Proceedings of the Standing Senate Committee on
Banking, Trade and Commerce
Issue 12 - Evidence of February 13, 2003
OTTAWA, Thursday, February 13, 2003
The Standing Senate Committee on Banking, Trade and Commerce met this day at 11 a.m. to examine and report upon the present state of the domestic and international financial system (Canadian perspective to the Enron collapse).
Senator E. Leo Kolber (Chairman) in the Chair.
[English]
The Chairman: We are continuing our examination and report upon the present state of the domestic and international financial system and, in particular, our perspective to the Enron collapse, not Enron specifically but ``Enronitis,'' as we call it.
We have two witnesses this morning. The first is from PricewaterhouseCoopers Canada. Mr. Kevin J. Dancey is CEO and Canadian senior partner. Good morning Mr. Dancey, nice to see you again. Welcome to the committee. I assume you have an opening statement.
Mr. Kevin J. Dancey, CEO, Canadian Senior Partner, PricewaterhouseCoopers Canada: I am pleased to appear before you today on behalf of PwC as you continue to examine the present state of the domestic and international financial system and Canadian perspectives of the Enron collapse.
We commend the committee for offering stakeholders this opportunity to voice their opinions on the important subjects of accounting standards, corporate governance and securities regulations. PwC takes its responsibilities to the investing public very seriously. Quality, integrity and excellence have been, and remain, our core values with respect to all services that we provide to clients.
Copies of my presentation have been provided to the committee in both official languages. At the completion of my remarks, I would be pleased to answer questions.
As a personal aside, during my career, I spent four years in the Canadian government, most recently from 1993 to 1995 as assistant deputy minister in the Department of Finance. At that time I enjoyed appearing before various committees, and I certainly look forward to it today.
The recent failure of Enron and other large U.S. companies rocked the capital markets. What happened at these high profile organizations has raised important questions about how these markets function, that is, questions about company executives, boards of directors, auditors, analysts, regulator and the media, all of whom are members of what I will refer to in this presentation as ``the corporate supply chain.''
In the weeks follows the Enron failure, much of the media and boardroom debate focused on who was to blame. However, the more important questions are those you have given us a forum to explore today. Can it happen again? Can it happen here? What can we do to prevent another failure and restore investor confidence and public trust?
Unfortunately, business failures will always occur, and risk taking will always be part of our free market system. However, we must acknowledge the impact of recent corporate failures on investors, and we must challenge each member of the corporate supply chain to assess what steps they can take to restore public trust and investor confidence.
PwC's recent publication, Building Public Trust, The Future of Corporate Reporting, a copy of which was supplied to each of you last summer, addresses this challenge. While time does not permit me to cover all the recommendations in the book, I will speak to the three key concepts — a spirit of transparency; a culture of accountability; and an unwavering integrity — that we believe every participant in the corporate supply chain must embrace.
My presentation today will look at each of these concepts and its role in shaping the future of corporate reporting. As a representative of one of the country's leading chartered accountancy firms, I will focus on our role as auditors and how we can be part of that solution.
I will begin by, first, reviewing the major regulatory developments of the past year and our thoughts on their impact. Second, I will identify improvements to our corporate reporting model that PwC believes are necessary. Finally, I will look at the challenge of what we call the ``expectations gap'' — the gap between what the public perceives we do when we perform an audit and what accounting and auditing standards actually require us to do.
Since the Enron debacle, regulatory bodies on both sides of the U.S.-Canadian border and in many other parts of the world have strengthened their rules and guidelines to demand greater accountability from management, boards of directors, auditors and analysts. In Canada, as David Smith of the CICA has told you, many of these developments were already on the table before Enron. The magnitude of Enron's collapse simply accelerated their finalization.
Last summer, the Canadian Securities Administrators, the Office of Superintendent of Financial Institutions and the CICA announced the creation of a new independent Canadian public oversight board for auditors of public companies. The new body, called the Canadian Public Accountability Board, headed by Gordon Thiessen, former Governor of the Bank of Canada, will conduct more frequent and rigorous inspections of auditors, enforce tougher independence rules for auditors, ensure regular lead partner rotations for public company audits, demand second partner review of all public company audits, and enforce new quality control requirements.
PwC fully supports and welcomes the changes put in place by the Canadian Public Accountability Board. Canada is already recognized as having a strong set of standards in place for public company audits. In today's world, however, the Canadian Public Accountability Board represents an appropriate balance between public oversight on the one hand and self-regulation on the other.
What is is also interesting, and some find remarkable, is that, unlike the approach south of the border, this regime, with all its federal-provincial jurisdictional issues, will be put in place by way of contract and agreement with the major firms responsible for performing public audits without any legislation.
Last summer, the Sarbanes-Oxley Act was signed into law in the U.S. In January of this year, we saw the translation of the act's intentions in actual rules enforceable by the Securities and Exchange Commission, the SEC. Once all of the provisions are in place, Sarbanes-Oxley will bring about fundamental changes to how audit committees, management, lawyers, analysts and auditors conduct themselves.
There are a few key points that I would like to address today regarding the importation of portions of this law into Canada. Sarbanes-Oxley prohibits auditors of public companies from providing certain non-audit services to those same clients, including internal audit outsourcing services and financial information systems design and management functions. Other services are permitted if approved by the audit committee.
PwC agrees with these new regulations, which strike the appropriate balance between the needs for auditors to be perceived as independent with the fact that many of the services we provide to our audit client, such as tax and risk management and control services, directly support the performance of the highest quality audit.
While we believe there are elements of Sarbanes-Oxley that could be imported to Canada, such as CEO and CFO certification and pre-approval of non-audit services, we also believe that Canada should not react in a knee jerk way to adopt all of these U.S. rules. We need to be thoughtful in our actions and develop a response that speaks to the unique needs of Canadian marketplace — a response that considers and serves the interests of both the small issuers, who make up a significant part of our community in Canada, and market investors.
The Canadian response also needs to minimize any potential regulatory overlap between the U.S. and Canada. Many of Canada's largest public companies are listed in both Canada and the U.S. As such, these companies are regulated not only in Canada, but also by the SEC. Moreover, it is proposed that PwC Canada, as their auditors, will also be subject to oversight, inspection and discipline by U.S. regulators at the same time as we are regulated by the new Canadian Public Accountability Board and other Canadian regulators. The challenge for Canada is to work with the U.S. regulators so that our regulatory regime in Canada is not only effective but also cost effective and efficient, that is, reduce the overlap in regulation by the two countries.
Sarbanes-Oxley, the Canadian Public Accountability Board and the new independence rules proposed by the CICA will no doubt contribute to better financial practices both here and south of the border. Ultimately, increasing public trust, restoring stability to our capital markets and preventing another Enron will not come solely through increased regulation.
To restore investor confidence and restore public trust, PwC believes there is significant room for improvement to our corporate reporting model, particularly with respect to the transparency of financial information. Information, as we all know, is the lifeblood of the capital markets. To make effective investment decisions, investors must be able to rely on the information companies put forth.
This information must be three things. It must be relevant, accurate and timely. In today's increasingly complex business world, the true drivers of a business's value are not just the annual or quarterly financial results. Intangible, non-financial factors are increasingly relevant to investor decision making.
PwC recently conducted a number of industry surveys, and in each we discovered significant gaps between what management said it finds important in running the company and what, by its own admission, it actually reports to the public.
The challenge for our corporate reporting model is to have public companies provide information that investors needs to fully understand financial performance, risks and, most importantly, value. Investors want substance, not form, and they are getting better ay distinguishing between the two.
Since Enron's collapse, numerous companies have fallen out of favour with analysts and investors alike due to complex structures and opaque accounting and reporting practices.
Accordingly, it is no longer enough for companies to simply provide financial measures of performance in accordance with GAAP. Investors need information on the non-financial measures as well.
