:
Good afternoon, everyone. Welcome to the 42nd meeting of the Standing Committee on Industry, Science and Technology, this November 4, 2009.
We're here pursuant to the order of reference of Wednesday, April 22, 2009, and pursuant to section 136 of the Canada Business Corporations Act, to conduct a statutory review of the act.
Before us today, we have four witnesses from the Department of Industry: Madam Downie, Mr. Lennon, Madam Kirby, and Madam Ringor. Welcome to you all.
We'll begin with ten minutes or so of opening statements from the department, if they have them, and then we'll proceed to questions and comments from members of the committee.
Before we do that, I just want to mention to members of the committee that there have been a number of Governor in Council appointments made, which have been sent to the clerk of the committee as a point of information. I'll have the clerk of the committee distribute that information to your offices, if you so wish. It's your right, as members of the committee, to review those appointments. If you want to do that, let the clerk know.
Without further ado, we'll begin with Madam Downie.
:
Thank you very much, and good afternoon.
I'll just start out with a quick note, and an apology, which is that I am going to be referring to a slide deck, but through some kind of miscommunication, we don't have the copies as yet. Somebody is on their way with copies. So I'll make sure that my remarks are self-explanatory. I apologize for that.
Just to expand on your introduction, my responsibility at Industry Canada is as director general for marketplace framework policy. That's my title. I'm responsible for the policy behind the Canada Business Corporations Act.
I am joined by Wayne Lennon, who works with me in the branch. Also joining me is Cheryl Ringor, director of compliance and policy, and a deputy director under the CBCA. Both she and Coleen Kirby, the manager of the policy section at Corporations Canada, are really the feet on the ground, the actual administrators or folks who are in charge of actually making the statute work.
[Translation]
That said, we are here today to help the committee and to answer any questions that you may have. My colleague, Ms. Ringor, and I will start with a brief presentation, which will speak to the provisions in the Canada Business Corporations Act, the amendments that were made in 2001 and the implementation of the act.
[English]
Just by way of initial background, corporate law provides a framework for the creation and governance of corporations, by defining rights and responsibilities of the corporation and its shareholders, directors, and managers. It also provides rules around disclosure and transparency, conflict of interest, and the way corporations interact with third parties, just as examples.
The corporate governance framework in Canada is complemented by provincial securities laws, which apply to the way securities markets work and the rules around the operations of those markets. Obviously, a well-managed corporate framework in Canada benefits Canadian society as a whole. It's a fundamental ingredient to increasing Canadian economic prosperity by doing things such as providing certainty to attract investment; to increase our competitiveness as a place to invest; and to assist in the development of innovation—again because it provides that certainty.
[Translation]
Our corporate governance framework is recognized internationally. Delegations from a number of countries have visited Canada specifically to learn more about how the CBCA works, with a view to including some of its features in their own governance framework.
[English]
In terms of our framework being recognized internationally, the World Bank's Doing Business 2009 and 2010 ranked Canada second as a place for starting a business--New Zealand was first-- and eighth for ease of doing business, behind Singapore, New Zealand, the U.S., Hong Kong, Denmark, the U.K., and Ireland. The World Economic Forum's Global Competitiveness Report for this year ranked Canada fourth for efficiency of corporate boards of directors and eighth for the protection of minority shareholder interests. In both cases, obviously, a number of factors went into the ranking. It wasn't all about the CBCA, but certainly the CBCA was an important ingredient in those rankings.
Created in 1975,
[Translation]
In Canada, the CBCA has been considered a leading-edge statute in corporate law and has served as the basis for provincial corporate law legislation and implementation. One of the act's main objectives is to balance the interests of corporations and their directors against those of shareholders and creditors, all the while deflecting an unnecessary burden.
[English]
So the main objective of the law is to permit the efficient administration of the act while balancing the interests of management, shareholders, and creditors of federal corporations. It contains little administrative discretion, again, to provide that certainty that I referred to before. It does provide some flexibility through regulations and for detailing rules. It provides a comprehensive regime of shareholder remedies.
