough by ourselves.
The Chairman: Your organization is a member of the Pension Investment Association of Canada, or PIAC, is that correct?
Ms Parrish: Yes, we are.
The Chairman: Earlier in your comments, as I recall, you referred to the PIAC guidelines.
Ms Parrish: Yes.
The Chairman: Do you attempt to follow those guidelines fairly closely?
Ms Parrish: We have our own guidelines. We looked at the PIAC guidelines when we developed ours, but we have some variations. We also cover some things that PIAC does not, but our guidelines are similar to theirs.
The Chairman: Have you looked at the guidelines that were released recently by the Office of the Superintendent of Financial Institutions? I understand you are not federally regulated, but have you looked at it?
Ms Parrish: I have. I have not yet had my colleagues bring them to the attention of the board.
The Chairman: My reading is they are pretty similar.
Ms Parrish: Yes, they are.
The Chairman: One would not want to legislate any of these sets of guidelines exactly as they are. It has been suggested, however, that there might be merit in having a regulation which required pension funds to report deviations from the guidelines to shareholders on an annual basis. This could be done in much the same way that the corporate governance guidelines of the TSE are only guidelines, but deviations from the guidelines must be reported annually. If deviations occur, they must be explained. What is your reaction to that idea?
Ms Parrish: We would not be opposed to doing that. We tell our membership lots of things that we do. I do not think it is a bad idea. People should be given meaningful disclosure. That disclosure should be put into context, however, and I would want to make sure that that context was there.
The Chairman: Right.
Ms Parrish: I say this from my own experience. My background was as a regulator, and it is very to have been on both sides. I am not sure that it is useful to have mandate what should be done. I think it is more useful to request a process.
For example, I think the Pension Benefits Act in Ontario requires a statement of policy goals, and that it be reviewed every year. It is possible for this statement to be produced, and for nothing of any use to be done about it, of course. At the same time, however, by creating that pressure, there is a greater likelihood that pension plans will do it.
If people should have proxy voting guidelines, those guidelines should include a policy on how to communicate what is being done, as opposed to mandating what should be communicated. The boards should be told to think about how they are communicating information, and to develop something that will do the trick.
The Chairman: That, of course, is exactly the power of the Dey guidelines and the TSE guidelines. The boards were told that they were guidelines, and they could do what they wanted to with them, but they had to report back on what they had done.
We had a conversation with the Governor of the Central Bank of New Zealand recently. They have done away with a lot of regulation, but they require financial institutions to release more public information -- much like the Dey guidelines. He acknowledged that it had a significant impact on behaviour, while still maintaining the flexibility of guidelines. If there is a reasonable excuse for deviating from the guidelines, it can probably be defended.
There are a whole series of pension fund management guidelines floating around, all of which are more or less consistent. There does not seem to be a mechanism, however, which would allow members to know whether or not the guidelines were being adhered to. That was the background to my question.
As long as the guidelines are flexible, then telling people that you will more or less stick to them, except for these minor variations, does not seem to cause you a problem. That is what you seem to be saying. Is that a fair statement?
Ms Parrish: I do not think that it causes a problem, as long as we could work on how to meaningfully communicate information.
The Chairman: In addition to not having objections, would it actually be beneficial as a governance strategy?
Ms Parrish: Our philosophy is that it is always good that the stakeholders -- in our case, members and pensioners -- know what the people are doing with their money. The only caveat I would have about that is that you want to ensure you are telling them meaningful things. I have read too many things where you tell people something, but they have not got the significance of it because of the way it has been told.
The Chairman: Meaningful means that they can comprehend it and understand it.
Ms Parrish: They can understand the significance of what they have been told, and they know what they should say or do about it.
The Chairman: Thank you for taking the time to be with us today.
Senators, our last witness is Mr. Yves Michaud.
Mr. Michaud, thank you for being with us today. For purposes of our record, please introduce your colleagues.
[Translation]
Mr. Yves Michaud, President, Association de protection des épargnants et investisseurs du Québec: Mr. Chairman, the pleasure is all mine. We have wanted to meet with you for some time now.