In our book, Building Public Trust, The Future of Corporate Reporting, we propose a three-tiered approach to reporting. It begins with establishing global GAAP, then follows with a second tier of industry-specific standards to allow for apples-to-apples comparisons between similar companies in the same industry. Finally, the third tier in our vision for corporate reporting is company-specific information, that is, relevant information unique to the company such as management's view on the business and competitive environment.
The need for global GAAP is an important part of this solution. Generally accepted accounting principles vary around the world and, while Canadian GAAP is among the best in the world, PwC believes that a set of global generally accepted accounting principles should be established. Global standards that are principle-based rather than rule-based would enable investors to more easily and accurately compare the financial performance of any company in any industry. They would also allow companies access to the world's capital markets with less cost.
Finally, to facilitate adequate levels of disclosure in today's complex business environment, companies also need a new way to share information with stakeholders. PwC believes that the Internet is the next frontier for reporting, providing benefits for both businesses and investors. Extensible Business Reporting Language, also known as XBRL, will bring new efficiencies to the distribution of information. In the simplest terms, this Internet-based system tags relevant reporting information, including financial and non-financial information, explains its meaning and puts it in the proper context.
After corporate transparency, a second concept that PwC believes must be embraced by all members of the corporate supply chain is a culture of accountability. Providing information is not enough. It must be accompanied by a firm commitment by all market participants to the ideals of being accountable for their actions to all market participants. The roles, responsibilities and accountabilities of the parties in the corporate supply change are quite clear. Management must be accountable for producing relevant and reliable information and setting the tone at the top. Management must ensure that proper internal control systems are in place. Management must also make this information fully comprehensible to the board and the capital markets.
The board of directors or audit committee must ensure that management lives unto its obligation to prepare the company's financial statements with integrity and objectivity. These directors require a financial literacy and independence that allows them to assess the real implications of accounting judgments, policies and disclosures. They need to be ready and willing to ask the tough questions of both management and the auditors. PwC's directors' forums and our support of the Institute of Corporate Directors are just two examples of how PwC is assisting in the training and education of directors in Canada.
Auditors support both management and the audit committee in their role of providing assurance that the financial statements fairly present the company's financial position. I would like to pause for a moment on this point and ask you to consider our role as auditors in the context of something I mentioned in the introduction of this speech — the expectations gap.
A wide discrepancy exists between what the general public assumes that auditors provide — some form of guarantee or validation of the health and soundness of a company — and what current accounting and auditing standards actually require us to do, which is provide assurance that the financial statements present fairly the company's financial position. This expectations gap exists in a number of crucial areas that can have a huge impact on how a company's performance is perceived. These areas include detection of fraud, internal controls, health of a business or its business model, quality of reporting and transparency, or other non-financial operating disclosures.
Narrowing this expectations gap and delivering more of what investors expect from auditors will require a number of changes including expanding the scope of information upon which we provide an opinion, instituting new audit procedures, services and standards, and addressing all the issues set out in our book, Building Public Trust, The Future of Corporate Reporting.
Let us be clear: improving the corporate reporting model and narrowing this expectations gap are not the sole prerogative of auditors. Every member of the corporate supply chain will have views on what improvements need to be made to the corporate reporting model, how much transparency is required, and what role auditors should play in providing assurance around any enhanced disclosures.
PwC's view is that the reporting model that we have today and the size of expectations gap is not conducive to restoring investor confidence and building public trust. Changes and improvements are required.
If we endeavour to narrow this gap, as PwC believes we should, it must be recognized that we will never be able to close it. An auditor can never deliver an absolute guarantee with respect to a company's set of financial statements; and fraud due to collusion will always be difficult to detect. Moreover, there is a cost-benefit aspect to this. What price are companies, directors and investors willing pay to obtain assurance around enhanced disclosures in any new reporting model?
Mr. Chairman, as we consider the expectations gap and steps that can be taken to narrow it, we must also consider the legal environment in which auditors currently operate. We operate in an environment where we can be put out of business and partners' personal assets are put at risk every time we perform a major public audit. It is particularly important to consider this point at a time when our civil liability is being extended through changes like those introduced in Bill 198 in Ontario. If we are to narrow the expectations gap, auditors will undoubtedly move into areas that are less certain, express opinions that are higher risk and, consequently, increase their exposure.
All businesses must operate within in appropriate liability framework. We expect to be financially accountable for our actions if we are negligent. However, in the interests of fairness, improving the corporate reporting model and narrowing the expectations gap, and reducing the risk that one or more of the Big Four remaining big accounting firms will go out of business, a development that would have a negative impact on our capital markets, we recommend consideration be given to, first, introducing proportionate liability into corporate and securities statutes. This would be in accordance with the conclusion of the Senate Banking Committee in its 1998 report regarding proposed amendments to the CBCA. Second, accountants should be allowed to avail themselves of full shield limited liability protection, LLP, status or, alternatively, to incorporate.
These changes would still leave accounting firms liable for their share of a plaintiff's loss, but would allow accountants, like the owners of most businesses, to protect their personal assets from risk of loss. Other countries, like Australia, are in the process of addressing this liability issue. We suggest Canada do the same.
Mr. Chairman, committee members, without a doubt, transparency and accountability are key to ensuring the smooth and efficient operation of our financial markets. In the end, both rely on people with integrity. It is on this subject of integrity that I would like to conclude my comments today.
Rules, regulations, best practices, a changing legal environment and state of the art technology cannot ensure that another Enron will not happen. We cannot expect to completely fix the problem with regulations. Integrity and doing the right thing cannot be legislated. We must be able to put our faith in the integrity of the CEOs, the analysts, the auditors, the regulators and the boards of directors. Integrity, therefore, should be a determining factor in selecting individuals for key positions at every point along the corporate supply chain.
For auditors, this means striving for the highest quality audit and communicating our best judgment, no matter how unpopular to management or the board of directors.
Because of these recent corporate failures, the capital market system is receiving the scrutiny it has always deserved. The need for good corporate governance has received much needed attention. The general public, mainstream media and lawmakers have a heightened awareness of corporate governance issues. CEOs and boards, and we know this from the many meetings we have held with our clients over the past year, are assessing their corporate governance policies.
Let me sum up the key points that I have made today as they relate to auditors in the accounting profession.
First, the increased focus on regulation in the last year is welcomed but increased regulation is not the only answer. Second, improvements need to be made in the corporate reporting model, specifically with respect to transparency. Third, as improvements are made the corporate reporting model, auditors have key role to play in narrowing what I have referred to as the expectations gap. Finally, regardless of stronger regulations and a more informed public, the keys to preventing another failure the size and scope of Enron lie in a collective effort across the corporate supply chain to embrace a culture of transparency accountability and utmost integrity.
I would be pleased to answer any questions.
Senator Angus: Mr. Dancey, congratulations on a very comprehensive statement and the book that you have sent to us all. It is an excellent way to get the message out.
Mr. Dancey: It tries to set out a framework.
Senator Angus: My first question is on the lips of many Canadians, and it probably is not one you are expecting this morning. You talk of the ``Big Four.'' I used to hear of the ``Big Eight.'' There were mergers. Always the name ``Arthur Andersen'' was in that list of the top, huge accounting firms in the world. Now we are here talking about Enron and one of the effects, like to or not of Enron, was the absolute annihilation of one of the great accounting firms of the world. How could this happen?
Mr. Dancey: The meltdown of Andersen was most unfortunate, and, in my personal view, it was not warranted. It resulted because someone shredded some documents. That was the ultimate cause of the downfall of Andersen. It still seems kind of shocking to me that that one event could cause the downfall of an entire company, both within the U.S. and around the world, destroying many people's personal lives. It was a reaction within the U.S. The U.S. Justice Department brought a suit against Andersen and once that happened, it just unravelled.