It is a framework statute, as I mentioned earlier, that also provides for the creation and dissolution...all kinds of reorganization in between federal business corporations. It sets out the basic features and structures of a corporation, establishes corporate governance standards, codifies principles of transparency and accountability, and provides a framework for the interaction of various interested parties, directors, management, shareholders, and creditors. It is not prescriptive about the way that a corporation runs its internal and external business. It actually facilitates the ability of a corporation to arrange those structures in the ways that it sees fit and to adapt as the economy and as the business adapts over time.
Perhaps I'll pass it over to you now, Cheryl.
:
I'll just do a quick overview of some of the operations.
The number of new incorporations in Canada is about 180,000 to 200,000 a year. Prior to fall 2008 the strong Canadian economy has meant that there was an increase in the number of new incorporations. In fiscal year 2007-2008 it reached a high of 200,000.
The percentage of new corporations that go under the CBCA is between 11% and 12% of the national total, and that's been relatively steady. But with the economic downturn of last year, the preliminary data show that incorporations have declined by about 10% throughout Canada. For CBCA incorporations, we've experienced a reduction of 4% from the previous years, and some provincial registrars have experienced a greater reduction.
What this shows is that even in the midst of the economic downturn the federal corporate statute still remains relevant to incorporators across the country, providing a stable legislative framework for aspiring entrepreneurs.
The biggest change since 2001 in the operations has been the use of online filing. We first introduced online filing for incorporations on January 1, 1999, and the 2001 amendments made it easier to offer more services online. So what we have now for online is 90% of incorporations are done online and 81% of returned filings are also done online. While they're still very popular, because we have reached a penetration rate of 90%, there's still a certain percentage who still want to file by paper or other traditional means. We will continue to offer those means of transacting with us.
Currently there are about 192,000 corporations under the CBCA, and fewer than 1% of those are publicly traded. This indicates that the CBCA is an important framework for tens of thousands of small and medium-sized enterprises across the country. Having said that, the publicly traded corporations, though, of CBCA represent 39% of the TSX Composite Index, and 56% of the TSX 60 Index is incorporated under the CBCA. That's excluding banks and other financial institutions.
So that's the broad overview from the operational side. I'll just pass it over to Colette.
:
I'll give a very quick thirty-second history of the CBCA. As I mentioned, it was introduced in 1975, and in 2001 a set of very comprehensive amendments were made. These were the result of extensive national consultations across the country involving hundreds of stakeholders and soliciting a large number of recommendations and suggestions for change. The resulting amendments directly reflected the concerns of those stakeholders. We would be happy to provide more detail about the extent of those consultations and those changes.
In 2004, after the Enron and WorldCom scandals, Industry Canada issued a discussion paper asking stakeholders what amendments might be necessary to the CBCA. Among the issues under discussion in that paper were the independence of directors and auditors, the certification of financial statements by the CEO of corporations, the separation of the positions of CEO and chairman of the board, and whether increases in penalties were needed for infractions of the relevant provisions of the CBCA. As a result of those consultations, there was little consensus among stakeholders about how the federal government should address those issues. However, most felt that since the CBCA applies only to a percentage of publicly traded Canadian corporations, these matters should be left to provincial securities regulators.
A second discussion paper was issued, in 2007, asking whether the government should enact a stand-alone piece of legislation to establish procedures on the transfer of securities or whether this should be left to the provinces. The prevailing view as a result of the consultations was that the federal government should not introduce its own security transfers act, but rather that the provinces would be in a better position to regulate the procedures around transferring shares and securities of corporations.
To sum up, the CBCA appears to be a well-functioning statute. It's responsive and flexible, and since 2001 there has been little substantive or significant demand for amendments to the CBCA. However, that's not to say, as is the case for any piece of legislation, that it is perfect. Because of the continuing evolution of the marketplace, modernization may be required. We suspect stakeholders, specifically the Canadian Bar Association, the Canadian Coalition for Good Governance, and the Shareholder Association for Research and Education, will be interested in having the opportunity to address the committee on a number of issues.