With me today is the Vice-President of our association, Marie Rousseau, a member of our Board of Directors, Paul Lussier and author and economist Richard Langlois, who has just published a book entitled Requins, L'insoutenable voracité des banquiers, which roughly translated, stands for Sharks: The Voracious Appetite of Bankers. Yours truly wrote the book's preface. This work is the most comprehensive, in-depth analysis in French of the workings of the Canadian banking system. It should be required reading for everyone. It is an important in that it helps to broaden people's understanding of how banks operate.
I represent the Association de protection des épargnants et des investisseurs du Québec, the only association of its kind in Canada. Like Caesar's wife, we have no ties with anyone and we are above reproach. Our concern is for the rights of shareholders, the principles of corporate governance, the accountability of directors, both of banks and public corporations, transparency and informed shareholders. These areas have been the focus of our attention for the past two or three years.
Our association currently has close to 1,000 members and I hope that next year, with the recruitment campaign under way, we will surpass the 2,000 mark. That would be an interesting milestone, given that we do not provide specific services to our members, but rather defend what we believe to be noble causes.
I was told by one of your emissaries that my presentation should last anywhere from five to ten minutes. That is asking a herculean effort of a former parliamentarian whose last speech to the National Assembly lasted 67 hours in 1969.
[English]
Senator Kolber: Mr. Chairman, I have a conflict of interest. As such, I am not able to stay to listen to this.
The Chairman: Very well.
[Translation]
Mr. Michaud: Mr. Chairman, I will be very brief. I believe you received an English as well as a French copy of my brief. I will confine myself to reading the titles and giving some brief explanations. Committee members can then ask us any questions that they deem relevant to this submission.
In all, we recommend 15 amendments to the Bank Act and to the Canada Business Corporations Act. I refer to these as the 15 pillars of wisdom. The author D. H. Lawrence had seven pillars, whereas we have 15 in total.
Proposal 1 has garnered the general support of all institutional investors, as noted in the Cadbury report, now the Hampel report in the UK, of CalPERS and of all people around the world who deal with the principles of corporate governance. We advocate that the positions of CEO and chairman of the board of directors be held by separate individuals. Why? Because the only true power that shareholders, that is the people who own the banks and corporations, have is the power to elect board members. Of course they can attend meetings and make proposals, but in electing board members, they have a hand in formulating general policy and in overseeing the actions of management.
When these two positions are held by the same person, there can be a conflict of interest or a perceived a conflict of interest. An analogy can be drawn here with the legal field. Not only is it important that justice be served, there must also be an appearance that justice has been served. A person would have to be superhuman to be both objective as CEO and chairman of the board because he would have to evaluate his own performance. Given that it is commonplace for banks and large corporations to appoint friends and acquaintances to boards of directors, it is extremely difficult for shareholders to nominate someone for a position on a bank's board.
We are proposing that the legislation be general in scope. There could be exceptions -- we leave it to Parliament to decide this -- primarily to the Bank Act, because we are dealing with hundreds of thousands of shareholders. This measure would apply solely to business corporations that have been listed on the stock exchange for more than five years and in which no shareholder holds more than 10 per cent of voting rights. This measure would apply almost solely to banks. Admittedly, it excludes all small corporations which would not fall into this category.
Proposal 2 reads as follows:
Ensure that small shareholders sit on the boards of business corporations.
We are not suggesting here that the regulations associated with section 168 of the Bank Act which deals with cumulative voting be amended, or that a two-thirds majority of votes of shareholders be required. The percentage required should be only 50 per cent plus 1. The cumulative voting process allows shareholders to nominate one candidate out of 24, provided, of course, that in accordance with the legislation, the shareholder holds at least five per cent of the shares in circulation. This is quite ludicrous. The legislation imposes very serious restrictions on small shareholders who need to hold five per cent of a company's shares in order to nominate a candidate. Using the smallest bank, the National Bank, as an example, when we consider that this institution has a total of 160 million shares, this means that a shareholder must hold eight million shares in order to be entitled, pursuant to section 143 of the Bank Act, to nominate a candidate for board membership.