Senator Angus: As the CEO of the next-largest accounting firm, it must have sent shivers down your spine and those of your partners to see that it could happen in such a comprehensive way.
Mr. Dancey: In terms of our business, our reputation is our biggest asset. Once you lose your reputation in this business, it is basically game over. That is why, within all the firms and certainly within ours, there is a heavy emphasis on quality.
Senator Angus: Moving along, I would like to focus on what you called the need for uniformity in reporting standards. You called for global GAAP, as opposed to Canadian or U.S. GAAP. You stressed those should be principle based, as opposed to rule based, and I wondered if you were taking a shot at the American system. Could you explain?
Mr. Dancey: To say principle based versus rule based is sometimes a bit glib. There is no doubt that the U.S. system has principles. The problem is that the U.S. has come up with so many interpretations to define what those principles mean, that they have almost lost sight of the fact that these are principles. Principles only work as principles when they are interpreted as such. In the U.S., they have looked to the rules and said it is the rules that govern, as opposed to the principles. That just does not work. However, I am hopeful. We have Bob Herz, who is in charge of FASB in the U.S. looking into this whole question.
As to European developments, I believe that we are in a movement towards a global GAAP. This is important to the international community, because many companies are global and it is inefficient, costly and confusing when people see earnings numbers that look different depending on which GAAP is used.
Senator Angus: As a committee, we have run into this issue of a rule-based versus a principle-based approach, not just in dealing with corporate governance and accounting standards, but more particularly in respect of the supervision of banks and financial institutions, from a regulatory point of view. Our understanding from the evidence we have heard over the last number of years in dealing with the bank situation is that it is very difficult to reconcile a system internationally as long as the Americans are there with their preoccupation and focus on minute rules. We hear in the U.K. that this is bad and they would rather have the judgment-based approach.
Given the culture south of the border and their general approach to life, how could we can to a global GAAP of the type you suggest? Are we just dreaming in colour?
Mr. Dancey: I do not think we are dreaming in colour. I think much depends on the people who are in the various positions in the U.S. who are driving the agenda. Bob Herz, who is in charge of FASB, and who used to be a former partner of mine, has this high on his radar screen. He sees it as an important thing to do. It will not be easy. However, if you look at a number of the ongoing changes, you will see that there is starting to be more convergence on a piecemeal basis, one by one. I am hopeful we will eventually get there.
[Translation]
Senator Hervieux-Payette: I think that your brief is a high quality document, and this committee will have to hang on to several ideas in it.
A fairly important question is this. Several years ago, we used to hire audit firms, and pay them a certain amount of money for their work. For a number of years now, we have been calling for tenders, so there is price competition. Does this have an impact of the quality of audits?
[English]
Mr. Dancey: I heard the last part of the question. Does the price of an audit impact on the quality of an audit?
Senator Hervieux-Payette: Does it impact when you bid on a contract?
Mr. Dancey: As we approach proposals these days, we are not bidding on the basis of price, in the sense of trying to be a low-cost bidder in this business. When you look at our kind of business model and what we have to do in today's world, an audit takes a lot of time and effort. The scope of the audit is expanding. Our approach is to bid and propose, based on quality, scope and the level of assurance we can give the audit committee and the board of directors.
[Translation]
Senator Hervieux-Payette: You talked about principles. When those principles are implemented, the deeper you go in the details, the higher the costs for the customer. When do we cease to be exposed to reasonable risks in an audit? You take a sample and check if all the documents are in the file. How can a director on a board make sure he or she gets a high quality report for the price that is paid?
[English]
Mr. Dancey: That is part of the challenge of the audit firm. The audit firm really sits in an interesting position. The audit firm has to work with management in auditing management's financial statements. We also have to work with and support the audit committee, so the audit committee can carry out its function. As to the processes that we go through in our audit, there is probably more engagement now of the audit committee. We make sure that the audit committee understands the scope of what we have done, the different approaches that could have been taken in the statements, and our opinion as to the preferred approach. What you are seeing is more dialogue between the audit firms and the audit committees to help and support the audit committees carry out their obligation to oversee this process on behalf of the shareholders.
We live in a complex world with many complex businesses. Business has become very complex, with derivatives, financial engineering, et cetera. That role of supporting both management and the audit committee is an ongoing challenge for audit firms.
[Translation]
Senator Hervieux-Payette: Let us talk about the role of the chairman of the audit committee as a director on the board concerning internal and external audits. In your brief, you talked about restricting the liability of external auditors and letting accountants limit their legal liability. How could this be done? To whom could analysts and investors turn in a case like Enron's, when the chairman of the audit committee accepts audited financial statements and recommends them to the board? Internal auditors provide the data, and external auditors work from that. In that context, how could we sort out who is ultimately responsible?
[English]
Mr. Dancey: The approach I would take, and certainly the approach taken in our book, is that if the ultimate end goal is to restore public trust and increase investor confidence, many different players participate in that. It starts with the management who produce the statement, the board and the audit committee that oversees it. The auditors, the analysts, the media and the information distributors all have a role to play. Many different players have roles in it. It is not just one person or one element of that corporate reporting supply chain that is the one that has accountability. Each is accountable for its piece of it and each is accountable to each other in making sure that the right information gets out.
As we indicated in the book, there are different ways, such as the Internet and XBRL, for example, to communicate the information in such a way that investors and others can assimilate and analyze in a more effective and efficient manner than the paper-based formats that are used today.
Senator Hervieux-Payette: When the director, who chairs the auditing committee, does not agree with the internal auditor, and your external auditor is, of course, providing a fee for service, how do you resolve this?
Mr. Dancey: We do have issues that come up, and it happens a fair amount, where management may take one position and our view may be different from theirs. Sometimes that is resolved between the audit firm and management before it reaches the audit committee, and sometimes it is not resolved before it gets to the audit committee. On those occasions, you have to go through it with the audit committee to ensure that they understand both the position of management and the position of the audit firm; and then they have to make a decision. That is a tough position for directors to be in because, while directors vary in their levels of financial literacy, they often have to talk about tricky issues such as the interpretation of Generally Accepted Accounting Principles, GAAP. It can be tough on directors to perform that job.
Senator Meighen: I wanted to go back to an issue raised by Senator Angus, that is, global GAAP. Let me be provocative: I think you are dreaming in colour, at least when you envision that happening in our lifetime. I want you to tell me why I am wrong.
Would you also tell me, if there were global GAAP, would those allow for different practices of a so-called ``minor nature?'' For example, while attending a conference in Japan, I was astonished to find out what Japanese accountants considered to be cash. Would those kinds of exceptions continue under your global GAAP? Given the fact that the biggest capital market in the world is in the United States, how would you envision the global GAAP being anything other than the model the Americans want?
Mr. Dancey: I may be the eternal optimist, but I hope I am not dreaming in Technicolor. Over the last few years, we have seen changes in the U.S. view of things, the European view of things, and even of the Canadian view of things. Changes are being made that are bringing the principles closer together.
We can debate whether it will always be a journey as opposed to reaching an end point. You can never be at that end point because the principles keep evolving, but the journey will get us closer together.
Let us say that countries do come closer together on their concepts and interpretations and have more commonality regarding the principles. In my view, there will be exceptions — for example, for private companies in the local market regime and for smaller entities. However, when you think about the economic integration that is occurring around the world and the large, multi-national companies, whether listed in the U.K, in the U.S or in Germany, if there is to be any commonality among the different players in the same industry, the drive must be to achieve commonality in the major principles. As I said, I have confidence that the U.S. will move on some of these principles so that we will have commonality, and I think there has been some movement over the last year.
Senator Meighen: Who is driving this movement? Is it the accounting profession or the regulators?
