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Evidence of meeting #43 for Industry, Science and Technology in the 40th Parliament, 2nd Session. (The original version is on Parliament’s site, as are the minutes.) The winning word was shareholders.

A recording is available from Parliament.

On the agenda

MPs speaking

Also speaking

Wayne Gray  Partner, McMillan LLP, As an Individual
Tim Draimin  Executive Director, Social Innovation Generation
Laura O'Neill  Director, Law and Policy, Shareholder Association for Research and Education
Judy Cotte  General Counsel and Director, Policy Development, Canadian Coalition for Good Governance

4:20 p.m.

Executive Director, Social Innovation Generation

Tim Draimin

I think right now there must be a fair amount of this competition going on, if a fair amount of the income from non-profits already comes from earned income. But what I'm proposing is the creation of a corporate structure that would allow the earned income component of what public benefit organizations are doing to be structured in an entity that would become taxable.

In that sense, this seems to me to offer a more level playing field than the current situation.

4:20 p.m.

Bloc

Robert Vincent Bloc Shefford, QC

Ms. Cotte, you said earlier that there should be annual votes to elect people and that this should be put into the law. Currently, the act states that elections must take place every three years.

Do you believe in continuity, with a chair elected for one year as opposed to one elected for three years? With a new chair every year, won't there be a waste of time when you consider the time it takes to get used to each file? If we really want to see things go forward, with a chair elected for a three-year period, files will move forward much more rapidly. For the continuity of activities within the organization, it is much better than starting over every year. Each year, we know how long it can take before files will be well managed. If, once we have a good grasp of the files, we have to launch an election, couldn't that create problems?

4:20 p.m.

General Counsel and Director, Policy Development, Canadian Coalition for Good Governance

Judy Cotte

As I said earlier, that's presuming that shareholders would choose to change a director every year. I think that's very unlikely. Most sophisticated investors realize the need for continuity. After all, they are in this to make money and they know that this is important for any business. In fact, our members are all long-term shareholders, so they want to see the company prosper and grow over the long term.

It's really just an ability to remove a director, if there is a problem, that institutional shareholders want to have. It is very unlikely, absent a problem, that each and every director would change every year. I can't imagine it happening, absent a problem. If there is a problem, shareholders want the ability to remove that director in one year rather than having to wait three, because a lot of damage can be done to a business over three years, if the directors are not performing properly.

4:20 p.m.

Conservative

The Chair Conservative Michael Chong

Thank you, Mr. Vincent.

We will now hear from the member for the riding of Burlington, Mr. Mike Wallace.

4:20 p.m.

Conservative

Mike Wallace Conservative Burlington, ON

Thank you, Mr. Chair.

I want to thank you all for coming today. I appreciate your input.

I'm going to come back to Tim, but I want to start with a couple of quick questions.

We're dealing with this review. To summarize what the other three individuals who have been here before to talk about this act seem to say, another consultation process is what you really are asking for. You have some specifics that you want to give to us, but a consultation process is what you want.

I have no issue with that. My question concerns what Mr. Gray brought up, that in the Quebec legislation they have removed the requirement of having a vote, if there is only one shareholder. You talked about having a separation between the head of the board and the president. Obviously, if it's a small family corporation, all the family members have shares. Do you have a size in mind at which corporations would take part in this? This can't work in every corporation.

4:25 p.m.

General Counsel and Director, Policy Development, Canadian Coalition for Good Governance

Judy Cotte

No. We're dealing with public companies. There would always be more than one shareholder in a public company.

4:25 p.m.

Conservative

Mike Wallace Conservative Burlington, ON

It's only for public companies. Okay, thanks.

Now let me come to SIG. It was my suggestion that SIG come here today; I had heard their presentation at the finance committee. I appreciate their coming.

Often as politicians we hear that government should operate more like business, so why should a not-for-profit not operate more like business? Here is an opportunity, in my view, Mr. Chair—and we're not breaking new ground here, for as you mentioned, they exist in the U.K. and in the U.S.—whereby charities might....

I'll give you an example. My local art centre has a store, but it's not separately incorporated, and no one can invest in it. The art centre relies on fundraising and government funds to operate, and then the revenue from the store comes in. My vision of what you're looking for here—and I don't know whether it is within the bill we have here or whether we'd have to do a separate bill.... I have no idea, to be perfectly honest with you, but I think it needs to be studied.