We are not suggesting that the regulations be amended, but rather that a simple proposal be considered in keeping with the cumulative voting process which Parliament, in its wisdom, included in the Bank Act precisely to give shareholders an opportunity to have elected to the board a candidate who might otherwise not have been the board's choice.
By opting for this approach, we could bring new blood to boards of directors. We are not talking about nominating musicians to serve as directors, although they could have extensive knowledge of banking, but merely about adding new expertise to the board.
This brings me to proposal 3, namely making large service suppliers ineligible for board membership. Clearly, a lawyer or accountant drawing $2 or $3 million a year in fees and sitting on the board of directors of a bank or corporation would be in a conflict of interest. In most cases, that director would have to withdraw and abstain from voting most likely ten times at every board meeting. In our view, the legislation should clearly stipulate that large service suppliers are ineligible for membership on a corporate board.
Proposal 4 would require the disclosure of all direct or indirect business ties between a bank or corporation (or its principal shareholders) and its directors.
Proposal 5, which we consider to be quite logical, would limit the terms of board members, other than corporate officers, to a maximum of ten years. It is so true that after a director has served for ten years on a board, the next ten years often prove to be merely routine for him, a mere sleepwalking exercise. The director may have already given the best of himself and therefore, he should look to devote his attention to another corporate board.
The remainder of our proposals concern shareholder rights. Proposal 6 calls for making a shareholder list available to the corporation or bank. I have read all of your reports. As things now stand, even banks and corporations have no idea who their shareholders are. This information is known only to brokers and the like.
Proposal 7 calls for extending to the actual unregistered shareholders the right to submit proposals for debate at shareholder meetings.
The relevant provision of the Bank Act excludes 95 per cent of shareholders who would not be entitled to submit proposals because they do not hold nominal shares registered in their name. Already, we saw last year some unregistered shareholders demand the right to submit proposals. In spite of the Supreme Court ruling in the Verdun case -- Verdun's claim was rejected because his shares were not registered in his name -- the banks have agreed to consider proposals from unregistered shareholders, finding it unreasonable that the right to submit proposals was limited to only four or five per cent of shareholders in Canada, with all other shareholders denied this right.
Proposal 8 calls for amending section 137 of the Business Corporations Act and section 143 of the Bank Act to remove the stipulation that a bank or corporation may refuse to include the proposals of a shareholder in the management circular if the purpose of that proposal is to promote general economic, political, racial, religious, social or similar causes. Why not sexual orientation, while we are at it! In our view, these grounds violate the Canadian Charter of Rights and Freedoms. If you refer to the ruling in the case that I brought before the courts to secure the right to submit proposals, I asked the judge to find this provision contrary to the interests of shareholders and in violation of the Canadian Charter of Rights and Freedoms.
Given the way this provision is currently worded, several members of our association, including an elderly shareholder, a 94-year-old woman, were told by the bank that their proposals could not be included in their management circular, pursuant to section 143 of the Act. The provision in question reads as follows:
... or primarily for the purpose of promoting general economic, political, racial, religious, social or similar causes.
As far as we were concerned, this provision made no sense whatsoever. While the legislation should stipulate that proposals must be relevant -- meaning that they should not be futile or frivolous or even part of some crusade -- this provision should not be used as an excuse to dismiss proposals of any nature whatsoever. If a proposal is rejected for no reason by the banks, which is what happened in my case, a shareholder can take the matter to court, that is he can file suit in either Quebec or Ontario Superior Court and demand the right to submit proposals and have shareholders vote on them.
Proposal 9 recommends that an administrative body, perhaps the Office of the Superintendent of Financial Institutions, be delegated responsibility for determining the validity of the corporate management decision to reject shareholder proposals. In other words, between the actual submission of the proposal and the filing of a suit, even if the claim were to be rejected by an administrative tribunal reporting to, as I said, the Office of the Superintendent, there should still be a possibility of filing suit in court if the shareholder feels his rights have been violated because his proposal was rejected.
Proposal 10 recommends that proxies be issued to all board members, with the exception of members of corporate management.
In most cases, corporate management is given too much power. On the form of proxy, shareholders are told to send their proxy to the Chairman or Vice-Chairman of the bank or failing this -- then they enter someone's name on the appropriate line. Too much power is arbitrarily given to members of corporate management. Shareholders should be able to choose from among all board members the director they feel can best represent them and vote on their behalf. They should not have to assign their voting rights to corporate management.