Mr. Dancey: We have the IASB with Sir David Tweedie; we have FASB in the U.S., which is headed up by Bob Hertz; and we have other participants as well. There is a global initiative to try to bring this together. Of course, many European firms have to comply with the IASB standards by 2005. There are many global initiatives to bring it together.
Senator Meighen: In conclusion, you say that improvements need to be made in the corporate reporting models, specifically with respect to transparency.
How do you see improvements coming about? Our next witness will testify that the days of a profession's or an institution's self-regulation are possibly over, which, obviously, sends shifters up my spine as a lawyer. Do you believe that? Specifically, will it be the regulators or the profession that will make the improvements that you advocate in the corporate reporting the model?
Mr. Dancey: Let me deal with the point about the self-regulation. A firm such as PwC has given up much of our self- regulation. The Canadian Public Accountability Board is a national board that is not controlled by the accountants. Mr. Gordon Thiessen heads it up. That board will be doing quality reviews and establishing certain things that we have to do if we want to continue to audit public companies in Canada. The accounting oversight committee headed up by Mr. Tom Allen today sets accounting standards in Canada; and Mr. Jim Bailey heads up the auditing standards committee. Those are populated by many people who are not CAs and are practising in that profession. The standard setters in Canada, as they relate to what we do on a daily basis, are people from outside the CA profession. There are also certain provincial institutes that supposedly govern my profession.
Through contract and setting up the Canadian Public Accountability Board, we have given up much of our self- regulation.
Your second point was about who would make the improvements in the corporate reporting model? As I indicated, it is not the sole prerogative of the audit firms to do that. There needs to be other members within the corporate supply chain to do that
There are examples in the block of companies that have taken transparency and disclosure to the next level. They thought they had good benefits for doing that. For example, Shell and what they have done around sustainability. The question is: What do they think will increase their shareholder value?
Senator Kroft: I would refer to the second page of your report. You mention three concepts, the second of which is a culture of accountability.
Then on page 5, I was intrigued by the statement in the third paragraph that PwC recently conducted a number of industry surveys and in each you discovered significant gaps between what management said that it finds important in running the company and what, by it is own admission, it actually reported to the public. Could you elaborate on the implications of that finding?
Mr. Dancey: Try to step back and think of the framework in the sense that the objective is to build public trust and restore investor confidence. To do that, investors need information that makes them understand the value in the business, the risks in the business and where the business is going.
Through these surveys that are outlined in the book, it looks as if management says what they find important in terms of running the business, and what the risks are in the business, is different from the information they give to investors. That leads to a gap. If you want to build public trust and restore investor confidence, clearly a piece of that must be making sure the investors have the information they need to make their decisions.
Senator Kroft: That is what I thought. We are talking about lower case ``gap,'' rather than the upper case ``GAAP,'' just so we are not confused. What is there in the way of accounting principles, or in the legal and regulatory environment, that will close that gap? Investors would certainly like to know what is important to management, because that is what will determine whether the company is successful or not.
I would like you to tell me what there is in what we are trying to do in a regulatory and legislative fashion that is focussing on making sure that the companies tell us what is really important. The fact that what they tell us may be accurate or not is a different issue.
Mr. Dancey: I think there are two issues. One is the type of information, the level of information and the transparency around the information that companies report. The second aspect is the need for assurance that the information is correct and the company is doing what it says it will do.
It is not the accounting profession on its own that will make it happen. As I indicated in the paper, it is not the sole prerogative of auditors to change the corporate reporting model and get to this level. There are examples in the book of various companies who have done various things. We talk about three tiers of corporate reporting; global GAAP being the base, with some common industry standards being the second level and then company-specific standards being the third tier.
In the book there are examples of companies that have moved in that direction. They feel they get better value for that in the sense that there is a better understanding of the entity. That is reflected in the interest in the company and the capitalization in the company.
Senator Kroft: Would you give us some specific examples of something management finds important that is not included in the reporting?
Mr. Dancey: Let us look at what the reporting is right now. In terms of narrow financial reporting, we look back, that is, we talk about the past financial statement, the past year or the past quarter and our assurance around the financial statements at that time.
There are various charts in the book that discuss what management finds important and what it discloses, by industry. I will talk about a couple of examples. It could be that a lot of non-financial information, in terms of benchmarking against peers, is not put out. It could be something as simple as cash forecasts or even pro forma forecasts. There could be different types of information that management looks at from both a financial and non- financial perspective. It could be information about around customer satisfaction. It could be a comparison, say, of our firm against other firms. It could be lots of data that management feels is important in evaluating the value of the business.
Senator Kroft: Is there anything in the current efforts to re-establish investor confidence in the U.S. or in Canada through legislation and regulations that is moving in the direction of requiring that type of information be shared with the shareholders?
Mr. Dancey: In terms of legislation and regulations, not that I am aware of in the U.S., no. Our view is that you will not solve all of these problems solely by legislation and regulation.
Senator Kroft: How would you suggest to this committee that we, in our recommendations, try to get it done? What could we recommend that would help close this gap that you have identified?
Mr. Dancey: A lot of people have to come together to close the gap. Regulators have a piece to play in it, but certainly not the only piece.
The point that we are trying to get across is that when you look at our corporate reporting model today with the objective of trying to restore investor confidence, much of it is up to the companies. Their boards must decide what type of information they should properly disclose that gives the right view in terms of that particular entity. Accountants also will have a view, as will regulators. Each member of that corporate supply chain will have a view as to how we get to the right answer.
If you step back and look at it today, you will be hard pressed to say that the corporate reporting model is meeting the needs of both building public trust and restoring investor confidence.
Is legislation on its own the sole answer? No. It may be a piece of the answer but it cannot be the sole answer. You cannot solve all those problems through regulation.
Senator Moore: A number of the questions that Senator Kroft asked were on my mind, particularly those based on the discovery that resulted from your industrial surveys. You were asked what recommendations this committee might make towards closing the gap. If the gap cannot be closed by the introduction of legislation — or, at least, not completely — and we do not have GAPP, how can we define what is to be reported? What will define the model that you say we are lacking?
Mr. Dancey: The model that we put forward in the book has three levels in terms of improving the corporate reporting model. One starts with global GAAP, that is, a common base for financial reporting. The next level is industry-based standards. There are some examples where industries get together and say perhaps more information should be put out that will allow investors to better understand the businesses that are in the same industries. The reason you need industry-based standards is that banks are different from telecommunication companies and pharmaceutical companies. If you try to increase the volume and transparency of the information out there, and build investor confidence, you need to begin with a framework.
What I would like the Senate to acknowledge that there are problems with the corporate reporting model, that it is not really giving the information that investors need today, and there has to be an evolution to improve it. That will involve many different people. It will involve regulators and accountants, as well as boards and companies doing the right thing. Ultimately, it comes back to integrity, to people doing the right thing. If there is a framework for working towards doing the right thing, that has to be helpful.
Senator Moore: Hence the chance it will happen.
Senator Grafstein: I am not a member of this committee but I happen to have been interested in this topic for a long period of time.
I think the emphasis on investors is not the right way to go. The first test of good accounting is to give information to management on a timely basis, so management knows where it is going. Sometimes, management of large companies are surprised by information in their own company. I remember the reaction in Canada to chief executive officers certifying their statements and one or two making the statement to the press that, ``I don't keep track of the numbers,'' which I found astounding. Their stocks went down the day after. I think the emphasis on Enron is unfair to Canadians, because we have had meltdowns that were more substantive in relative terms. There have been quick writedowns of companies in Canada that indicate that governance in Canada is not a problem for Americans, it is a problem for Canadians.
The heart of the issue, and we will hear from others about this, is the audit committee. In my experience, rarely has the audit committee been truly independent of management. It is made up of people who are friendly to management, and who were appointed because they were friendly to management. The tools and resources available to them are based on what the management allows them to have.
