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

Issue 13 - Evidence, May 11, 2000

The Standing Senate Committee on Banking, Trade and Commerce, to which was referred Bill S-19, to amend the Canada Business Corporations Act and the Canada Cooperatives Act and to amend other Acts in consequence, met this day at 11:00 a.m. to give consideration to the bill.

[English]

Mr. Gary Levy, Clerk of the Committee: Honourable senators, we have a quorum and it is my duty to inform you of the absence of Senator Kolber and the Deputy Chair. Thus, I need a nomination for acting chairman.

Senator Kroft: I move that Senator Furey act as today's chairman.

Mr. Levy: Honourable senators, is that agreed?

Hon. Senators: Agreed.

Hon. George J. Furey (Acting Chairman) in the Chair.

The Acting Chairman: Honourable senators, before we begin, I should like to make a few comments. Due to circumstances beyond their control, neither our Chair, Senator Kolber, nor our Deputy Chair, Senator Tkachuk, is able to be here today.

I want to echo some of our chairman's comments of yesterday, that in dealing with such a complex and important piece of proposed legislation as Bill S-19, it is imperative that we receive witnesses' submissions in a timely fashion.

I believe our committee clerk, Mr. Levy, advises witnesses in writing that they should have their written submissions to us well before their appearance dates. Receiving briefs or submissions on the day before or the day of testimony makes it more difficult for us.

In any event, we will endeavour to make the best of whatever situation in which we find ourselves. As was stated yesterday by the chairman, we will need to see where we are at the end of today's hearing and make some decisions as to whether we need to hear from more witnesses, either by having them return to the committee or through further written submissions.

Before we call our first witness, I want to remind everyone that we have approximately 40 minutes set aside for each witness. You are free to use whatever time you feel is necessary in your opening remarks and the committee members will use what time you leave us to ask a few questions.

I call our first witness, Mr. Tom Gunn.

Mr. G. Tom Gunn, Chief Investment Officer, Ontario Municipal Employees Retirement System: Honourable senators, I can assure you that the Ontario Municipal Employees Retirement System will not be presenting a 50-page brief full of technical amendments today.

I should like to talk at a fairly high level about some principles in the proposed legislation. I confess that I delivered our brief a short time ago. I will be speaking to matters of principle, rather than to the specific details of the brief, which we have tabled as more of a background paper.

To begin, the Ontario Municipal Employees Retirement System is the second largest pension plan in the Province of Ontario. It is managed by a 13-member board appointed by the Ontario government to represent the various municipalities and approximately 1,100 groups within the province.

Two members of the board are elected from the various municipal bodies; one is a pensioner and one is a provincial official. There are approximately 280,000 participants and pensioners within OMERS. Today, we manage approximately $37 billion worth of pensioners' money.

The fund is international, investing both in Canada and abroad. We have a great deal of exposure to corporate statutes in Canada, the United States, Europe, and elsewhere in the world. Part of our aim today is to talk to seven principal points.

The first is, we see ourselves as share-owners rather than shareholders. We consider that pension fund money constitutes a permanent source of capital, but we also consider that companies are our property. This is a growing trend in a number of pension plans both in Canada and elsewhere, and we take our responsibility as an owner of companies seriously.

We are strong believers in proper corporate governance principles. Our view is that all corporations should seek proper alignment from all constituents, being boards of directors, management, owners, customers, and other parties, and that proper statutes reflect the reality that corporations have multiple responsibilities.

We are also great believers in the words of former prime minister Laurier, who said that Canada should see itself as an international player. While he made the statement that the 20th century should have belonged to Canada, we like to think that perhaps the 21st century can.

We feel that Bill S-19 should empower Canadian companies on a worldwide basis. It is useful to consider the amendments to the British Corporations Act and the changes underway in the United States to ensure that the corporate powers under this proposed legislation are coordinated with those, and that companies domiciled in Canada are not somehow disadvantaged.

We also believe that corporations should be more generally responsive to shareholder rights, and we welcome changes to the CBCA in regard to the allocation of capital and proper responsiveness to economic conditions.

We believe there should be a national securities commission and we see some of the changes simplifying federal and provincial legislation as certainly moving in the right direction.

We would like to suggest something that may be obvious -- that some of the changes to the CBCA be incorporated into the proposed bank act coming forward.

One last point, which OMERS has talked about for some time. We do think it would be useful to separate the offices of the chief executive and the chairman. It is a trend in other countries and we think it makes practical sense. It is not in the act but a number of corporations have said to us that they do not oppose the move in principle. However, they will not move unless someone else does. This would be a movement towards proper governance, but it will not happen unless it is placed in legislation.

That is a summary of our position. I am now open to questions.

The Acting Chairman: I have one question on the last point. What is the big advantage to separating the CEO and the chair?

Mr. Gunn: Companies that are governed with that separation produce better returns for their shareholders. This works effectively in the United Kingdom and is the practice in certain industries in Canada. We believe it separates the management of a board, with the various responsibilities that involves -- particularly for large, growing enterprises operating in multiple jurisdictions around the world -- from the management of the day-to-day operations.

We see conglomerates and merged companies with separate business heads. To suggest that one person can do all might have been appropriate 20 years ago, but that is not necessarily the case today.

The Acting Chairman: Is it more a function of efficiency than of conflicts between the positions?

Mr. Gunn: There can always be conflicts, but we are suggesting adopting the highest possible standard rather than citing any wrongdoing or inefficiency.

Senator Stratton: Why should we legislate that kind of thing? Why should that not be the responsibility of the corporations themselves through good corporate governance?