[Translation]
We will be following the committee's deliberations with interest and look forward to its recommendations.
We are now happy to answer all of your questions.
Thank you.
:
I can certainly take an initial stab at that question, and others can add detail.
Yes, there are provincial incorporation statutes companies can also choose if they wish to incorporate. By and large, the CBCA is viewed as the model for a number of pieces of provincial legislation. Often, if changes are made to the CBCA, similar changes are made to provincial statutes. It's not always the case. But it's very much viewed as a fairly effective piece of legislation by the provinces.
It's up to corporations as to where they incorporate, and it's very much a business decision. If a business knows from the start that it's interested in operating across the country, and it wants to know whether a particular business name has been taken across Canada, it might choose to incorporate under the Canadian Business Corporations Act, because that search will be done. Other than that, it's very much a matter of a business decision by the prospective new business.
:
I would just like to add that for the vast majority of small businesses, a lot of the provisions don't really make much difference to them, because they're just more interested in running their businesses.
When we did an analysis of what's a good predictor of whether they'll come federally or provincially, the cost was a big predictor. When we reduced our incorporation cost in 2001 by half, from $500 to $250, we saw an increase in incorporations. In fact, our fees are among the most competitive in Canada, other than Alberta, in terms of incorporation. So the start-up costs are very low.
As well as our services that Wayne alluded to, we offer incorporation online. We've heard anecdotally and also through our surveys that you could almost get a certificate of incorporation in a few hours. That's why, under the starting-a-business element of the World Bank's doing business project, we're ranked number two.
:
Some of the suggestions we've heard about from stakeholders--and none of the ones on my list that I'm about to give you are particularly technical--concern executive compensation, for example: what are the possibilities in terms of limiting or restricting compensation or making the details of executive compensation packages more transparent? Also, we think that stakeholders may want to raise the issue of shareholder approval of executive pay packages. So there is the whole issue of shareholders' say on pay. That's one.
The other one concerns the rules governing the election of directors, specifically the rules around when and how shareholders can nominate, elect, and remove individual directors, as opposed to the common practice in Canada now, which is to elect by slates of directors.
Another issue would be the removal, as I mentioned earlier, of the securities transfer provisions of the act and whether that shouldn't just be left to the provinces to deal with, as they deal with it now.
A final one that we've heard about is whether shareholders should be given the ability or stronger tools to approve major acquisitions of other firms, for example, or mergers, particularly where new shares are issued and the value of their shares is diluted or affected as a result.
Those are the significant issues we've heard about.
Do you have anything else to add to that?
Thank you for being here this afternoon.
As you may know, Quebec enforces the Charter of the French Language. Furthermore, Parliament has recognized the Quebec nation. And one of the shared values of the Quebec nation is the French language. Just recently, the NDP put forward a motion having to do with the precedence that Quebec gives the French language in the case of immigrants to Canada.
Did your analysis take into account the province in which companies set up when registering or incorporating under the Canada Business Corporations Act, specifically, whether it is Quebec or elsewhere in Canada?
:
We've never participated in one.
The basic framework behind CBCA says it's self-enforcing. That means we put a framework in place. A lot of the rules the corporations deal with themselves. We're not enforcing them; it's really to facilitate them to communicate.
For meetings, you can put everybody in a room; you can put half the people in the room and half the people on a conference call, or on some kind of video conferencing over the computer; you can put everybody into conferencing over the computer. It's left to the corporations to figure out what works for them.
Since we have no involvement with them—unless one of us happens to be on the board or a member of the corporation—we've never participated. What we know is solely out of the newspapers.
:
No. The concept in the late 1990s of collection of proxies by telephone came in. The technology suddenly hit about 1997, 1998, and CBCA companies weren't allowed to do it because the act itself prevented it.
One of the things we changed was the rules. You're looking at the principle. What do you want? You want people to be able to participate. Does it really matter if they're in a room together, on a computer, on a conference call, or in a chat room, those kinds of things? What we did with the 2001 amendments is make it clear that if you're going to participate in a meeting, you have to be able to hear everybody else and participate meaningfully. But the act is not going to tell you how that happens. We went very generic: we simply said that as long as you meet the principles, it's up to you to determine how you want to run the meeting, whether it's one person electronically, ten people, or everybody.