The question that I have is this: Are you satisfied that, when you say that these directors require independence, that we have set up, not by regulation, but by regulatory standards, a sufficient amount of independence in the audit committees?
Mr. Dancey: There are various voluntary guidelines with the TSX and other bodies on that particular issue. David Brown of the OSC has been before this committee. One of the issues high on his list is to come up with regulations requiring audit committees to be independent. Will that mean that all committee members will have to be independent or only a majority? What will be the definition of independence? We will have to see what that is.
Many of our largest public companies have to comply with Sarbanes-Oxley or, if listed in New York, they have to comply with the listing requirements there. There are pretty stiff definitions of ``independent'' and ``unrelated.'' I think in terms of the public companies within Canada, you will see a level of degree of independence within the audit community going forward.
Senator Angus: My question follows from Senator Grafstein's question. It has to do with the new rules flowing from Sarbanes-Oxley, requiring the CEO and the CFO to certify the financial statements. That means not only the annual ones, but also the quarterly ones. To me, it seems mindboggling that, even though they are the senior officers, they could be asked to certify the accuracy of statements of multi-billion dollar enterprises. However, I realize that they are now doing it. Could you demystify this process for us? Is it done with a wink and nod from the auditors, or is it done according to some other due diligence that has been developed?
Mr. Dancey: When I think back to some of the hearings in the U.S., I am reminded of the time when Ken Lay and Bernie Ebbers went before the committees as CEOs and said, ``Gee, I don't really know what's going on,'' you knew that something like CEO certification would absolutely happen. No regulator, going forward, would allow a CEO to say that he or she did not know what was going on. You knew something like certification would happen.
Companies are implementing processes within the company to make sure that it information comes from below, so to speak, in the sense that, if the someone is asked to certify, he will ask various people what internal controls they have, what goes on, whether they are comfortable with the numbers and the like. It is causing a good cultural change within companies, because it focuses the attention on making sure the numbers are right.
Senator Angus: Could you give us a practical example? Take a big public company like BCE. How can Mr. Sabia certify that the numbers accurate?
Mr. Dancey: I do not know what Mr. Sabia is doing, but I am sure he has a process in place whereby he understands the processes in the subsidiaries and divisions that report up that ensure that the controls are yielding accurate information. There is a signoff at that level and that bubbles up to him. I am sure he has a definite process in place, so that he is not signing on a wink and nod. I can assure you that, when he signs, he has a level of assurance in that many people behind him have signed as well.
Senator Angus: Let's say you are the auditors of a certain company, and the CEO says he will not certify. Would that be grounds for you to refuse to give a certificate?
Mr. Dancey: For a long time, as part of our standard auditing procedures, we have gone to the CEOs and told them that we want to know they are comfortable with the numbers and that they believe everything is in order. We have implicitly asked for a lot of that information for a long time.
Senator Angus: Under the new law, am I correct in understanding it is a sine qua non for you?
Mr. Dancey: Let's put this way: if the CEO or the CFO said they were not going to sign, that would be a very large red flag for someone in my job.
The Chairman: That would be breaking the law.
Mr. Dancey: That is true.
Senator Grafstein: Is it explicit or implicit, the responsibility internally to the auditor?
Senator Angus: My understanding of Sarbanes-Oxley is that, for Canadian companies currently listed in the U.S., the CEO and the CFO must sign in accordance with a certain formula. Failing that, the auditors are unable to give their certification.
Mr. Dancey: First, I think the chairman is right — he would be breaking the law. The law says he should be doing this.
Senator Angus: You cannot give the numbers out.
Thank you. It is certainly a new minefield, and your evidence has been very helpful to us.
Mr. Dancey: If you do not read anything in the book except the epilogue, which is only three or four pages, it paints three scenarios 10 years out. Those four or five pages are a useful read.
The Chairman: If you walked into one of the top Canadian banks and asked what their exposures were on derivatives this morning, would they know?
Mr. Dancey: I have not done that lately. Our processes would be in terms of going through and dealing with the people in the risk area of the banks.
The Chairman: Would the CEO who has to sign, as Senator Angus points out, really know?
Mr. Dancey: Would he know at any particular point in time? It is hard to say. I am not the CEO of a bank.
The Chairman: I am not suggesting he does or does not. I am quite skeptical that he could.
Mr. Dancey: The question is: are there processes in place within the organization that control the exposure that any part of the bank can take on at any one point in time?
The Chairman: They can control the exposure only up to a point, because they do not know what the other side is good for. A derivative always has two sides and you do not know the condition of the other one. I will not get into that. I think it is a good question and I do not know how they could possibly sign.
Thank you for your time. It was nice to see you again. We will probably have you back in due course.
Mr. Dancey: Any time.
The Chairman: The clerk wants to hand out the schedule of the forthcoming weeks.
I would like senators to note that our proposed trip to New York and Washington is now delayed one week.
We welcome Ms. Collenette from the Kennedy School of Government at Harvard University. First, we extend the committee's apologies to you for having cancelled your presentation last time.
Ms. Penny Collenette, Senior Fellow, Centre for Business and Government, Kennedy School of Government, Harvard University: Before I begin, I would like to pay tribute to one of the members of the Senate who has done enormous work on the subject of corporate governance and has the respect of many of us who study in this field, and that is Senator Don Oliver. I have been very impressed with his work over the past few years. Many of his speeches and reports are circulated throughout the academic community.
I want to actually thank you for cancelling my last appearance before your committee. Not only did that force me to pull my thoughts together into an article, which I think some of you have read in MacLean's, but it also had some very good consequences. I had mentioned in the article my concern that many Canadian and American banks do not mention the subject of corporate governance on the home pages of their Web sites. I found that the Deutsche Bank did, which is possibly a reflection of European style of corporatism. As a result of the article, Peter Godsoe of the Scotiabank called me, and we had a good 20-minute discussion; and Charles Coffey of the Royal Bank cornered me in the airport the other night, and we had a good discussion. Apparently, there is further discussion going on in those two banks about their Web sites and the mention of corporate governance. To be sure that I had all my facts correct for today, I did another Web search last night. Although it is not on the home page, CIBC has an excellent discussion of corporate governance within their Web site.
Why is this important? Many people get their information on companies from Web sites today. Sixteen per cent of Canadians are banking on line.
Banking directors are held to a very high standard of care because they are dealing with public money, in terms of corporate governance. The fact that a bank would concern itself with putting governance issues on its home page is worthwhile to note.
I want to discuss some observations on the pace of governance issues and then, in conclusion, ask you a series of questions, which I hope will form a bit of a discussion.
I want to note that I have no agenda in being here today other than to raise the issue of governance. It is a very hot topic in the world. I believe that there are still some sceptics around the table and in the country on the importance of corporate governance.
Purdy Crawford, in an excellent speech to the Canadian Club on Monday, wrestled with those who still argue that good governance does not necessarily increase value. With all due respect, I think that we are approaching this the wrong way. What we must understand is that bad governance decreases value.
We all know that American stocks lost $7 trillion in value between the spring of 2000 and the summer of 2002. Billions vanished from retirement savings. We are now witnessing public costs. There have already been 14 congressional hearings into Enron.
The bottom line is that there is a high price to be paid for corporate recklessness. That is certainly the lesson learned in corporate America. I do not think that it is a lesson that we want to learn here in Canada.
For the first time in my life, I have been a Canadian living outside the country, in Cambridge, and looking inside. I have a couple of observations as I peer from the outside.
On the minus side of this issue, I have seven points. I see selective, but not collective concern on this issue. In spite of hearings like this, there is too much silence on the part of too many CEOs. I see some self-interest. I see a lack of clear strategic leadership from both the private and public sectors. I see a lack of a national coordinating body on governance. There is a lack of ministerial responsibility. In the U.K. some of you will know that there is a junior minister responsible for corporate social responsibility. Arguable that is not governance, but I will talk about that in a minute. My sixth point is there are many regulators with the normal, federal-provincial challenges. Seventh, and most important, is that there is a lack of opinion from the youth in this country. I am not saying that they do not have an opinion, but I am not sure they have had a chance to be heard. Many of them were burned for the first time in their lives at a very young age with the stock market casino culture. They will be our corporate leaders in the future.