In proposal 11, we ask that provision be made for a separate vote for director candidates on the form of proxy. I hope that it will not be too difficult to include this in the legislation. In March of last year, a proposal I made was endorsed by 49.4 per cent of Royal Bank shareholders. In all, 48.2 per cent of National Bank shareholders voted in favour of my proposal and in the case of the National Bank, the Chairman said that given the massive support for the proposal, he was prepared to recommend to his board that it change its position and go along with this. The Chairman of the Royal Bank noted that given the high level of support for the proposal, almost enough to win a referendum, he was prepared to ask his corporate governance committee to review the bank's position on this matter.
Of course, a separate vote would allow shareholders to express support for individual board members. This may not be revolutionary as far as changes go, but it would be a step forward in that it would let shareholders voice their satisfaction about certain directors in particular.
Proposal 12 is so complex that I am sure your officials will want to examine. This proposal calls for a repeal of a provision in the Form of Proxy Regulations, or SOR/82-925, which authorizes a bank to withhold a proposal submitted by a shareholder.
Pursuant to this provision, a bank can announce that the Board of Directors will be voting against the shareholder's proposals, but it is not required to include the proposals in the management circular.
Proposal 13 concerns the adoption of a code of procedure for shareholder meetings. This proposal has already been implemented. The Laurentian Bank has already included a code of procedure in its bylaws. Anyone submitting a proposal is entitled to speak to that proposal for five to seven minutes, while subsequent speakers have three minutes to reply. This procedure resembles that in use in the British parliamentary system. Often, chairmen have overstepped their authority and cut off a shareholder whom they felt was asking too many questions.
Given that even the smallest unions and associations have codes of procedure in place, banks should also follow suit.
Proposal 14 calls for the management compensation policy and its parameters to be submitted to a vote at shareholder meetings. This has nothing to do with imposing a ceiling on compensation levels. However, we would like the government to require the board or the committee which oversees compensation to inform shareholders of its actions, to make studies public and to hire experts to make salary comparisons and so forth. In other words, the board should be required to keep shareholders informed of its compensation policy.
If you look at bank annual reports, compensation policies are always couched in vague terms. We would like the parameters of any compensation policy to be clearly stated and we would like the board to be required to keep shareholders better informed.
Proposal 15, which calls for amendments to the Canada Business Corporations Act and to the Bank Act, would add, after the expression "consideration of the financial statements, auditor's report" the expression "following their submission to the shareholders meeting." Shareholders find it a little insulting and arrogant on the banks' part to include an item on the agenda that reads "reception of financial statements." The shareholders receive the financial statements, but cannot examine them. End of discussion. We are not entitled to see the financial report or to ask questions. Of course, we can ask questions during the regular question-and-answer session, but it seems to me that when an item like "reception of financial statements" appears on the agenda, it should read "review of financial statements" instead. A review implies an examination, not merely passive acceptance.
Finally, I have distributed to you an addendum to our submission which focuses on tax havens and information for shareholders. We have extensively researched the subject of tax havens and found that very little has been written, either internationally or nationally, about them. It would seem that people are somewhat reluctant or hesitant to discuss tax havens, as if they were otherworldly. The one exception is a book by Judge De Renaud Van Ruymbeke entitled Un monde sans loi which explores the subject.
The implications are enormous. It is estimated that $320 billion are laundered each year through a series of large-scale operations. Governments and taxpayers are frustrated by what they see happening, for example, swap transactions between two corporations and alawa banks, a legal financial compensation process used among members of the same ethnic community. Add to this offshore accounts, that is accounts opened in tax haven countries and a whole range of loopholes which neither our governments nor the public appear to be concerned about.
We would like the legislation to impose more stringent controls on banking operations, even a prohibition on banks and public corporations on investing and operating branches in tax haven countries, given the tremendous risk this entails in terms of codes of ethics. Governments stand to lose hundreds of millions of dollars each year through tax fraud and money flowing to these tax havens.