My question, first of all is this. I'm sitting at home and I hear a knock on my door and I have a chance to.... Why would I invest my own cash in an organization like the one you're proposing?

4:25 p.m.

Executive Director, Social Innovation Generation

Tim Draimin

Thank you very much for that question. The answer is, obviously, because you want a financial return. In the model I'm suggesting, if it were like a community interest company in the U.K., the share pays a dividend. There's a thing called an asset lock, which means that somebody can't benefit for private purposes, so basically there's a control on the size of the dividend: the assets can't be stripped out of the organization, but there is an annual dividend. Basically, somebody would be purchasing these as an analogous form to some kind of low-performing investment that they had, which might in one sense be somewhat secure.

A week ago Monday in The Globe and Mail “Report on Business” there was a review of the social enterprise fund of the Edmonton Community Foundation. It has partnered with the City of Edmonton, and they have created an investment fund. They invest in social enterprises, and their return on their social enterprises last year was 6%, while their return on their portfolio was minus 14%. So it doesn't give a really high return, but it does give a return, and it would be part of an asset allocation for somebody who is making investments.

Secondly, if you have money that you're investing and decide you want to put it, let's say, into a mutual fund or something, and you live somewhere outside the major urban centres, you would recognize that the benefit of your investment, if you put it in a company, would probably not be in your community. But if there were these community interest companies, quite a lot of them would be regional or local. It would mean that people would be able to buy shares in something that was happening in their local community. They would know that they were investing in their own community.

4:25 p.m.

Conservative

Mike Wallace Conservative Burlington, ON

To my second question, I have a certain amount of money that I donate a year. Why wouldn't I buy shares instead of donating if I'm going to get a return on it? How does that balance work?

4:25 p.m.

Executive Director, Social Innovation Generation

Tim Draimin

That's a really great question.

The way I think of it is that right now the charity and non-profit sector system is broken. There's an increasing number of charities each year competing for pretty much the same pool of dollars. As a matter of fact, Statistics Canada says that the pool of charitable donation dollars is declining.

We can predict, based on the deficit that governments are taking on right now, that we're going to see cutbacks in government spending, and at the end of the line of all those cutbacks, even though it won't be intentional, will be non-profits. Canada has the highest proportion of government funding for non-profits probably in the OECD. So the system is hitting a wall and non-profits have to figure out new ways to capitalize the things they want to do.

What I'm suggesting is not that people cannibalize the existing charitable donations. What I'm proposing is that people would be making an investment on which they would be able to get a financial return. They would do this to complement their existing support to charities through charitable donations. I wouldn't want this in any way to be construed as a way of undermining the existing passion and interest of Canadians to be supporting their charities.

4:30 p.m.

Conservative

Mike Wallace Conservative Burlington, ON

My next question is along the same lines: Is there not a risk that government money would then retreat if they're able to attract capital from other locations?

4:30 p.m.

Executive Director, Social Innovation Generation

Tim Draimin

There's definitely a problem that charities have right now. To the enterprising charities that have created smart modes of operation, a lot of their funders will say, “You're doing really well, so I'm not going to give you any more.”

It's kind of perverse. Successful organizations, if they were in a marketplace, would get more capital attracted to them because they were successful, as opposed to the non-profit sector where, if they're successful, they can have less capital. That's one of the anomalies of the current system.

Again, I wouldn't want government to say that because this is happening we should be cutting back on non-profits. Our non-profit sector is sorely underfunded. Most organizations have been cannibalizing their core assets. The maximum that non-profits spend on technology, for example, is something like 2.4%. The minimum that businesses spend is something like 2.5%, up to 8%.

The non-profit sector is not spending on itself right now. It needs the money. So I wouldn't be advocating that if they were able to succeed by doing this, government should cut back. What we'd be seeing is a more effective, more competitive, more innovative non-profit sector able to meet the needs of communities. That's what this model would help people move towards.

I did a study a decade ago on enterprising non-profits across Canada. Where you have a non-profit that is thinking about employing market means, it has a cultural impact on the way the non-profit operates. It lets people think more strategically about their organization. It builds in more sensitivity to the economics of how the organization works.

I've never really understood why non-profits operate on the basis that they create a budget, fundraise for it, spend it through the course of the year, and at the end of the year reach zero, and then start the whole thing all over again. Somebody has described this to me as the cha-cha-cha version of non-profit survival, as opposed to creating ideas whereby non-profits have the ability to build up assets, just like families, individuals, and companies do. They should be encouraged to take on these kinds of strategies to create a more resilient and diversified sector serving Canadians.