Combined with this lack of the opportunity for youth to be heard, we also have the drain of our corporate directors. Between the years of 1999 and 2004, one third of the 20,700 directors in this country will reach the age of 70. We have a little problem of succession planning.
On the plus side, I see five points. First, there is a reasonably careful corporate culture, which tends to treat our CEOs not like stars. This is good. As someone at Harvard mentioned to me, Canadians tend to look for heroes, not celebrities. Second, we have a fairly good corporate system of checks and balances. More Canadian companies have separation of the chair and CEO position than American companies. Third, I see courageous and outspoken individuals, whether they be regulators or shareholder activists. Fourth, there is a huge explosion of interest by universities and learning centres, whether it is the Canadian Coalition for Good Governance or the Institute of Corporate Directors. Many new chairs are being established in governance at various universities. Fifth, there are lots of good intentions.
I mentioned after the observations that I would talk about the pace of governance issues. It is amazing. It was only little over a year ago that Enron filed for bankruptcy. While the immediate crisis is over, we are now into the new stage, as we move along this spectrum of events, of what I would call litigation and judicial activism.
A ruling by a Texas district court before Christmas decided that lawyers and bankers who prepared public statements or arranged public offerings of securities for a company involved in fraud could become primary violators with the company itself, and, therefore, subject to legal sanctions. Big law firms are starting to understand that if this decision is allowed to stand — it is under appeal — then they along with investment banks will become the insurers of the good conduct of their clients. This is a huge sea change in the American corporate culture.
In this country, Neil Finkelstein of Blake Cassels & Graydon has noted that the Supreme Court of Canada is hearing more business cases than previously. He talks about the flow-out of Enron that is going to have a huge impact.
It is not just judicial activism. There are more media stories to come. Sherron Watkins, the whistle-blower at Enron, comes out next month with her book, Power Failure: The Inside Story of How Enron's Culture of Arrogance and Greed Led to the Biggest Bankruptcy in American History.
I do not know if you noticed the New York Times headline today. It reads, ``Tax Moves by Enron said to Mystify the IRS.'' Senator Max Baucus says that the report paints a shocking picture of Enron's tax gimmicks and structured transactions and executive compensations. They inundated the IRS and they ``out-complexed'' the IRS.
We have also had a plethora of reports. In November, when I was first to speak, I would have said that Sarbanes was a work in progress and that there was confusion over the new SEC chair in the States. Today, less than three months later, rules are more defined — with a lot of lobbying — on the question as to whether mutual funds should disclose how they exercise their investor proxy votes. The SEC received 7,500 comments. I believe Mr. Donaldson is about to be confirmed as the new chair of the SEC. Since November, Davos has come and gone with a new global governance task force convened by the World Economic Forum.
The recent January American Conference Board's report, as you know, lead to the suggestion of three models with a recommendation for strong consideration for splitting the positions of CEO and chair. In addition, Mr. Derek Higgs, a former banker, has done his report in the U.K. and has caused almost as much debate as Sarbanes has, with its rigor on its definition of ``independent director,'' by calling for term limits for directors.
Where are we heading? In my first article in The Globe and Mail, I mentioned that governance is at a tipping point. Mr. Paul Tellier, in one of his speeches, referred to it as a ``cottage industry.'' I would say that we have a growth industry on our hands.
You have heard the testimony of many people. I have read as much as I could, and it seems to me that the level of detail has been amazing. Sometimes it helps to stand back, ignore the trees, if you will, and look at the forest. I would like to conclude by nudging you a bit towards the forest with a series of what I hope are thought-provoking questions — that is what Harvard is all about — as you seek to find best practices to apply to the Canadian financial system.
I know you feel as I do, that Canada deserves the best we can offer, and there is no reason why Canada cannot be a leader in the governance debate.
I have a few questions. One: Could an Enron situation have happened here in Canada? If yes, why? If not, why not?
Two: What would have prevented the Enron collapse?
Three: Can we balance the need for regulatory strength but, at the same time, protect and encourage voluntary, ethical initiative not to mention entrepreneurial initiative? Americans are now in the peculiar position of re-regulating the deregulated.
Four: How do we find the courage to speak up, whether it is in a boardroom or as an employee of a large corporation? If we do speak up, is there protection? I think here particularly of the whistle-blowing section in Sarbanes-Oxley, which we can talk about later.
Five: What is the modern day role of corporations? Are they just legal fiction or are they social actors? Corporate social responsibility used to be the purview of marginal, social activists. Today, it is a mainstream subject. Business reporter Deirdre McMurdy noted in a recent column that Canada's five major chartered banks each faces shareholder resolutions this spring asking that they file public reports on the social, environmental and ethical risks in their loan portfolios and other aspects of their operations. The much-loved, single bottom line is under attack. Are we asking too much of our CEOs?
Six: Do we have a recognizable, Canadian corporate culture? If so, what are the values or the rules?
Seven: Does the traditional board model actually work? Are there other models that may be more appropriate to a global, technologically sophisticated world?
To me, there are two main characteristics of governance: The first is leadership. The word is derived from gubernare, which means ``to lead.'' Boards, CEOs and politicians are supposed to lead. When you talk about governance, think about leadership. Think also about the word ``linkage'' or ``intersection.'' An academic article at Harvard talks about corporate governance being seen as the institutional matrix that links market signals to the decisions of corporate managers.
I have been really lucky to spend the last four months at the Kennedy School, at the Centre for Business and Government, CBG. It is described as a catalyst, convener and innovator at the critical intersection where private enterprise meets governance.
I want to thank my colleagues at CBG for helping me with this presentation. I would also like to thank two American law firms and particularly Lanae Holbrook of the American Law firm of Fried, Frank, Harris Shriver & Jacobson; and Jeffrey Gerrish, who gave a tremendous keynote speech to the American Bankers Association last August, and he is with Gerrish and McCreary, a Tennessee law firm.
One thing I learned at Harvard is that you can e-mail just about anyone from Harvard and they will respond.
The Chairman: That was interesting. We had hoped you would come here with solutions rather than questions, but we will see what we can do.
Senator Kelleher: I will come back at you with some of my own questions. We are concerned in Canada about the fact that the Americans have already staked out their ground, principally with the Sarbanes-Oxley Act. It is a fact of life. Many of our large companies, particularly those at yesterday's meeting, expressed the concern to us that, whether they are in the United States or in Canada, they will have to follow those rules, particularly if they are double-listed. Naturally, they would very much like to see us conform as closely as possible to the American style of legislation.
As I am sure you are aware, the American system is more of a rules-based jurisdiction, whereas we are more of a principle-based jurisdiction. However, it is all well and good for these large Canadian companies to tell us that we should follow along the same lines as the Americans and move closer to their style, but we do not have that many large companies in Canada. We have many small companies and one-size does not fit all.
Wisely, our chairman is arranging for the commit to travel to New York and Washington to speak to the authors of the Sarbanes-Oxley legislation. In your opinion, which you have developed while living in the States and attending Harvard, what approach should we consider taking with the Americans to resolve this problem because it will be a difficult process?
Ms. Collenette: I am glad that you are going down there. One of my suggestions was going to be that you invite Senator Sarbanes and Mr. Higgs from the U.K. come over to talk to you. It is great to talk to academics or to people from different professions but these are the people who drafted the bill. My understanding is that Senator Sarbanes is a very respected Democrat who has been working on this bill for quite some time. I guess the word came down that it had to be done quickly, and it is well known in the United States that it was drafted far too quickly. That is why, when I mentioned the lobbying efforts, I wanted to make the point that it has been intense in Washington. There were 7,500 comments on one issue alone.