Mr. Gunn: I agree that it should be an act of good corporate governance undertaken by companies. When we have met with corporate governance committees of major corporations, we have put this point directly to them and asked for their position. I believe that more companies in Canada support this than is generally known, but at the same time, there is reluctance to act. It has been suggested that the appropriate time to separate out the two offices is when there is a succession underway. However, frankly, I believe there is a desire to be the second to move, rather than the first, in many industries. No company wants to go first, particularly within the banking business.

Senator Kroft: I share your view on separating the position of chair from president or CEO. I feel very strongly about it. In fact, this committee, in a report prior to my membership here, recommended that in principle. We fell short of recommending its incorporation in legislation.

Because of my interest in this subject, I have studied the arguments, always looking for the legitimacy of the other side, which seems to fall into two categories. The first is that there is a range of company size for which it is less than practical. I think you and I would agree that the bigger and more widely held the company, the greater the responsibility, and the more shareholders, the stronger the case becomes. Therefore, I invite your comment on whether there might be a middle ground where you could categorize companies as being subject to the legislative requirement in this area. That is on the practical side.

On the other side, it seems to me that the banks do not like it. When you explore the argument, one way or another, that is the lurking reality. There are many significant companies in this country that have that separation. Unfortunately, I do not have the statistics. Do you know what the numbers are?

When the government officials appeared, I asked who is pressing on this point. They echoed what you said. All sorts of people think it is a great idea when you speak to them one on one, but there is a reticence and there has not been a lot of pressure in favour of it. I do not want to lose the opportunity in this committee to understand better the realities of this.

Mr. Gunn: I will speak anecdotally about different industries. We are aware that there is a material difference in practice from industry to industry. For example, in the oil and gas and resource industry, I would suggest that at least one-third of the companies have these offices separated. There is separation of the offices in the public real estate companies. The banking business is very distinct, in that there is a virtual uniformity where the two offices are combined.

An individual at one bank, who holds a combined office, observed to the Ontario Municipal Employees Retirement Board that he deems it to be a point of competitive advantage; that if one person goes forward clearly as the individual in charge, as both the chairman and chief executive officer, major business customers know that they are talking to the ultimate decision maker. If the office is split, it suggests that the person is not the ultimate decision maker. No banker wishes to be the first to take that stance, on the theory that they would be empowering someone else.

On the other hand, while that argument is perfectly plausible, I am not sure it is valid. One bank in Canada operates that way. Certainly, a number of banks in the United States work that way without difficulty. There is simply a natural Canadian reluctance to move on this. I can certainly sympathize with someone not wishing to create an apparent advantage for a competitor, which is why legislation may be the best and most comfortable answer.

I do not think that anyone would suggest that shareholder value would not be served by separating these two offices, particularly if it were in legislation.

As to whether they should be separated in smaller companies, or there should be a dollar limit, would that imply that smaller companies should have smaller boards, whose members need not necessarily be as informed or of the highest quality? To the extent that many small companies in Canada source capital from pension funds, I would take the opposite stance. I believe that we should encourage any company wishing to grow to set itself up with proper governance at the beginning and to aspire to become a larger entity rather than middle-of-the-road.

When a company sets up its governance properly, an entrepreneur has a sound second individual as board chair to judge the business plans and ensure that management is not running ahead of itself. That strengthens the organization and corporate governance.

In private organizations in which we have substantial financing, we usually ask that the offices be separated. Only in special circumstances would we consent to the offices being joint. We are not adamant on this, but we look at it as a source of proper practice. All things being equal, we believe that proper governance creates shareholder value, which is in the interest of everyone.

Senator Poulin: My question is supplementary to those of my colleagues who have been asking about corporate governance and splitting up the main board and senior management positions.

Approximately 12 years ago, when I was an executive at CBC, that publicly funded organization had a president who was also the chairman of the board. Then, with the change to the Broadcasting Act at the end of the 1980s, we had a chairman and a CEO.

There were definite impacts on the board in terms of empowering members and creating a "chamber of sober second thought" within the organization. Also, there was a change in the relationship between senior management and the board.

Do you believe that the CEO should be a voting member of the board if the chairman and CEO positions are split?

Mr. Gunn: Yes I do, because the president is actually representing a legitimate constituency, and to the extent that in the corporate world a formal vote is required, it is important that the president's voice be heard.

However, I would also observe that in corporate Canada, few things come to a formal vote. Good boards are run more by consensus.

Senator Poulin: Like Senate committees?

Mr. Gunn: Perhaps. However, it is best that a corporation reach a consensus among various viewpoints on what the direction should be. If a formal vote needs to be recorded, it tends to be something of an exception.

If there is a conflict, people are willing to identify it and votes stand out on that front. It is more important that a board reach consensus, and that sober first and second thoughts come together to reach a stronger answer.

Senator Poulin: Since you are recommending legislating this approach, do you feel that the legislator should have any additional responsibility for facilitating such a transition in corporate Canada?

Mr. Gunn: Senator, perhaps the committee has already done so with the suggestion that residency requirements be relaxed. Certainly, we promote the idea that there should be a broader constituency of directors in Canada. That does help all Canadians recognize that the model of a successful company in the 21st century will likely be a multinational based in Canada. To be a lead supplier of services in one's home market is all very well, but Canada is not the world.

The CBC would be a greater entity, broadcasting around the world, and its governance would thus be improved if there were a number of board representatives with experience of broadcasting issues in Britain, Canada, and the United States. Recognizing how others did it may have made for a stronger entity to promote Canadian culture.

Relaxing the residency requirements should bring in a broader spectrum of directors and there should be a wider selection of chairs and boards.

Senator Kroft: Making Canada an attractive and hospitable place for a multinational company is a major challenge that we face in the private sector and in the making of policy.

Have you any suggestions for this committee, not necessarily in reference to any particular items in the bill? What legislative measures might enhance Canada's attractiveness as a place of residence for multinational corporations?