When I question bankers about this, I never get an answer, or at least one that I understand. What exactly are they involved in? For example, the Cayman Islands have a population of 30,000 and a total of 43,000 registered companies. I have never received a satisfactory answer. All they say is that everyone is doing it. But just because everyone is doing it does not make it right.
My final comment concerns the information supplied to shareholders. We would like things to revert to the way they were almost ten years ago. Back then, all shareholders received an unabridged copy of the minutes of proceedings of the annual shareholders meeting. This is no longer the case. It is vitally important for shareholders to know what goes on at shareholder meetings. The Royal Bank has 160,000 shareholders, but only 1,000 of them attend the shareholders meeting. Shareholders need to know who voted for or against certain proposals, whether they were submitted by management or shareholders, and what the outcome of the vote was.
That concludes my presentation. My colleagues and I will now be happy to answer your questions.
[English]
The Chairman: Thank you, Mr. Michaud. I understand now how you gave such a long final speech in the legislature.
One of your 15 recommendations dealt with a subject of which I had never heard. With respect to your proposal number 8, you talk about subsection (5) of section 137 of the Canada Business Corporations Act. I am not a lawyer, and I am not familiar with the detailed sections, but what does that section say, essentially? What does it do, and how has it been used to block certain shareholder proposals from being put before annual meetings?
[Translation]
Mr. Michaud: When a shareholder submits a proposal, he forwards it to the corporate secretary of the bank or corporation. The bank can refuse to consider the proposal, pursuant to section 137(4)a) b) and f). This provision states the following:
[English]
The bank can refuse if the proposal made by the shareholder has, as its primary objective, the satisfaction of a personal grievance, or for the purposes of promoting general economic, political, racial, religious, social or similar causes.
[Translation]
In life, everything revolves around political and economic considerations.
Section 137 of the Act is utterly ridiculous and that is what the shareholder must contend with. Section 144 states that a shareholder claiming to be aggrieved by a bank's refusal to include a proposal in its circular may make an application to a court for an order. That is what I did. I was the first Canadian in the country to do so. I took the matter to Superior Court and won my case. I was up against a battery of the most brilliant lawyers in the city, all of whom were trying to attack me.
Ms. Marie Rousseau, Vice-President, Association de protection des épargnants et investisseurs du Québec: Mr. Michaud did what I and probably countless others did not do. This provision gives banks and corporations a convenient excuse for refusing a shareholder's proposal demanding some explanations.
[English]
The Chairman: I am astonished that such a section exists in the act. I have no idea where it came from. We will deal with that when deal with the CPP. It is a very strange part of a corporate act.
[Translation]
Senator Hervieux-Payette: We appreciate your comments on the Canadian Bank Act. On reading your submission, I am tempted to give my blanket support to your proposals. You appear to be on a crusade to protect small shareholders and restore some common sense. I use the word crusade because what you are trying to accomplish is so difficult and your adversary so imposing that I cannot imagine that it is easy for an ordinary shareholder who owns a few shares to do battle with a giant. You must represent a group of individuals.
Can you tell us a little about your association, how it operates and how it is funded? I understand that your membership consists of shareholders, consumers, and citizens.
Mr. Michaud: Our mission is twofold: to protect investors and to protect shareholders, that is those who invest in publicly held corporations. For the moment, we have focused much of our attention on defending the rights of shareholders more so than the rights of investors, or consumers. We are now looking at bank merger proposals to see if consumers, or investors, will be well or poorly served by this move. We have not yet come to any kind of conclusion as far as bank mergers are concerned.
I forgot to mention one thing. When I proposed that the Bank of Montreal and the Royal Bank separate management positions, they argued loudly that this was unacceptable, a terrible idea. However, with the decision to merge, now they have decided to in fact separate these responsibilities.
The president of the Bank of Montreal will become chairman of the Board of Directors. This is seen as a sound move because the bank is getting bigger. I do not know if you see the logic in this. Management jobs are being protected, but I do not know if the same can be said for rank and file employees. Separating positions becomes a good idea because of the merger, but it was not such a good idea before. Go figure that one out.