4:30 p.m.

Conservative

The Chair Conservative Michael Chong

Thank you, Mr. Wallace and Mr. Draimin.

Mr. Masse.

4:30 p.m.

NDP

Brian Masse NDP Windsor West, ON

Thank you, Mr. Chair.

Thank you to the witnesses for being here.

Ms. O'Neill and Ms. Cotte, it was interesting when you were describing the atmosphere at some of these meetings. It reminded me of the Senate in terms of accountability.

There were some things you talked about that I might go back to, but there is one thing that wasn't brought up on which I would like to get some input—and Mr. Gray, from you as well, if you have something to contribute to this.

I would like to get some information on the stability and openness of CEO and board compensation. It's a dog's breakfast out there. It's very difficult to figure out what the actual salary is at the end of the day, depending upon bonuses, stock options, and pensions. Could I have your thoughts on that?

I believe there needs to be some serious reform on that, especially for publicly traded companies. There sometimes seems to be a murky understanding about what the compensation package truly is at the end of the day.

4:30 p.m.

Director, Law and Policy, Shareholder Association for Research and Education

Laura O'Neill

I can start in on that. For public companies we do have new executive compensation disclosure rules. They came into force at the tail end of last year, so pretty much everybody but the banks--who have year-ends in October--who have year-ends on December 31 have now reported out for one year. There's a box for salaries, a box for bonuses. They've tried to make sure that in one table, the compensation summary table, everything's in there, and they have to total it. They have to give the grand total figure.

I can say from reading through the new disclosure by the composite issuers—and these are the companies that should do the best job—some of them are simply terrible. You get three or four pages of metrics, what purports to be performance criteria for the incentive pay, and then there seems to be some magic wand that's waved and you get this number. They don't tie together. It's a bit of a smokescreen.

Some companies, on the other hand, are doing a really good job with their compensation disclosure. So we're on our way with at least disclosure. That's why we at SHARE and our clients want to see an advisory vote on the pay. Once a company brings to us some information we can actually get through and make sense of, let's have a vote on that. I think we're getting somewhere with compensation, although it still remains a huge issue, and I know the CCGG has its concerns about director compensation, which the say on pay doesn't touch.

4:35 p.m.

General Counsel and Director, Policy Development, Canadian Coalition for Good Governance

Judy Cotte

I'll add to that. I agree with everything Ms. O'Neill said. We have recently published our principles for executive compensation, which is a guideline to help companies make their compensation clearer. One thing that we stress when we meet with boards of directors is that it should be clear and understandable, and really it should say what your company is trying to achieve and how your compensation system sets out to achieve that.

I would agree with Laura that some companies are getting better, and some companies are terrible, with 18 defined terms at the start of their disclosure, and it's incomprehensible. I do think that improvements are being made, however.

We also support an advisory vote on compensation and recently issued, for public comment, a draft model board policy that companies can adopt to provide for a shareholder advisory vote on compensation. We also provided a draft form of resolution so that all companies in Canada will use the same form of resolution.

We'd like to avoid what we see in the U.S., where companies that have been required to adopt advisory votes are all using different language in the resolution put to shareholders, adding another layer of obfuscation for shareholders to get through. We've issued this model board policy and draft resolution. What's unique to Canada is that we actually worked with the 12 issuers who have agreed to have advisory votes on pay. They have all agreed to use that common form of resolution.

Our policy and the resolution is out for public comment. The end of the comment period is at the end of this month, and then we'll finalize it and have it available for companies to use. We think that should also help improve clarity of disclosures, because companies are concerned about these advisory say-on-pay votes. They're worried that they're going to receive a no vote, so we think it will encourage them to go further into plain English disclosure and make sure shareholders can understand what they're being asked to vote upon.

4:35 p.m.

Conservative

The Chair Conservative Michael Chong

Mr. Masse, I think Mr. Gray had something to add to that.

4:35 p.m.

Partner, McMillan LLP, As an Individual

Wayne Gray

I wanted to make a slightly different point from what has been made up to this point on this issue.