Mr. Gunn: My general advice is that we should recognize that as a nation, we can sometimes be more insular than we realize.

The trends of globalization, e-commerce, NAFTA, and the European Common Market affect many other countries as well as ourselves.

We would be well advised to take more notice of what is happening in other countries that are trying to come to grips with the same issues. The British government rewrote its corporate legislation, trying to make Great Britain a more attractive place, particularly for new and medical technology development.

I heard the Prime Minister of Great Britain publicly announce that there should be no hesitation in winding up a company and recognizing a loss in an enterprise, but that that should not inhibit the formation of new companies. I am not sure that our business and legislative climate is at that point.

We may be in a situation where a Canadian entrepreneur may have access to capital in either Canada or the United States, yet not necessarily find that Canada is the best place to build an enterprise.

The restriction on pension investment still works in a detrimental fashion. I have made the point to the Finance Committee of the House of Commons that ultimately, under NAFTA, there can be quite a contrary effect of limiting pension investments.

Today, Canadian shares and corporations can be acquired quite easily by American companies, but not vice versa. The next plant built by a Canadian company that has been acquired by an American company, and is now ineligible for investment, will probably be in Ohio rather than Ontario or Quebec.

If a Canadian company buys an American company, chances are the next plant and the employment will be in Canada. Restricting foreign investment can ultimately mean that jobs can migrate out of the country. Restricting investment in foreign countries can actually decrease jobs in Canada.

Under NAFTA, in the interest of generating both jobs and economic growth in Canada, the Canadian legislative environment should be, on a competitive basis, more positive, and definitely with an eye on other places where people might choose to locate, such as the U.S.

The Acting Chairman: Thank you, Mr. Gunn, for your presentation and for taking the time to be with us this morning.

Our next witness is Ms Jane Beatty.

Ms Jane Beatty, Legal Counsel, Investments, Ontario Teachers' Pension Plan Board: Honourable senators, I am here today at the request of our president and chief executive officer, who could not be here this morning.

I am pleased to share with you our organization's generally favourable reaction to Bill S-19, amending the Canada Business Corporations Act, and the proposed revision of the regulations.

I have been with Teachers' for about eight years and am responsible for providing legal advice and representation to the board on all investment matters. In this capacity, I work closely with the investment and finance professionals at Teachers' in the day-to-day management of a pension fund with net assets of around $70 billion.

Teachers' needs little introduction at this stage of its 10-year history as an independent corporation entrusted with ensuring that the value in the pension plan is sufficient to pay an indexed stream of defined retirement income benefits for the remainder of the lives of Ontario's active and retired teachers.

Ten years ago, Teachers' held $520 million worth of Canadian equities. Today, we hold close to $20 billion worth. The capitalization of the TSE 300 was almost $743 billion at the end of 1999. Therefore, our portfolio of Canadian stocks at year-end represented close to 2.5 per cent of the TSE 300, the largest 300 companies in the Canadian public market.

In the early 1990s, we became quite knowledgeable quite quickly about the constraints Canadian corporate and securities laws present to investors in Canada and the urgent need for reform of the 25-year-old corporation legislation, the Canada Business Corporations Act.

We offer our congratulations to Industry Canada and to this committee for their efforts to date. Much work has gone into the attempt to get the CBCA and the regulations right for the changing times. It is an important statute with a large and diverse constituency. That the review appears to be headed for a successful conclusion must be gratifying.

As an interested member of the constituency, the Ontario Teachers Pension Plan Board has tried to play a meaningful role in the CBCA reform process over the last five years. We responded to eight of Industry Canada's requests for comment that were issued in 1995 and 1996. Mr. Lamoureux testified before this committee in 1996. We participated in Industry Canada's round table discussion on CBCA reform in January 1999, and we provided support to the positions of various interest groups relative to the proposed reforms. We appreciate the commitment of the Government of Canada to the process and we eagerly anticipate the effective date of these reforms to the CBCA and the regulations.

Why is Teachers' so interested in Canadian corporate law? As a large public sector investor with a fiduciary obligation to its captive beneficiaries, and with a substantial share ownership in Canadian public companies, we have little choice but to take an active interest in Canadian corporate and securities laws that encourage company managers to increase shareholder value. Teachers', along with OMERS and the Caisse, have been three large public sector pension funds among relatively few in Canada in the past decade, but the landscape is changing quickly with the emergence at the federal level of the Canada Pension Plan Investment Board and the Public Sector Investment Board. There will be increased competition in the Canadian capital markets and increased pressure on the Canadian government to enact and enforce modern corporate and securities laws.

Having said that Teachers' is keenly interested in the development of corporate and securities laws in Canada, our position on regulation in this area in the 21st century is consistent with the position expressed by Mr. Lamoureux to this committee in 1996.

We are of the view that, as institutions like Teachers' continue to assume an important role as overseers of the corporate governance process -- holding managers, directors, and large, active shareholders accountable -- the need for a direct and intrusive regulatory approach to corporate governance decreases. A number of legal rules evolved in the 20th century, the purpose of which was to fill the accountability vacuum created by the lack of large, disinterested shareholders.

As institutional shareholders, and even individual shareholders, play their roles in corporate governance, they, in conjunction with management and boards, should attain the right outcome on matters of overall corporate performance and help the Canadian economy to perform better. The greater the number of large and more active institutional holders, the more the bias in the regulatory framework should be to let the market find solutions to governance problems. This is instead of imposing specific solutions in the form of mandated processes or outright prohibitions on transactions or behaviour. Direct intrusions into the marketplace may be slow to evolve and can become irrelevant to the ills they were designed to cure.