:
I happen to be the pension critic for our party. There are some things that have surfaced of late because of the downturn—5,000-plus companies going bankrupt, and those things.
Recently we had some changes to the BIA, under the wage earner protection program. How does that relate to pension severance, how they are ranked or prioritized during bankruptcy proceedings? That would be one question.
Second, in the event a company goes into bankruptcy proceedings, the pensions of the employees are called special payments, I understand. Now, from our perspective we're talking about deferred wages, and we'd like to see a philosophical change to that. I'd like you to comment on whether you see these special payments—that designation—as being acceptable or even just. I'll leave you the chance to absorb those a bit.
:
Sure, I appreciate that, but it has shot down my questions pretty quickly. That's okay. I understand. I don't mean any criticism.
I'll try one more, then. To both again, this is something a little more direct, on pensions. According to the OECD guidelines, where a pension insurance plan does not exist—and I'll quote from here—it says there should be a “priority position for due”—and I can see the answer coming already—“and unpaid contributions...equal to at least the position of due and unpaid taxes...”. In some countries they'd call that super-preference.
The guidelines recommend that “priority rights may also be appropriate for underfunded pension commitments...that are the responsibility of the plan sponsor”, depending on whether a guarantee scheme exists and the likely impact on credit availability.
I am interested in your comments on the issue of according super-status, especially regarding unfunded pension liabilities, and how this might affect bankruptcy laws. Again we're into that other area.
:
One of the things the 2001 amendments did was to make much easier and in fact legalize the ability of shareholders to communicate with one another. Prior to that, it was very difficult for them to do so, and it led to organizations such as the Canadian Coalition for Good Governance and the SHARE, of which I spoke earlier, who were combining various institutional investors, particularly, into an organization that can put a great deal of pressure on corporations in which they invest.
Whether they choose to do that on a particular case-by-case basis is pretty much up to them. I know they do it, but one of the things the recent OECD meeting on corporate governance did recommend was that shareholders generally—and they're speaking in the broader context, not just Canada—and especially institutional shareholders, should take more responsibility in administering their shares and pressuring boards to act in ways that maximize shareholder value in the long term particularly.
If the Canadian Coalition for Good Governance and the SHARE came before this committee, they would probably have specific issues they would like to see raised and discussed. The only one of which I'm aware is one Colette referred to earlier, that they specifically would like to be able to nominate, remove, and elect individual directors.
I thank you for coming and joining us today. I've seen a number of you a few times.
I just have a point for Wayne. The finance committee has committed to doing a study of pensions. The questions we're asking here would be great with the right witnesses. That study is to start sometime in December, if not after that. So if you have a colleague who will be witnessing for that, we'd be happy if you replaced him for that meeting. Anyway, that's another point.
Just as a little bit of a follow-up, we've been working on having a national securities regulator. Hopefully, we'll have such a regulator some day. I know you are talking about provincial securities regulators right now, but do you expect that to influence or change the act we're talking about here today, or will the act be able to sustain itself even with a national securities regulator?
:
Okay, I appreciate that.
The other question I have you may not be able to answer. You're on the policy side of the equation of what the organization does. I don't know how much time you have to think about policy changes and where you should be going or whether it's about implementing policy that is already there.
Here's my question. I've been on the finance committee for three years. For the first time, we've heard that there are two different organizations, representing not-for-profits, that would like to develop something that exists in Britain and other countries. It would be a share capital corporation in which not-for-profits could trade shares. It would be a way for them to raise capital and give them an ability to invest in their businesses.
I would like to know, as an organization, whether you've had a chance to look at that. How do we bring that to you as something to get a response on?
It is not easy to sit through all these rounds of questions to get to the most important one. I waited, but a lot of the questions did not even have to do with the CBCA. I have a question for you that does. It has to do with section 125. I believe you know it well.