Our association currently has about 1,000 members who pay $25 a year. Our members come from all sectors of society. They include senators and members of Parliament and I am grateful for this. However, we do not provide any kind of direct service to our members. Given that they pay only $25 a year in dues, our association is by no means financially well off. Far from it. We lobbied repeatedly for the financial support we receive from the Quebec Department of Finance and from several institutional investors who support our views on the principles of corporate governance. Our annual operating budget is around $40,000 or $45,000.
With a budget like that, we are not about to revolutionize the world overnight.
Senator Hervieux-Payette: Mr. Chairman, I feel it is important to clarify who Mr. Michaud represents and how his association is funded. When a person raises important issues like this, he leaves himself open to criticism. Therefore, it is important to know that his support is widespread.
My question is this: Although you have most often targeted banks, would your 15 proposals apply as well to all business corporations, that is to all publicly held corporations?
Mr. Michaud: Yes, mutatis mutandis.
Senator Hervieux-Payette: That is worthwhile noting because we are not talking about a single industry here, but rather about all public corporations.
Proposal 6 on page 5 recommends that a shareholder list be made available to the corporation. I was a legal secretary in the 1970s, back when shareholder lists were readily available. I have not researched this subject, but I was told that at some point in time, brokers acquired title to the shares and information about shareholder lists became hard to come by. I do not think that it was ever the intention of the legislator to hide the identity of shareholders. I suppose we can blame computers and the increase in the number of shareholders for the fact that at some point, this information somehow got lost.
Is the securities commission unresponsive to this? It has to know who the shareholders are in order to ensure that they receive their notice of meeting. Some corporations do send out these notices to their shareholders. There has to be a list somewhere. Why is this list not available to the general public or to shareholders in particular?
Mr. Michaud: No such list exists. The Bank Act states that every shareholder has the right to consult the list of shareholders. That is what I did and I came across names like Lévesque, Beaubien et Geoffrion, Midland and so forth. Combined, these brokerage firms represented perhaps 30,000 shareholders. Even the bank does not know the names of individual shareholders.
[English]
The Chairman: Just so that we are clear, that is not unique to banks.
Mr. Michaud: No; to corporations.
[Translation]
Mr. Michaud: There is no list.
Senator Hervieux-Payette: I realize that. Then how do they manage to send out the notices of meeting?
Mr. Michaud: The broker says to the corporation or to the bank: how many documents do you want? The answer he gets is 35,000. The broker then takes the list and sends it to Lévesque, Beaubien et Geoffrion, Midland et al and to those shareholders who have requested the notice of meeting and the annual report. Those who have not requested these documents do not receive them. Again, there is something wrong here. Even the corporations want to have the shareholder list. But they cannot have it, because no such list exists.
Senator Hervieux-Payette: I think that over time, a technological error occurred and the time has certainly come to correct it. I would also imagine that the Quebec and federal revenue departments would like some assurances that everyone has received the proper forms for paying tax on the shares they hold.
[English]
The Chairman: As you know, that issue was covered in our report of about one year ago on changes to the Canada Business Corporations Act, wherein we proposed a change that would make the list available. We have been told by the government that all the changes that we recommended will be incorporated into the Canada Business Corporations Act when the changes come before Parliament next fall. Typically that would mean that the next time the Bank Act comes before Parliament, that change would also be made. My guess is that that list will be changed as the acts come up.
[Translation]
Senator Meighen: Just to clarify something, even if you do manage to find out the corporation's name, this does not change the fact that you will not necessarily know the true identity of all shareholders. For example, you find out that 12345 Ontario Inc., a numbered company, holds 100,000 shares in bank X. It is not that I object to your proposal. However, are you really any further ahead by knowing that 12345 Ontario Inc. holds 100,000 shares?
Mr. Michaud: If I wish to submit a proposal and solicit proxies in support of my proposal -- I would have to write to 100,000 shareholders individually. If a further 30,000 or 40,000 shares are held by Lévesque Beaubien or some other brokerage firm, and the shareholders' names are anonymous, it would cost hundreds of thousands of dollars to contact everyone. What we need is a list of shareholder names.