We recognizes the need for rules and that they play a critical role in ensuring that the right solutions obtain in a free market populated, in part, by large institutional holders like Teachers' -- long-term, patient investors. In such a market, the rules must ensure that the game is fair, which means that shareholders must have sufficient baseline rights and guarantees. Many of the amendments to the CBCA proposed by Bill S-19 and the regulations will achieve this end.

In its work culminating in Bill S-19, Industry Canada characterized CBCA reform in its January 1999 presentation to the round table discussion as "enhancing Canadian competitiveness in the global, knowledge-based economy." Industry Canada further acknowledged that the global, knowledge-based economy recognizes that Canada is in a global race where, first, partnerships are key; second, vision is essential; and third, speed wins.

I wonder about Industry Canada's perception that speed wins. We have been at this reform for over five years and passage of Bill S-19 and the regulations into law needs to be a priority if Canada hopes to win.

I will now turn to specific comments on the proposals. As I have said, our reaction to Bill S-19 and the proposed regulations is generally favourable. I propose to comment briefly on four discrete items, each of which, from time to time, impacts on us as an institutional shareholder. These items are: shareholder communications and proxy rules; takeover bids; insider trading and reporting; and residency requirements of directors and directors' liability.

Communication among shareholders of federally incorporated companies has been an issue for Teachers' since the early 1990s. Our concern over the breadth of the words in the act that define "solicitation," and which include "the sending of a form of proxy or other communication to a shareholder under circumstances reasonably calculated to result in the procurement, withholding or revocation of a proxy," has compelled Teachers' to make application to Industry Canada on several occasions, most recently last month, to seek an exemption from the requirement to produce a dissident proxy circular in order to communicate with 15 or fewer other shareholders.

Since the time we first applied for such an exemptive order, the director of the corporations directorate of Industry Canada has released a policy statement, possibly prompted by the applications of Teachers' and others, expressly stating that such exemptive orders, that is, to permit communication with 15 or fewer other shareholders, will be granted as a matter of course.

Bill S-19, or at least proposed section 62 of the regulations, will now provide us with the required relief in order to communicate without having to seek an exemptive order. This is a clear example of efficiency-driven reform and is of great assistance to shareholders when posed with the question, "Where were the shareholders?"

While public announcements of how Teachers' will vote on a matter has never been an issue, we are pleased with the amendment permitting shareholders to make such public announcements without triggering the dissident proxy rules. Shareholder interests are best served by the absence of unnecessary regulatory interference in the discussion process, and the more the barriers to communication come down, the better.

We believe that Bill S-19 reflects the correct option by repealing the CBCA takeover bid provisions entirely. The provincial securities laws provide a detailed, carefully crafted, comprehensive code for the regulation of takeover bids of public companies in Canada. The securities regulators are experts in administering and enforcing these takeover codes, and the takeover provisions in the CBCA reflect a regulatory inefficiency and, hence, a cost burden to capital market participants.

Teachers' investment strategy has clearly been adversely impacted by the takeover bid regime in the CBCA, which duplicates the code and provincial securities acts. The threshold is different -- 10 per cent at the federal level rather than 20 per cent at the provincial level -- and there is a heavy compliance burden associated with different calculation and reporting requirements. The elimination of the takeover provisions in the CBCA is a welcome withdrawal by the federal authorities from matters that are being handled competently at the provincial securities law level.

The CBCA currently imposes insider reporting requirements on certain individuals and companies -- those who meet the definition of "insider." Provincial securities laws also impose and enforce insider reporting requirements. Hence, the market is afforded relevant and relatively timely information about trading by insiders through provincial securities laws. In certain respects, the CBCA calculation of who is an insider for reporting purposes is different from that of the provincial laws, leading to duplicative, expensive, and inconsistent compliance requirements. Bill S-19 repeals the CBCA insider reporting requirement, and we support the amendment.

While Bill S-19 eliminates the CBCA regulation of insider reporting, it maintains a CBCA civil right of action for damages arising out of insider trading. At the same time, however, it moves the substance of the CBCA right of action closer to that contained in the provincial securities statutes. Under the proposed CBCA provision, it will no longer be necessary to establish that the insider made use of the material confidential information in order to bring an insider trading action. This is also the case under the provincial securities statutes, where it is enough to prove that the insider traded with knowledge of material confidential information. However, care should be taken in adopting the provincial model.

While a right of action is generally granted for trading with knowledge under the provincial securities statutes, in Ontario, for example, the regulations under the Ontario Securities Act provide the insider with a defence in respect of an insider trading action. A defence exists if the insider proves that the purchase was made pursuant to an automatic dividend reinvestment or share purchase plan that was entered into prior to the acquisition of knowledge of the material confidential information.

The defence is also available where a purchase is made pursuant to a legally binding obligation that was entered into prior to the acquisition of knowledge of the material confidential information. No similar defences have been provided in the proposed right of action in Bill S-19, and it is important that consideration be given to building them into the proposed CBCA provisions.

We agree with Bill S-19's loosening of residency requirements for directors. We are in a global marketplace, and in order to compete on the world stage, Canada needs to introduce premium talent at the board of directors' level, with fewer national considerations. To this end, the amendments to the liability provisions for directors are also an improvement.

In closing, Bill S-19 and the regulations, through the proposed amendments, and what those amendments say about Canada's commitment to corporate law reform, should help facilitate the transition to an environment in Canada in which active, responsible institutional shareholders will participate fully in the governance process and thereby improve performance.

Teachers' would like to see a crystallization soon of Industry Canada's and this committee's efforts to date in the enactment into law of Bill S-19 and the regulations.

Finally, we are in the midst of rapid changes in the global marketplace and a gradual revolution in corporate governance. We would like to see these changes recognized in the continual consideration by the federal government of the appropriateness of regulation in the corporate and securities areas.