You are no doubt aware of the recent economic developments that have really mobilized public opinion, especially in the papers. I want you to consider a report on Nortel, as one example. We were talking about pensions earlier, and I know that is not your area of expertise, but nonetheless. The government of Quebec was called upon to take over the pensions of 6,000 Nortel employees in Quebec so they could still collect their pensions. Meanwhile, Mike Zafirovski, a former Nortel executive who officially declared bankruptcy for the company, was demanding $12 million for himself, just one of a group of senior executives demanding a total of $25 million in pensions, salaries and bonuses. We want to protect shareholders and employees from the sometimes excessive compensation and bonus packages of directors, when a company's financial performance does not justify sacrifices on the part of its shareholders or employees in order for it to survive. Section 125 of the CBCA stipulates that the directors of a corporation may fix their own remuneration subject to articles with the company's consent or unanimous shareholder agreement. That gives directors a lot of discretion in determining their own salaries, and those salaries may go against the interests of shareholders and other employees, depending on the company's success or lack thereof.
I would like to know whether you anticipate making any amendments to section 125 in order to limit the compensation received by directors.
:
We're not coming forward with specific proposals for amendments to the legislation. We're certainly going to watch the hearings with interest and we'll look forward as well to the committee's report.
Generally on the subject of executive compensation, the G-20 has looked into this issue, and it has made a number of recommendations with respect to financial institutions that are being implemented by the government and by financial institutions in Canada. They really are aimed at making sure that executive compensation is transparent, in particular, rather than at setting caps or limits around the compensation levels.
It should also be noted with respect to business corporations generally, not just those under the Canada Business Corporations Act, that the Canadian securities administrators' continuous disclosure obligations already implement disclosure requirements for salaries and compensation packages. These includes the public disclosure of salary, form of compensation, and the design characteristics of the compensation system, including performance measures and risk policies as well. This is very much consistent with what the G-20 also recognized.
I appreciate your testimony this afternoon.
Many of my questions have been asked and answered, and we appreciate the answers you've given.
Here are a couple of thing that relate to a business's decision to incorporate. If a company, a corporation, even a mom-and-pop organization, decides it's going to set up in a cross-border location between two different provinces, is it in their best interest to federally incorporate, or would they otherwise incorporate in two separate provinces?
:
CPPIB, the Canada Pension Plan Investment Board, would have their own legislation over there, so there's no way we can get at them here. The reality is, some of our friends back home would like to get at somebody who got a $2.3 million bonus in a year they lost $24 billion. They don't quite understand that.
There's another one, in my own community, and it may be something this committee wants to look at; I'm not sure. We had in CCAA Stelco, which was purchased then by U.S. Steel, and Mr. Mott took $57 million from this company and went back south with the money in his pocket. There's a reaction to that. Obviously, from the comments I've heard here, to have a strategy to deal with this, both at the national level and the provincial level, would require some kind of a summit or gathering of those people with those particular areas of responsibility.
When you talked about incorporation and when they use a lawyer and when they don't, I recall incorporating provincially about ten years ago, and we were given the choice of getting just a quick number, but if we wanted to incorporate a specific name they felt that it required the use of a lawyer. I never did quite understand why it cost us $2,400 to find out why, but is that a provision of the way you'd get an incorporation federally? Is there a difference?
:
Thank you, Mr. Bouchard.
Do any other committee members have any questions?
[English]
It looks as if we don't have anybody else. I want to thank our four witnesses--Madame Ringor, Madame Downie, Madame Kirby, and Mr. Lennon--for appearing in front of us today.
Before we adjourn, I just want to let members of the committee know two things. First, if I understand correctly, supplementary estimates B were submitted to the House today, and we have until the Christmas recess to review these supplementary estimates. If members of the committee wish to review the sups B sometime between now and the recess, let us know and let's have a discussion about that.
Second, as I mentioned earlier, five order-in-council appointments have been made over the last number of months. It's the right of members of the committee to review these appointments if you so wish. If that's the case then bring it up at some future meeting.
Without further ado, this meeting is adjourned.