Senator Hervieux-Payette: If a dispute were to arise with respect to proposal 9, could a shareholder appeal to the securities commission rather than to Superior Court which is already bogged down in cases and not an expert on the subject, given that what the shareholder really wants is someone to decide if the corporation was justified in rejecting his proposal for submission at the shareholders meeting. Since the various commissions endorse a number of documents when a public offering is made, from a pragmatic standpoint, if a shareholder has to make an application to Superior Court, and incur expenses and put up with delays, which can be a fairly costly process, perhaps a special commission would be the best way of stopping shareholders in a public corporation from making futile proposals. If a public corporation rejects the shareholder proposal, then that shareholder could protest the decision and demand that the matter be settled by an arbitrator of some sort. The securities commission could be that arbitrator. I support the submission of reasonable proposals. Who should we look to to decide whether a proposal is reasonable and in the public interest? Perhaps the answer is the securities commission.
Mr. Michaud: That certainly is a good idea. However, are security commissions fully versed in the Bank Act and the Business Corporations Act? Do they have the necessary legal departments? I see this more as a matter for the Office of the Superintendent of Financial Institutions in Ottawa to handle. Rejected proposals could be examined by a division of the Office. Once the shareholder has decided to contact the superintendent, a small committee could determine whether or not the proposal is well founded and subsequently hand down a ruling. A shareholder forced to take his case to Superior Court could incur costs of between $30,000 and $35,000. That is ridiculous. Once the Office of the Superintendent has ruled on the proposal, I would be surprised if the bank refused to include it in the management circular.
Senator Hervieux-Payette: As for the ten-year limit on director terms, I rarely agree with setting limits. Ultimately, it is always arbitrary. Some directors can do an excellent job for 20 years. I do not really have a sound reason for supporting that particular proposal, but as for the others, I concur with you.
[English]
Senator Stewart: I have two questions. I do not want the first one to sound defeatist or pessimistic. However, how worthwhile is the battle to get proxies so as to be able to make a proposal? Is it not true that the shareholders' meetings of major corporations are really not business occasions, but social occasions, and that we might as well accept that fact?
[Translation]
Mr. Michaud: That is precisely what we want to change. Generally speaking, the shareholder meetings of banks and large corporations are a farce. Officials are there to sing the praises of the beloved chairman, shareholders are bombarded with images of the chairman embracing a synchronized swimmer on a giant screen, or some such thing, and all staff of the corporation are given a day off. The lowly shareholder who dares ask a question, as I did, is shouted down. He is seen as disrupting the established order of things.
That is what we want to change. Shareholders have one day a year to demand a reckoning of accounts and to examine the reports and financial statements. We want to give some power to shareholders who in essence are the owners of their company. Shareholder meetings resemble nothing more than social gatherings. Everything must be wrapped up by 12:30 or 1:00. I have seen this happen. There may be 30 people standing in line at the microphone waiting to ask questions. The chairman then says the meeting is adjourned and lunch is ready. Thirty or forty shareholders are left cooling their heels. Such behaviour is somewhat insulting because shareholders are legally entitled to ask questions. Through our efforts, we want to strengthen shareholder rights.
Mr. Paul Lussier, Director, Association de protection des épargnants et des investisseurs du Québec: There is also another important factor to consider in the case of banks. Given that no one shareholder can hold more than 10 per cent of the bank's overall shares, and given that there is a very large number of shareholders, shareholder meetings are the only opportunity for the true owners of the bank, namely the shareholders, to voice their opinions. Given the way such meetings are organized, the CEO and his assistants come across as being the owners of the bank. Indeed, they act as if they are. The resulting role confusion is very unhealthy for the future of the Canadian banking system.
[English]
Senator Stewart: My second question is rather different. I keep reading about mergers: Mergers of automobile companies, mergers of banks and other kind of financial institutions. It happens in Europe. It happens in the United States. Have you given any thought to this consolidation of financial power? It is called rationalization. Have you given any thought to this phenomenon?
[Translation]
Mr. Michaud: As I explained to you earlier, we have not yet decided whether the announced merger of two of the four Canadian banks is a positive or negative development. We are still examining the ramifications of the proposed merger.