Bill S-19 demonstrates a clear commitment to reform based on the elimination of duplication, regulation, and increased regulatory efficiency. We would encourage the committee, in that spirit, to consider proposals for the introduction of a national securities regulation system in Canada.

Senator Kroft: I have one question arising from the centre paragraph on page 2. It seems that you are making a case for letting the marketplace play a greater role in determining the appropriateness of legislation and regulation, and that government, given the realities of the modern marketplace, should step back and be less intrusive.

Since there are now institutional shareholders of a number and size that did not exist before, the government should reconsider the appropriateness of intervention in these areas. Is that what you are saying there?

You say the greater the number of large and more active institutional shareholders, the more the bias in the regulatory framework should be to let the market find solutions to governance problems.

What is your general message on the role of government and, therefore, to us as legislators in this area?

Ms Beatty: The position of Teachers' is that corporate and securities markets can operate efficiently without too much intervention and that institutions that represent individuals, public sector pension funds that represent significant numbers of individuals, can encourage good corporate governance and good corporate performance, and too much regulation is probably not necessary.

Senator Kroft: There are others who say that the government must protect itself from the handful of large institutions because they are developing an undue influence in the marketplace. I am suggesting there may be another side to this coin.

Ms Beatty: There is a concern that institutional investors like Teachers' and OMERS are becoming too powerful. Power is a relative thing, certainly. There are pension funds in the United States that are triple and quadruple the size of anything we see in Canada.

Senator Kroft: As is their economy.

Ms Beatty: That is right. However, it is important to recognize that while a small number of institutions do have significant power, they also have legal and fiduciary obligations to individuals. The Teachers' fund has 220,000 members and we take those fiduciary responsibilities seriously.

Senator Kroft: Frankly, I find your statement here somewhat excessive in suggesting that perhaps there is an alternate form of government in the marketplace that might do better than ours. You might regard my statement as an overstatement.

Ms Beatty: I do.

Senator Fitzpatrick: I listened to your comments with interest and I take it you are generally supportive of Bill S-19?

Ms Beatty: That is correct, senator.

Senator Fitzpatrick: It appears you are also quite supportive of the details. This is, perhaps, your last chance to complain about anything in the bill. I want to give you that opportunity again.

Ms Beatty: We are happy with the bill.

The Acting Chairman: If I could follow up before a question from Senator Poulin, you indicated in an earlier statement that your fund is now involved in a number of Canadian companies. I suppose this is part of the equity financing that many larger funds participate in. Are you happy with the position that this puts you in as a minority shareholder with respect to some of the changes that are proposed in that regard?

Ms Beatty: Would you elaborate, please?

The Acting Chairman: Most of the positions you find yourself in now -- and I go back to when you were talking about shareholder communications -- when you do equity financing, you are more likely than not to be a minority shareholder?

Ms Beatty: Yes.

The Acting Chairman: Some of these changes impact on that. The follow-up to Senator Fitzpatrick's question is: Are you happy that this satisfies the desire of a fund like yours to have more of a say in companies where you find yourselves in a minority position?

Ms Beatty: As a pension fund, we are almost without exception in a minority position. Are you referring to the unanimous shareholder provisions?

The Acting Chairman: Yes.

Ms Beatty: Frankly, we did not focus on those particularly. Our biggest concern over the past five years with the CBCA has been the shareholder communication provisions, and we have not felt the impact as a minority shareholder of the CBCA.

Senator Stratton: I am curious about the effect of the Canada Pension Plan hitting the market, the size of that pension plan. Do you think we are adjusting appropriately to that impact and have you looked at that?

Ms Beatty: I have not looked at the impact of the Canada Pension Plan in my responsibility as in-house counsel at Teachers'. Other individuals at Teachers' have been involved in the emergence of that fund.

There will be considerably more competition for increasingly fewer products in Canada with the emergence of the CPP into the equity markets. We operate within a global marketplace and we need to accommodate that. There will be more competition for less product, or the same product.

Senator Stratton: What do you believe will be the effect of that? I would expect you to have an opinion. Will that competition drive the stock values up artificially, or do we do something else that allows us to invest more globally?

Ms Beatty: We have recently seen some amendments that allow us to invest more globally. Those are good things. We will need to work harder to make Canada a more attractive place to invest and do business, so that there is more product here. I will leave it there.

Senator Poulin: I found your presentation quite interesting. I think we all wish that our portfolios had moved in the same way that yours has moved in less than 10 years, from $520 million to $20 billion of Canadian equities. Congratulations are in order to both your board and your senior management. I am sure you will convey that to Mr. Lamoureux.

For the record, would you remind us of the profile of your board, in terms of numbers and how they are appointed? I would like to hear your comments on the subject that we were discussing with the previous witness, the separation of the chairman of the board and CEO of an organization.

Ms Beatty: I would like to start by clarifying the $520 million to $20 billion. In 1990, the Ontario Teachers' Pension Fund was invested entirely in fixed income, so that while it might look dramatic -- and it is a dramatic entry into the equity markets -- it does reflect a movement from 100 per cent fixed income to a more diversified portfolio, aside from the fact that the markets have performed well.

The board of the Ontario Teachers' Pension Plan is comprised of nine members. Four members are nominated by the Ontario Teachers' Federation and four by the Ontario government.They jointly appoint the chair, to bring it to the nine.

In terms of the separation of the chair and the CEO, the Ontario Teachers' Pension Plan Board position is probably that we do need checks and balances in order to ensure the system works properly.

I believe that the Ontario Teachers' Pension Plan Board would say, do not put the requirement into legislation, that good corporate governance demands a separation of power and encourages less regulatory intervention. They would also say that good governance will be brought to bear, and that for the most part, a well-run company that can accommodate it will separate the two. Our proxy voting guidelines suggest that we vote for the separation, but recognize that probably one size does not fit all corporate circumstances. We prefer not to see it in legislation.