As you know, some provisions of the bill have had to be changed already. The lawyers were concerned about this noisy withdrawal proposal, and accountants were concerned about one of the issues, so there have already been modifications. I, for one, am glad that we did not leap immediately to adopt Sarbanes-Oxley because everyone has had to have some time to sort all these problems out.
There is one question on rules. Even though it is being sorted out, we still have to look at what Peter Godsoe calls ``the law of unintended consequences.'' A chairman of a large bank in the States, who was also a senior fellow at Harvard, mentioned that, with the new requirements and criteria, the United States pool of directors would be down about 300 to 400. We have an even smaller pool here and, as I described, some aging questions within ours. There could be major consequences.
The other thing I heard, anecdotally, but from several law firms, is that many of their clients are asking to delist or go private.
When you look at the TSX, we do not want to have companies delisting because they cannot keep up with criteria.
Therefore, when you ask me about an approach to the American lawmakers, and you are more experienced than I am at this, I think it is necessary to point out that we have not only a smaller market up here but, often, a different culture. I pointed out the fact that we do not really get into the celebrity CEO nonsense. I am glad we do not when we see the fall from grace of many of the American CEOs. We have smaller companies, often family-run companies, much more than in the United States.
We also have a good bit of business and culture still linked with the UK. It is great that you are going to the States. I also mentioned Mr. Higgs' report and there is another terrific report by the Financial Services Authority in the U.K., which clearly says it is a values-based approach. However, rather than imposing rules, it asks a series of questions that they suggest companies ask their employees to figure out their ethical standards. I think we all learn better by figuring things out for ourselves rather than by having rules imposed.
The Chairman: What is your answer to him?
Ms. Collenette: He is asking me about the approach. I wanted to explain that we have a different market, a different psyche and a different culture. In terms of their imposition of rules, which they had trouble with, what do they think would work in terms of Canada-United States relations on business matters? With Americans, as you know, you have to be aggressive.
Senator Kelleher: I am concerned about this. I used an analogy yesterday that we are facing, in a sense, the same problem with our softwood lumber dispute. We have two entirely different systems.
Ms. Collenette: Will you mix up softwood lumber with this?
Senator Kelleher: No, I do not want to mix it up. We have been trying to point out to Americans that our lands are Crown-owned and we have a different system. The land is privately owned in the U.S., which is almost a 90 per cent reversal. It does not make much of a dint on the Americans. They are not prepared to listen. What I am concerned about is the state of mind. They have already enacted their legislation. I am concerned that it will be difficult for us to make much of a dint on their psyche.
Ms. Collenette: They are getting pressure too. It has not been easy for them. At Davos, many of the American corporate leaders were pressured by European corporate leaders who have their own rules. I do not think you have to go there and think this is a holy grail. You are there to find out what they did in their process and what lessons we can learn.
Senator Kelleher: Do you think the way to approach it is from the cultural aspect, theirs and ours, and point out to them the differences?
Ms. Collenette: Are you trying to gain information?
Senator Kelleher: Yes, at this point.
Ms. Collenette: What were the lessons learned? What happened in the last six months that you would not have done, given the uproar with everything? Americans are often honest about what has been going on.
I would also ask them what some of the unexpected consequences were. Were things like delisting and people wanting to go private foreseen?
Senator Kelleher: I would add the meltdown of Arthur Andersen.
Ms. Collenette: As I mentioned, judicial activism will not make the Americans happy.
Senator Kelleher: It is incumbent on us, Mr. Chairman, to have a thorough understanding of Sarbanes-Oxley before we go.
Senator Kroft: I have two questions. You make the observation, in your article that appeared in The Globe and Mail, that you cannot legislate good behaviour. We would all probably agree that you cannot.
In the time that you have been looking at this subject and in your exposure in the U.S., What are your thoughts about whether you can alleviate the problem by creating a legislative and regulatory environment where the price of bad behaviour is unacceptably high? In other words, on a behavioural level, what do you think is the impact of the severity of sanctions on helping create good behaviour? I mean high fines, prison terms and so forth.
Ms. Collenette: I think the fact that the Americans have had to be so tough on this, certainly in terms of the fines and the penalties, speaks volumes about the absence of this influence.
A question we tackled in one of our working groups was: ``Was Enron one-off or was it systemic?'' Of the 15 people in the group, one person thought it was a one-off and the others thought it was systemic. It was a terrific discussion that lasted about an hour.
By systemic nature we meant that there was Enron, and there were these tentacles in so many parts of American society: law, lobbying, the list is endless. One thing I believe Americans have become very worried about is how is became so widespread. Why was there not one profession that raised their hands? By profession, I mean why was there not an analyst, a journalist, a lawyer, an accountant, a consultant who said something?
Senator Kroft: Do you think it was because there were deemed to be no consequences?
Ms. Collenette: Perhaps it was not taken seriously.
Senator Kroft: Let me turn to another question. You commented on multiple board appointments in an obviously critical fashion.
Ms. Collenette: I do not understand.
Senator Kroft: In your article, you say journalists must rethink their attitude, that far too often, they heap praise on those who win multiple board appointments. I presume that you share the view of those who have been critical of multiple board appointments. I would add the observation that in Canada, particularly, CEOs of large companies have taken comfort in having CEOs of other large companies on their boards. Because of the small community, this leads to multiple appointments and cross-appointments, which are worse, on each other's board. Would you like to expand on that?
Ms. Collenette: There are two points on that. First, because we rarely appoint journalists to boards, I wonder whether journalists understand the onerous duties of a director. Being a director, which used to be an honour but is now becoming a liability, is not a trophy. It is hard work. I am sure all honourable senators on this committee have been directors of companies at some point, and know how much work is involved as a director. There are all the books you have to read and the briefs you have to be up on. I am not sure within the journalistic world if there was that understanding of the position. I guess it was the same sort of argument I put forward when I was director of appointments. I had to say that if someone were appointed it would not be a plum, it would be hard work.
Senator Kroft: What is your conclusion?
Ms. Collenette: The problem is, and a number of people have raised this, how many appointments is too many appointments? One of the people I talked to in the United States is on the board of nine companies. He told me that, if he could, he would get off seven of them now.
Who regulates that? I cannot tell you. How many appointments should one person take? Of course, we have to look at their circumstances. Are they retired? Do they have full-time jobs? Do they know the sectors to which they are being appointed? We can only answer those questions ourselves.
The Chairman: Allow me one moment to tell Senator Kelleher that on March 26 at 4 p.m. we will have a briefing from the Department of Foreign Affairs on Sarbanes-Oxley.
Senator Angus: I was interested in your reference to the appearance of Mr. Purdy Crawford, on Monday in Toronto. According to a news clip I read on that, in Mr. Crawford's opinion, there was no one in Ottawa who had the guts to —
Ms. Collenette: — it was a real challenge.
Senator Angus: You were there.
Ms. Collenette: I was at the head table.
Senator Angus: Given your connections with Ottawa, directly, indirectly, historically, currently and in the future, no doubt, what is your comment?
Ms. Collenette: I think he is right on. That is why one of my observations is that we have a lack of a national strategic focus on governance. Correct me if I am wrong, but I do not believe that there is clear, ministerial direction on it.
I do not know why it is not a bigger issue. I was disappointed that it was not mentioned in the Speech from the Throne, except in the phrase ``First Nations Governance,'' which is a subset of this issue.
I do not have an agenda, but one of my messages today is: Why is this not more top-of-mind, given what I have described and what you have heard about how quickly other countries are moving on with this. Globally, this is a big issue. I am concerned about it.
