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February 1996 was a bitterly cold day in Calgary, Alberta. I
was a visitor there as Vice-Chair of the Senate Committee on
Banking, Trade and Commerce which was doing what was then a
fairly mundane study on Corporate Governance at the request of
the Minister of Industry.
The atmosphere heated up quickly, however, when our first
industry witness commenced his presentation. He was
Mr. J.P. Bryan, President and CEO of Gulf Canada Resources Inc.
“As far as I’m concerned”, he pronounced, “Corporate Governance
is just a crock of Guacamole!!” Petty rules and regulations on
governance processes just tend to get in the way of efficient
business practice, he said. “I have no time for them and prefer
to rely on the good judgment of good directors and good
management to get the job done in the best interests of
shareholders and the bottom line.
I mention this anecdote, ladies and gentlemen, because of its
obvious relevance to this very timely Directors’ Governance
Summit.
The Banking Committee’s 1996 study on Corporate Governance, in
the chronology of things, followed the introduction of the
Guidelines on Corporate Governance as recommended in the
December 1994 Report of The TSE Committee on Corporate
Governance in Canada entitled “Where Were the Directors?”
The Minister of Industry asked the Banking Committee in August
1995 to hold hearings with senior business people and investors
across Canada on a number of broad strategic policy issues
including such corporate governance issues as the liability of
corporate directors and auditors; insider trading rules; and
financial assistance such as loans by corporations to their
directors, officers and others. The Minister was aware of the
TSE Guidelines, but he wanted input from our Committee as to
whether they worked or were workable in practice, in the “real”
corporate world. In essence, were the Guidelines sufficient to
“get the job done” or did they need beefing up by legislative
provisions in a modernized Canada Business Corporations Act.
At about the same time, Industry Canada was circulating a
Discussion Paper on Directors’ Liability in connection with the
proposed CBC Act Reform.
The CBC Act reform was ultimately completed. Amendments were
introduced in areas such as directors’ liability, insider
trading and accounting practices and were enacted by Parliament
in November 2001.
Many but by no means a majority of Canadian public corporations,
during the period 1995 to 2001, made commendable, but relatively
modest strides towards complying with the TSE Guidelines and
otherwise strengthening their corporate governance practices.
By and large, however, I think it fair to say that corporate
Canada basically only paid lip-service to this relatively new
concept of good Corporate Governance during these years. The
reality appears to be that the impressive looking statements in
Annual Reports outlining various corporations’ so-called
compliance with the Corporate Governance Guidelines were just
“boiler plate” and not really reflective of a strong Governance
culture within the reporting corporations. One editorialist
commented early in 2000 that “badly attended seminars, lack of
interest in director education, apathetic compliance with the
TSE corporate governance guidelines – all are symptoms of a
business community that feels it is suffering from an overdose
of advice as to how they should be running their businesses.
It actually became clear during this period that there remained
substantial room for improvement in how boards of Canadian
public corporations were functioning. Shareholders’ rights
advocates complaining about the lack of proper corporate
accountability provided the “squeaking wheel” which led to
further major governance studies in Canada. Not the least of
these was the on-going study of the Joint Committee on Corporate
Governance under the chairmanship of Ms. Guylaine Saucier,
former Chair of the CBC. The Joint Committee issued an interim
Report entitled “Beyond Compliance: Building a Governance
Culture” in March 2001 and earlier this year issued its further
and final Report. The findings of the Joint Committee were, to
say the least, given a lukewarm reception by key institutional
investors and other outspoken shareholders rights advocates such
as Stephen Jarislowsky of Montreal. They were denounced as
being simply too “vanilla” and flawed because of their failure
to prescribe a governance regime which would lead to superior
transparency and accountability to shareholders as well as
providing a real and effective deterrence to fraudulent and
other improper corporate behaviour.
At the same time, various corporate scandals started coming to
light with disturbing frequency both in Canada and the United
States. Canadian examples often mentioned include Phillip
Services, BRE-X, CINAR, Livent, Dylex and even Nortel and JDS
Uniphase, whereas in the U.S., the cases of Martha Stewart, Tyco
and Adelphia were, as it soon turned out, only the “tip of the
iceberg”.
Then the bubble burst – Enron and WorldCom imploded in rapid
succession; allegations of fraud, greed, obscene compensation
packages, conflicts of interest and generally abominable
corporate governance were rampant. No one was immune.
Directors, senior management, outside auditors, analysts, all
were swept up in the maelstrom of accusations and
recriminations. The Guacamole had turned sour and the good men
in good faith with supposed good judgment were “under the gun”.
Corporate Governance had hit ground zero. Investor confidence
hit the skids in a big way and the light began to shine
brightly on the need to put an end to corporate fraud; to ensure
full and proper accountability to shareholders through complete
and transparent disclosure of all material information; revised
accounting rules and standards for auditors; new and strict
requirements for independent directors and for management
compensation packages to be aligned with performance and
shareholder reward, the whole plus a vigorous regime for
enforcement and punishment by much more than simple raps on the
knuckles.
In the U.S., President Bush called for sweeping new penalties to
root out executive corruption, including a financial “SWAT
TEAM”, doubling prison terms for executives convicted of cooking
the books and by increasing by US $100 million the investigative
budget of the SEC. He introduced a very tough new
corporate-accountability law – The SARBANES-OXLEY ACT – which
passed through Congress in record time and has been in force
since July 30th this year. This punishing American
law applies to those Canadian public companies listed on the
NYSE and NASDAQ and subject to SEC regulation, but there is an
active debate presently going on in Canada as to what would be
an appropriate model for Canada’s substantially different
corporate environment. Most observers seem to agree that a
Sarbanes-Oxley type law would be wrong for Canada and that one
size does not fit all here. A uniquely Canadian solution is
required.
There has in consequence been a great flurry of activity in
Canada recently. A group that includes Canada’s largest pension
funds, mutual funds and money managers has formed the Canadian
Coalition for Good Governance to fight for improved governance
at Canadian corporations. Other similar organizations such as
The Canadian Council of CEO’s are clamouring for urgent
governance reforms with a view to restoring investor
confidence. Tough new legislation has been tabled in Ontario’s
Bill 198. The accounting profession has been under tremendous
pressure and major reforms are already in effect. Audit,
Compensation and Corporate Governance Committees are being or
have already been re-constituted. Many Directors are
reconsidering their positions in light not only of their
potential legal liability, but also as to whether or not they
are truly independent. Directors and Officers Insurance is an
issue as is the ability to recruit competent independent board
members. The issues are such that many stakeholders are
involved in the quest for a solution including stock exchanges,
the accounting and legal professions, the investment dealers, as
well as regulators and politicians.
The Senate Banking Committee has been very much involved in the
subject once again and is just completing a major study on the
lessons to be learned from the Enron collapse and how they can
be applied to help restore investor confidence in Canada.
All of this to say, ladies and gentlemen, it is today a totally
new ball game for boards of directors in Canada. The aim of
this Directors’ Governance Summit is to determine what is
actually taking place in Canada governance-wise as we speak.
This morning’s forum will be on Performance and Liability and we
have several distinguished experts ready to give us the
up-to-date word. The first Panel will deal with Board and CEO
Compensation and the Status of H.R. and Compensation Committees
and it is my great pleasure to call upon Mr. Wayne McLeod,
Chairman of the Board of AMJ Campbell Inc. to introduce the
topic.
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