With the CBCA's corporate framework legislation, what you are really talking about is a matter of securities disclosure law. There's actually been a trend in the other direction, so that in the last year or so the provisions of the CBCA regulations dealing with executive disclosure have been moved out of those provisions, to adopt by reference the national instrument put out by the Canadian securities administrators, which is national policy 51-102, which contains a comprehensive uniform disclosure policy, including executive pay. This was the right thing to do, for the CBCA to essentially adopt the uniform national standard rather than trying to legislate it incrementally through corporate legislation.

4:35 p.m.

NDP

Brian Masse NDP Windsor West, ON

That's interesting. It's a topic that has been on the uptake in the United States as well. From my perspective, it has been interesting to watch, in that often many of those companies are lobbying effectively for standardization of regulations and so forth from government. At the same time, we don't have the same practices for their processes, and I've always found that ironic here.

Ms. O'Neill, you mentioned specifically, I believe, that 98 of 209 companies have adopted the practices that you've been advocating for, or was that...?

4:35 p.m.

General Counsel and Director, Policy Development, Canadian Coalition for Good Governance

Judy Cotte

I think that was my statistic, and it was that 98 of 209 of Canada's largest issuers have adopted our majority voting policy, which lets them have majority voting in spite of the fact that the CBCA doesn't require it.

4:40 p.m.

NDP

Brian Masse NDP Windsor West, ON

How long has that campaign been going? Is it at a point right now where you still have some partners out there that will move on this, or has it required another push, have you reached a threshold where other encouragements are necessary?

4:40 p.m.

General Counsel and Director, Policy Development, Canadian Coalition for Good Governance

Judy Cotte

I think it probably does need a push. Initially, the largest issuers, the banks, were the first to adopt it, and then the larger, more sophisticated issuers were to follow suit. But there are certainly some issuers who have communicated to us that they have no intention of adopting it. So I think this is a good opportunity for the CBCA to become a leader in that regard and make it a requirement for all CBCA companies.

November 16th, 2009 / 4:40 p.m.

NDP

Brian Masse NDP Windsor West, ON

It's very helpful to know that.

Mr. Draimin, I'll turn my questioning to you. I actually worked in the not-for-profit sector for over ten years, and I just want to clarify one thing. It's an interesting model; I'm going to give it some serious review.

I have a private member's bill, Bill C-274, that adjusts the charitable giving act to replicate that of political party and organization, that it return to the current structure past the $1,275 donation limit to individuals in politics or parties. What's happened over Canadian public policy in the last 10 or 15 years is that as we've reduced corporate and personal income taxes, it's had an adverse impact on charitable giving because it's tied to the lower income at income tax time, so charities are going to be able to bill back less at giving time. In fact, we're talking about 8% of the Canadian economy here that's had no effective policy over that period of time, because lowering corporate tax cuts for not-for-profit agencies doesn't do anything for them.

Just to be clear, one of the things is that many agencies can carry over only certain amounts of funds. That's when you saw, at the end of the year--and it happens here, even in the offices of Parliament--if you had a budget, you'd go out and buy your fax, your computers, at the last minute, and do unnecessary upgrades that probably wouldn't have been the most important things that you would decide to do. It happens all the time, because what ends up happening is you can't get the funding for other programs.

But if you move along a model like this, how do you ensure that the core value of the agencies is maintained? Because then we would have other types of interests at stake. Often not-for-profits are formed for social issues that aren't being administered by governments--for example, community action groups that get together to create the entity that isn't being provided out there. Would there be some shareholder thresholds or voting restrictions? How would it operate in terms of making sure it stayed within the mandate of so much investment of people over so many times?

4:40 p.m.

Executive Director, Social Innovation Generation

Tim Draimin

Thank you very much for the question.

In terms of the model that I think is the most developed and most applicable to Canada, the community interest company in the U.K., they actually have a regulator just for community interest companies, and instead of having “limited company” after their name, they have “CIC” after their name. They're quite visible and they're almost like a brand, so that people understand this is a community type of corporation that operates for a community benefit.

When they apply there's a public benefit test, and if they don't pass that public benefit test, they're not approved. Then there are the guidelines on how they operate. Basically, they can't operate for individual personal benefit; they can operate for community benefit only, and there are a number of ways in which that happens. They have an annual reporting that goes on to make sure that every year that's the case. They've built in a whole set of rules around the transparency of all the information that's required by the regulator. So they've created a series of standards reviews to precisely try to do exactly what you're describing in terms of ensuring the public benefit of these organizations.

4:40 p.m.

NDP

Brian Masse NDP Windsor West, ON

Thank you, Mr. Chair.