Senator Angus: You may not be aware, but this is the third study this committee has done on governance. We did our first study at the request of the Minister of Industry after Peter Day came out with the TSE guidelines. The general mandate was to know whether those would work in practice. It is all well and good to have them ex cathedra. We had hearings across the country and we issued a fairly substantial report.
We were subsequently asked to do one on governance of institutional investors.
This is the third one and it is very much in focus.
My question was directed to the other issue, which is having a national securities commission, as opposed to nine or 10 individual provincial ones. This terrible duplication exists in Canada. There is also the question of the need for companies to go to the extra expense. It is well documented that investment has been driven away from Canada because of this.
I understood Mr. Crawford's to say — and he has been here as a witness — that there is no one in Ottawa, in a leadership position, who has the guts to use laws that he says are on the books to impose a national securities commission. What do you think about that comment? Do we need a national securities commission? Is there a way that we could have one?
Ms. Collenette: I am not a securities expert but, in terms of organization and sense, it certainly would seem appropriate. Anecdotally, you are right about the loss of investor money to Canada because of this. One of the senior fellows at Harvard was involved in some work and he said that if he wanted to invest in Canada, he would have to traipse across the country from one provincial capital to the next to make those investments. He simply said that he did not have the time to do that. That is when it really hit home to me. I believe we do need a national securities commission.
Senator Angus: In terms of the leadership, you might use your influence. This preoccupies us.
We had a witness last week, William Dimma, whom you know. He is very much of a corporate governance guru. I asked him about his view on directors' fees. You mentioned the shrinking pool of directors, especially in light of all the new onerous liabilities and so on, and the issues of independence which disqualify otherwise qualified individuals to serve on audit committees and so forth.
Do you have any comments on the compensation of directors? Do we, in Canada, pay too much, not enough or just the right amount?
Ms. Collenette: It is not something I have looked at. I have looked at executive compensation. One of the big corporate directors in the States, and I guess everyone knows this, told me that Ken Lay recruited each director personally and each was paid between $300,000 and $400,000 per year. Somebody mentioned a red flag before. Why was that not a red flag?
Senator Angus: That would be too much?
Ms. Collenette: If that question has to be asked —
In fairness, I described the job of a director as a tough job. I am a director of a private company. I know how much time I spend looking at the financials and worrying about human resources problems and so forth. There is no question that directors do have to be fairly compensated as are CEOs. However, how we determine that, I do not know. Perhaps that is something for Mr. Dimma and the Institute of Corporate Directors to look at.
Senator Angus: You may not have been in the room when Mr. Dancey was talking about the current situation with respect to accountants. There has been a sea change, to use your expression in their world. We are familiar with the Higgs report and we are having Mr. Higgs as a witness shortly. I thought you would be glad to hear that. There is an issue. We would like to have him come personally but, at the moment, I think it will be done by video.
Many accountants have had to get out of lucrative consulting businesses that they had. They used to use the audit as a loss leader and get into the company to gain huge, multi-million-dollar contracts. Do you have a view on that?
Ms. Collenette: The whole conflict of interest situation that we saw in Enron was way out of hand. It may mean now that you have to be so tough that you almost have to go back and totally clean it up before there can be any sort of compromise. It is necessary at this time. It just cannot go on.
Senator Angus: Have you seen this in Canadian companies in your own research?
Ms. Collenette: I could not comment on that. I do not know what the situation is.
Senator Angus: I understand that your main thrust in coming today was to reinforce the need for high profiling the governance issues. You are underlining that in our own comings and goings, it is critical that, if we are to restore investor confidence, we have to clean up the governance of Canadian corporations.
Ms. Collenette: You are looking at corporate governance, in particular, but in my first article, I talked about governance problems in both the public sector and in the corporate sector. Unfortunately, in our world today, there are governance problems in both sectors. We are faced with an entire, ethical dilemma right now.
[Translation]
Senator Hervieux-Payette: What kind of system could be put in place to help employees who notice questionable behaviour? How can you distinguish dishonesty from incompetence? What kind of mechanism could help employees who are responsible for specific issues or whose reports are often kept from the board of directors?
How can you ensure the information gets to the directors without hurting the company? What can you do?
[English]
Ms. Collenette: I mentioned that in the brief. In Sarbanes-Oxley, or SOX as it is now being called, there is a new section for whistle-blowing. One of the law firms I mentioned earlier has a Web site with client notes that describe how the act is creating a new civil action for employees of public companies. There is no mention of employees in the government, which is interesting.
It refers to employees who may believe that they have been discharged due to their roles as whistle-blowers. The company may not discharge, demote, suspend, threaten, harass or in any other manner discriminate against an employee because the employee has provided information, caused information to be provided or assisted an investigation regarding any conduct. It is unclear how this provision will be made to work in the case of non-U.S. companies. However, non-U.S. companies will need to review their personnel policies for possible changes in light of this requirement.
I have been discussing whistle-blower protection in banks for employees who might see something wrong. There is clearly a legislative solution under Sarbanes-Oxley that we may or may not want to adopt here in Canada.
This also goes back to my concern about young people. At one of the Kennedy forums, many Harvard Business School students came over and questioned corporate governance issues. One young man got up and said: ``I am going to graduate from HBS and I would like to be employed by a big company like Enron. Where do I find the courage to speak up? I want to impress someone in a big company. Where do I go? Who do I talk to?''
It is an internal question for many corporations, but we also may need some legislative work on that.
[Translation]
Senator Hervieux-Payette: Should we not have a mechanism to ensure that directors are made aware when employees question the validity of the information sent to the board?
Some time ago, I was a director of a company when a consultant released information which directly impacted share prices. I got in touch with the Commission des valeurs mobilières du Québec and with the Montreal Exchange but nothing happened. Needless to say, I discussed the matter with other directors in order to find a way to stop that nonsense.
What can you do in these circumstances? Hundreds of people were hurt by this incident. I tried everything I could without harming the company. Of course, all shareholders are penalized when such rumours are spread.
How can you reestablish the truth if someone spreads false information, when both the Exchange and the Securities Commission are unable to intervene, when the company would not act and when you sit on the board?
Obviously I resigned. It was only a small company with a $3-million capitalization. I tried to help these people but I had to go. If you want to reestablish a climate of trust, you need a mechanism to do it.
[English]
Ms. Collenette: In your case, you took individual action to express your distaste for whatever was going on. That is commendable, frankly. If internal processes do not work and we do not have legislative protection for people, there is always one other avenue and that is, of course, to go to the journalists.
Senator Hervieux-Payette: In that way, all the shareholders lose as the shares go down. There should be some places where these things are settled so that it is not to the detriment of all people who have invested in that small company. They can lose a lot of money.
I thought my role as a fiduciary of these people was to protect all the investors, not to bring down the company because some idiots were promoting it in an unethical way.
Ms. Collenette: I do not have any answer for that, but I wish I did.
The Chairman: It is quite a quandary. Thank you for being with us, Ms. Collentte.
Senators, we will have a short discussion.
Senator Hervieux-Payette: We just received this document called, ``Corporate Governance Guidelines, January 2003.'' This is for financial institutions. It comes from OSFI. The brochure covers how directors should behave and what they should look for. It is specific. These details are treated as regulations by OSFI, even though they are called guidelines.
Ms. Collenette: I look forward to reading it.
The Chairman: On the question of privilege that was raised, a draft has been prepared and distributed. One sentence has been added. I need your approval or disapproval. I can then report the week after next when we resume sitting.
The second page states:
Furthermore, your committee is of the opinion that no further action is required, except to raise the awareness of senators and staff as to the need for and requirement of confidentiality...
This has been added:
...and to establish security procedures to avoid a repeat of this breach of privilege.
The remainder is the same. Security means that we will number the reports and so on. Do I have your approval?
Hon. Senators: Agreed.
The committee continued in camera.