At this stage, we are somewhat dubious that the merger will prove to be a positive move. In the medium-term, shareholders may benefit. However, I do not feel that it would be in the best interest of investors, that is bank customers. Why? Because such mergers eliminate competition and competition is at the very heart of capitalism. As things now stand, with six banks, we already have an oligopoly. Soon that number will cut to four, and later to two. We could end up with one bank if we persist in believing that bigger is better. We cannot play with the big boys unless the big boys come and play in our backyard. Ultimately, perhaps by the year 2010, the Americans will end up buying the only remaining Canadian bank and the entire Canadian economy will be controlled by the United States.
These are the risks and negatives associated with globalization. Nation states and governments would do well to proceed very cautiously and to make sure that if they choose this path, they do not go too far and lose their perspective.
In spite of a few shortcomings, the Canadian banking system has posted some good results thus far. Profits totalling $8 billion for six or seven banks, well that is not too shabby. I have never spoken out against banks making profits. Our association wants banks to turn a profit, provided they do not do so through illicit or illegal activities. Shareholders must receive a fair rate of return on their investment. Basically, that is how we feel. However, we have not yet made a decision about the proposed mergers. We will likely organize a meeting in the fall, prior to the release of the McKay report, at which time we will discuss the pros and cons of the mergers. We will try to initiate a public debate on the matter.
Senator Meighen: There are two parts to my question. With respect to tax havens, I think there are different kinds of havens. In some countries, tax laws are more favourable to business corporations. If we were to prohibit large Canadian corporations or banks from putting their money in certain tax haven countries, would we not be placing them at the disadvantage vis-à-vis their competitors? After all, they are not doing anything illegal.
Secondly, the approach advocated by Mr. Dey in his report has been, quite surprisingly, successful. Even though no legislative measures were adopted, boards of directors altered their behaviour quite radically because they could find themselves in a rather embarrassing situation if they fail to provide reasonable answers to shareholders.
Do you not think that this approach is preferable to doing battle with the boards at annual shareholder meetings where everyone has only so much time to speak and where it is difficult to hold people's attention all day and get them to listen to your proposals? Perhaps I am not making myself clear.
Mr. Michaud: As far as tax havens are concerned, I think it would be a good idea for governments to establish a commission of inquiry to look into this matter. We have no way of knowing what goes on in tax haven countries. That is why we would like the committee to suggest to the government that it examine the matter thoroughly. We do not know what goes on in tax havens like the Cayman Islands, the Caribbean or Andorra, but we do know that some operations amount to tax evasion.
Interest income earned on a bank account in the Cayman Islands is not necessarily going to show up in Canada. We know that instances of tax evasion are prevalent. While this may be legal, it is nonetheless immoral. That is why I mentioned the problem of tax havens. Governments have a responsibility to keep the public informed.
Senator Meighen: Tax invasion is illegal, while tax avoidance is not.
Mr. Michaud: I agree. Tax avoidance is legal, while tax evasion is not.
Senator Meighen: Personally, do you feel morally bound to pay as much tax is possible?
Mr. Michaud: Yes. I do not try to avoid paying taxes. I have nothing to hide.
Senator Meighen: There are steps you can take, legal steps, to pay less taxes.
Mr. Michaud: I do not have enough money to concern myself with tax evasion. The Dey report on the Toronto Stock Exchange got the ball rolling several years ago, following incidents of shareholder activism. This has been going on for 30 years in the United States, but it is a recent phenomenon in Canada. I am the first shareholder activist in Canada.
You ask if I would not be better off adopting a conciliatory approach as an institutional investor? You say that shareholders have one day a year to hear my proposals. However, 95 per cent of shareholders had already voted because at the meeting, a mere five per cent or one per cent of the vote is held. Shareholders have already assigned their proxies. In the United States, large corporation shareholder meetings sometimes last an entire day or even a day and a half. Here in Canada, shareholders have from 10 a.m. to 12 noon, and meetings are more of a friendly, social gathering. The purpose of such meetings should be to give shareholders an opportunity to discuss the corporation's or bank's affairs.
All of my proposals have always focused on the value of shareholder assets.
[English]
The Chairman: Thank you for attending. We are delighted to have had an opportunity to meet you.
The committee adjourned.