That is my personal view of what I think Teachers' view would be, and I can certainly confirm that for this committee if you would like to have a more formal response.

Senator Poulin: Could we receive a more formal view from Teachers' on this issue of separation?

Ms Beatty: I will get that back to you.

The Acting Chairman: Our next witnesses are from the Coalition for CBCA Reform.

Mr. John Kazanjian, Partner, Osler Hoskin & Harcourt and Counsel to the Coalition for CBCA Reform: Our coalition, as you are aware, is made up of 10 large, Canadian public companies. These companies are listed at the end of the submission that we filed.

Mr. Purdy Crawford, who is the Chair of the coalition, asked me to extend his apologies, as he was unable to attend today. Mr. McAusland and I are here in his place.

The coalition was formed in 1994 or 1995, and was very active in the CBCA reform initiative of Industry Canada, and in this committee's review of the issues. We filed extensive briefs that address, I believe, over 200 issues. Our submissions related to issues that Industry Canada presented to us, and also issues that our members had encountered on a day-to-day basis in living with the CBCA.

We have centralized our views around four key principles: flexibility, efficiency, certainty, and a balancing of interests. We also rested our views on a fundamental observation, and that is that corporate law must be enabling, not regulatory, legislation. Corporate law must provide the right platform for Canadian companies to operate effectively in a rapidly changing future environment. That does not mean that the special interest groups from the accounting organizations or the shareholder activists who have appeared do not offer a valuable perspective on a handful of issues. However, at the end of the day, this is a piece of proposed corporate legislation --, that is, enabling legislation for the coalition, large public companies and, equally, the 95 per cent of the CBCA corporate population is not made up of large public companies.

Overall, we think Industry Canada has done a solid job with Bill S-19. We regret the amount of time it has taken to get from the public discussion stage, which ended over three years ago, to where we are today. This only underscores the urgency of moving forward and passing the bill as quickly as possible.

Leading-edge, Canadian high-tech companies such as Nortel and BCE should not need to go to court to avoid the CBCA's archaic restrictions on electronic communications. As you will see from our brief, Newbridge had to go to court last month in order to be able to communicate effectively with its employee shareholders electronically.

Mr. David McAusland, Vice-President and Chief Legal Officer and Secretary, Alcan Aluminum Ltd.; Member of Coalition for CBCA Reform: I wish to address the specific question of directors' residency, as a member of the coalition principally, but also as a senior officer of Alcan. I wish to go back to Mr. Kazanjian's remarks that we are here to discuss the CBCA as a piece of effective legislation that helps us create a competitive environment for Canada.

It is often left unsaid, but it is very important that corporate law be seen as a tool of economic development, although, unfortunately, people tend not to see it that way. It is a tool of economic development in that if you have an effective and fairly balanced framework, you will attract business that others cannot attract because their legislation is not on the same footing. Frankly, the world is becoming more competitive in terms of corporate legislation and it is harder to remain on the cutting-edge. More and more countries are getting up to speed. This bill gives us an opportunity to stay out in front and we should not miss it.

The issue of directorship residency is very critical for all companies seeking to expand. Once again, I look at this from the point of view of Canadian corporations looking outward on the world, rather than as some others look at it, which is to batten down the hatches and protect ourselves against incoming hostile corporations. We must look at creating advantages for our corporations that are seeking to expand outside Canada, which is obviously increasingly the case.

I have the privilege of being with Alcan, which is one of Canada's largest industrial concerns and one of its premier, if not leading, global companies. Therefore, we know whereof we speak. When you are going out into the world, you must establish a network of contacts in every corner. Any corporation's network starts with its board of directors. It is a fundamental role of the board to help the company grow by having the right network in place in order to get things done and to demonstrate that the company is properly connected to the communities and markets where it is doing business.

If we do not move ahead on this in Canada and relax the current restrictions, we will simply not be competitive. Frankly, I believe that there is a compelling argument to be made for the complete removal of residency restrictions. We believe that they are superfluous, but the coalition is prepared to endorse the 25 per cent principle.

The reality for lawyers and other professionals involved in this is that the current restriction is counterproductive. Not only does it discourage companies from seeking high-quality directors, it also forces them to create "odd ball" situations where they have directors in place who are really artificial nominees of offshore shareholders who need to be represented on the board. They choose a local professional who is just a mouthpiece. There is nothing illegal about that, but it is not credible. I do not understand why we would have legislation that encourages that.

Those who think that this is an issue of Canadian control must focus on the fact that there are a myriad of artificial solutions to circumvent the existing legislation without enabling the company to get the proper kind of people on the board. The real way to address Canadian control issues in situations where it might be considered necessary for policy reasons is to put in place specific legislation on ownership thresholds. Then it is up to the shareholders to decide, in the normal course, who should be on their board, based on the fact that they should have a certain amount of Canadian ownership.

I will conclude with a comment on the capital markets. There is a shareholder value issue related to this point. Like it or not, we still have something of a Canadian discount on many companies, other than the largest ones. We do not get the same trading multiples, as a rule. I do not know if anyone has testified specifically on that point, but it is the case. We must be able to show that our companies are truly capable of being international citizens, albeit with their home base in Canada, in order that there is no seam between Canadian, U.S., or other corporations in terms of values. In that way, you are not penalizing our access to capital markets.

Finally, on a personal note, I will say that Alcan is in a position, in view of its recent merger pursuits, to testify eloquently on director residency, and on other issues. In our merger discussions, we literally went through a matrix analysis comparing Canada, the U.S., the U.K., and other jurisdictions, on the basis of the relative advantages from fiscal, corporate governance, and securities regulatory perspectives, as well as from an impact on capital value evaluation and a host of other issues. Through that analysis, we were able to win the day on Canada, by a narrow margin.

Focusing on the director residency issue was critical. The material that we sent to our shareholders shows that we were obliged to agree in writing that if we remain, in the longer term, in a situation where there is a majority requirement, we will have to continue the company in another jurisdiction, such as New Brunswick, the Yukon -- where there is no residency requirement -- or perhaps Quebec. A number of companies coming into Canada that do not want residency requirements are setting up in the Yukon. I have nothing against the Yukon, but it seems silly that the CBCA, presumably leading-edge corporation legislation, would play second fiddle to the Yukon.

Mr. Kazanjian: I will wrap up with two additional observations. You will see from our submission that we think that Industry Canada has gone a long way down the right path on electronic communications, but we have three or four suggestions that we hope will be seriously considered. It was an ambitious effort, but there are some areas in which some additional fine-tuning is necessary through minor and technical amendments.

We ask this committee to review in particular that portion of our brief requesting a more deliberate view on these three or four aspects of electronic communications, because there are some unintended effects in Bill S-19.

Second, the proposed legislation defers to the regulations. While we recognize that as a general measure it may not always be the most useful regulatory or legislative approach, we think it is essential in this circumstance, particularly because of the long "shelf life" of the proposed legislation, and the dramatic pace of change that is occurring from both a global and a communication and technology perspective.

However, given the additional deference to the regulations, we think it is important that the notice and comment provision in the current legislation be preserved. There should be an opportunity for notice and consultation. We are not clear why that was not continued in Bill S-19, but given the emphasis on regulation, we think there should be a more open process. In fact we suggested to this committee in earlier submissions that there should be some kind of expert, external advisory body to give guidance to the regulation-making authorities. We still offer that view.

We now stand ready for questions.

Senator Kroft: I regret that Mr. Crawford is not here. He is a colleague of mine in another place and certainly there is no one whose thinking on these matters is more enlightened and informed.

Mr. McAusland, you bring a unique view, because if anyone has taken this out of the world of theory into the world of the reality of the marketplace, you have. The recent experience of Alcan is very helpful as a real case study on some of these issues.

You have emphasized the residency issue. I would like to be a little clearer. I believe you said that you favour its removal. I presume from your other comments, and comments from other witnesses, the biggest reason for that is, when pushed, there are other ways of achieving that. However, they are not as effective, and we might as well do it here and give Canada the advantage. Is there a positive side to the requirement for maintaining the Canadian presence?

Mr. McAusland: Quite frankly, I am not saying that Canadian directors are not good.

Senator Kroft: I understand that. I am wondering if there might be some other kind of policy signal or direction.

Mr. McAusland: I do not see the need for that. There is an endless number of other jurisdictions that do not have that requirement and they have not been disadvantaged by it. In the Province of Quebec, provincial corporate legislation has absolutely no residency requirement. Certainly, there are many Quebec companies that have not been dominated by foreign directors. I do not believe it is an issue.

I would be prepared, as a member of the coalition, to endorse the 25 per cent versus nil as a transitional concession, without acknowledging that it is particularly useful. I am not prepared to endorse its utility. If it is useful as a policy position to assist the passage of this bill, we are delighted to support that at this time.

Senator Kroft: You have described an ideal world, and that is certainly what we are looking for, that is, the corporate law and the regulatory environment being a tool of economic development. I believe that is a positive framework in which to put this discussion. I would invite you to reach beyond your specific list here, or even beyond the draft bill that we have in front of us. Are we missing any practical opportunities for doing something to further that? Are we missing an opportunity to be innovative or creative in some other way in this economic development thrust? Rather than tinkering with provisions that are here, I am offering you a chance to throw out any altogether new ideas.

Mr. Kazanjian: Within the context of corporate and securities laws, there are things on the horizon that will need to be addressed, but my sense is that we need the flexibility to better understand what communication technology has in store for us in order to decide how best to respond. Clearly, there is proposed federal legislation in other areas that is attempting to cope with that, whether it is the privacy bill or other issues. I personally think that for now, from a corporate or a business law perspective, letting this bill go forward and seeing where we are from a technological standpoint three or four years down the road would probably allow me to answer that question with greater comfort.

Mr. McAusland: I think a good job has been done. I do not think any one of us could nitpick his way through the bill and ask for too much more. However, I think a good job has been done in bringing this up to date and making it reasonably cutting-edge. It is a piece of proposed corporate legislation that could do Canada proud and assist us in attracting business.

The most important thing you can do to assist that further, and demonstrate it, is to get it done as fast as possible, quite frankly. These issues are not devoid of urgency. Many of them are creating inefficiencies in the capital markets and penalizing Canadian companies on a day-to-day basis. Let's not dilly-dally. Let's get it done. That would be the most important bottom line.

Senator Fitzpatrick: First, I should like to address a matter relating to Mr. McAusland's capacity as an officer of Alcan. I am from British Columbia and I would like to thank Alcan for the contribution it made to the St. Roch project yesterday, which will be a fascinating millennium project. For those who do not know, Alcan came to the rescue as a private contributor and, I believe, contributed some $300,000 so this project could get off the ground.

I should like to follow up on the directorship residency issue. Most companies looking for non-resident directors are larger and probably have a directorship with 12 to 14 members. The 25 per cent rule means 25 per cent of the whole.

I heard what you said about getting on with this bill and supporting the 25 per cent if that was necessary, but I am wondering whether you think that a more practical approach would be to establish a minimum number, be it one or two, of members of the board of directors. The constitution of a board of directors depends upon whether you are an international or a domestic business, and I subscribe to the argument that you want to have that flexibility. However, should we be addressing it as a finite number, be that one or two, or 10 per cent or 25 per cent, depending on the size of the board?

Mr. McAusland: I do not believe that is a critical question these days because, other than the banks and a few other institutions, boards are getting smaller rather than larger. I think that people from Teachers' or OMERS would agree that you do not need boards of 15 in larger companies. Shareholders do not like huge boards, as a general rule. They like smaller, more hard-working, more focused boards. For a large company, a 9- to 13-member board is the range you most often see.

Mr. Kazanjian: I agree. In fact, the TSE guidelines suggest that good governance involves smaller, more efficient boards.

Mr. McAusland: In that context, and all things considered, the 25 per cent rule works, and it will work for smaller companies too. It is a reasonable approach. In discussions on the draft legislation, we considered whether it should be a fixed number. There are arguments to be made in favour of that, but I do not see much difference. It is not worth quibbling about.

Senator Fitzpatrick: I wish to follow up on the number of directors on boards. I am aware of the trend. I am also aware, having served on some national boards with corporate governance, audit, compensation, and environmental committees, that the workload for directors is becoming heavier and heavier, not only because of the expansion of the committees, but also because of the amount of work that needs to be done.

I know that this is not the subject of this bill, but I should like to hear your comments on that, because I know a number of people who are very good directors, and others who would be very good directors, who are saying that it is just too much. It is especially difficult if you live in Western Canada, because it is a three-day trek to attend a directors' meeting in Toronto. I am not sure that we will be able to get the best and brightest for our boards with the workload.

Mr. McAusland: There is no doubt that the workload, the expectations, and the liabilities are getting larger. I should have said "liabilities" first, because that is why the workload is getting bigger. The net result is that fewer and fewer people will be capable of serving on several boards, as they did in the past. That is not possible any more. Also, as a consequence of that, board member compensation will have to be increased. That is only normal because of the liability and the workload.

There is a real change in the directors' role. It is not an old boys' network any more. It is not a pat on the back or a matter of social standing. It is a matter of hard work, diligence, and acceptance of responsibility, and that will not become easier.

In terms of accessing good people, we must keep our eye on the liability issue to ensure that it does not become extreme, but is kept at reasonable levels. That is a very important issue. There is a legitimate liability issue for directors, but it also goes to the extreme. You need only look south of the border to see what liability issues have done to certain industries, such as the aircraft and the medical industry. It is devastating.

Looking at corporate legislation as a framework for economic development, if we have the right balance in terms of directors' responsibilities, so that expectations and liabilities are appropriate, we will be able to attract the best people, probably more easily than other jurisdictions, and therefore be attractive. I do not think the proposed legislation is offside now. It is fair enough, but I do not think we should push any harder on the liability pedal; quite to the contrary.

Mr. Kazanjian: With respect to board size and governance generally, there are many external, objective factors that influence a board, and only a very small measure of it is CBCA-generated. The stock exchanges and securities commissions have rules, there is investor pressure, and there are the expectations of institutional investors that you heard about. There is a whole mix of factors that go beyond the kinds of things that are on our collective table. One of the positive things about Bill S-19 is that it does not move into other areas where those influences become unbalanced, and I think there needs to be caution about how far beyond where you are you want to go, because other things may be upset by it.

Senator Poulin: We are finding that convergence is having a major influence on public governance, even on the way that different legislation and different departments affect Canadian business today. I ask this question wearing two hats -- as a member of this committee and also as a member of the Subcommittee on Communications, where we are doing a special study on the required policies for the 21st century on convergence, competition, and consumers. I am chairing that special study, so I should like to ask you to expand on the comments you made earlier about additional technological considerations.

I totally agree that our government has moved forward considerably on the issue of ensuring that Canadians, be they from the corporate business world or individuals, have access to greater communications flexibility because of this technological revolution. We saw this with Bill C-6, the privacy bill, which will be coming into effect on January 1.

What additional comments can you make on considerations that should be made on the new technology?

Mr. Kazanjian: Due to the composition of our coalition, when we were making submissions four years ago, I learned a great deal from what people said would be the new technologies coming down the pipe. We attempted to address some general principles; namely, that you cannot regulate in detail in an area where you cannot know what is likely to occur. This has influenced the approach of the U.S. Securities and Exchange Commission. Their legislation or regulation must always be at the level of general principles, and the world can then be interpreted in light of those general principles as it develops.

For example, consistent with Mr. Justice Farley's observation, we suggest not using words like "telephonic" in the CBCA, because I can connect to the Web through my telephone line and I can connect to someone through my cell phone without using a wire, so where does "telephonic" take us? We should be technologically neutral, stay at the level of objectives and principles in all our legislating in this area, provide an opportunity to interpret and evolve, and not let the law get in the way of technological change.

Senator Poulin: It is interesting that you mentioned being technologically neutral, because the Subcommittee on Communications has already published two studies in which we looked at Canada's positioning internationally within the global expansion of technology. We found that some words, rather than defining certain activities, raise more complications. We looked at what "broadcasting" and "telecommunications" really mean. You have coined the phrase "technologically neutral".

Mr. Kazanjian: I would like to take credit for that but I cannot.

We think the principle on proxy rules is excellent, but the whole area of liberalization of dissident proxy rules will soon have to change because it is predicated on a distinction between "sending", which we currently believe means mail, and "publicly broadcasting", which we believe means buying space in the Globe and Mail. However, once you introduce the electronic aspect, the distinction between "sending" and "broadcasting" disappears. The proxy rules in this bill have the principle right, but they are premised on that distinction persevering, and I do not think it will.

Senator Poulin: It is also interesting you should mention that, because there was an article in the New York Times about two weeks ago saying that Monica Lewinsky had learned that to her own detriment.

The Acting Chairman: There being no further questions, we thank you very much for your presentations and taking the time to be with us today.

The committee adjourned.