Industry Committee on Feb. 9th, 2017

[The Chair, Liberal, Dan Ruimy]

I call the meeting to order.

Welcome, everybody, to meeting 45 of the Standing Committee on Industry, Science and Technology.

We are continuing our study of Bill C-25.

Today we have with us Paul Schneider, head of corporate governance at the the Ontario Teachers' Pension Plan Board. From Transparency International Canada, we have Denis Meunier, beneficial ownership working group, and Paul Lalonde, president and chair of the board of directors, by video conferencing from Toronto. Then, from the Diversity Institute at Ryerson University, we have Wendy Cukier, director.

We're going to start off with Mr. Schneider from the Ontario Teachers' Pension Plan.

You have 10 minutes to give us a presentation.

[Paul Schneider, Head of Corporate Governance, Public Equities, Ontario Teachers' Pension Plan Board]

Thank you.

Mr. Chair and committee members, thank you for the opportunity to be here today to speak to you about Ontario Teachers' Pension Plan's views on Bill C-25. We support the passage of Bill C-25.

Please note that my comments will be limited to part 1, and more specifically to amendments to the Canada Business Corporations Act that address two key corporate governance issues: the election of directors to the board and board diversity.

Ontario Teachers' Pension Plan is Canada's largest single-profession pension plan, managing, as of our last audited annual report, over $171 billion of assets that provide retirement security for 316,000 active and retired teachers in the province of Ontario.

We have a long history of promoting good corporate governance in our investments and we believe that good governance is good business. We are a founding member of the Canadian Coalition for Good Governance and remain active in the organization.

Since its beginning in 2003, CCGG has grown from representing investors managing $350 billion of assets to today, when collectively CCGG members manage approximately $3 trillion of assets on behalf of all Canadians. Clearly governance, and in particular the governance of Canadian companies, matters to investors.

As I am head of corporate governance, my focus is promoting effective corporate governance on behalf of our members throughout our global public company portfolio of over 1,600 companies. We are engaged investors, meeting regularly with companies, actively voting all our shares, and working to improve corporate governance regulatory frameworks around the world. Personally, I have 15 years of experience in corporate governance, with the past seven in my role at Ontario Teachers'. Prior to that, I was the director of research at CCGG.

At its most fundamental level, corporate governance is the system and structures put in place to ensure that a company is effectively directed and controlled. In the corporate governance framework, shareholders elect directors, directors oversee management, and management executes its strategy.

The characteristics of public company ownership significantly raise the importance of having effective corporate governance. Typically, a public company shareholder like Ontario Teachers' will have a very small ownership stake in a company, usually less than 1%, yet their investment could be in the tens or even hundreds of millions of dollars.

As a result, we are placed in a situation where we have a large amount of money at risk, yet have limited levers of influence. We rely on the board to adopt and execute effective governance practices that properly oversee management and to keep the best interests of the corporation in mind—and, in doing so, safeguard and allow our investments to grow. When governance fails, our investment is impacted, and this can affect the pension promise we have made to our members—hence our statement “good governance is good business”, and why we spend so much time working to ensure that our public company investments have effective governance practices. Effective governance is about getting the right people around the board table and holding those individuals to account.

Our shareholder vote is our means or tool for holding the board of directors accountable. Unfortunately, in its current form, the effectiveness of our vote is limited. Our only two options when electing a director are to support and vote for, or to not vote at all and withhold. Voting against a director is not an option.

We find it difficult to reconcile the fact that as public company shareholders we are providing capital to companies, yet we cannot vote against a director should their actions cause us to lose confidence in their ability to effectively discharge their duties.

For years, we have advocated for the inclusion in Canadian and provincial laws of true majority voting—that is, the ability to vote for or against—in director elections. That is why we were extremely pleased to learn of the inclusion of majority voting in director elections in Bill C-25. We fully support the amendment to the CBCA that requires directors to be elected only when they receive the support of at least 50% plus one of the vote. This change will allow shareholders like Ontario Teachers' to truly hold individual directors accountable. We believe that holding directors accountable leads to more effective boards, effective governance, and effective capital markets. It is simply good business.

Some may argue that the current TSX rule requiring a majority vote policy is sufficient. We disagree, for the simple reason that under majority vote policies there is no guarantee that a director resignation will be accepted. In fact, there was an incident in 2015 when a director of a large Canadian company received a majority of withhold votes because shareholders were unhappy with the decision made by a committee the individual chaired. As per the majority vote policy, a resignation was submitted, only to be rejected by the chair because, in part, the loss of a director of “high quality and integrity...would be deplorable.”

While shareholders voiced their displeasure with the rejection of the resignation, they were left with little recourse and with having to accept a director in whom they had no confidence remaining on the board. This example illustrates the significant difference between a withhold vote and a vote against that cannot, nor should not, be underestimated. Facing the consequence of being voted off the board may be just the stimulus needed to cause a board or director to think twice about how they are exercising their fiduciary duty.

Let me be clear. Ontario Teachers' Pension Plan believes the vast majority of directors are highly qualified, extremely competent individuals who are performing a difficult and sometimes underappreciated task. However, we also strongly believe that it should be our right as owners of the company to decide who should be in that boardroom overseeing management and ensuring management is acting in the best interests of the corporation, and by extension in the best interests of the investors, who in our case are the active and retired teachers of Ontario.

Furthermore, and as I believe you are aware, Canada and the United States are outliers. We are the only jurisdictions in the world that do not allow shareholders to vote against directors. Thus, in addition to supporting effective governance, majority voting will increase the confidence global investors have in the ability of our capital markets to function effectively.

The second issue I would like to discuss with respect to Bill C-25 is the requirement to disclose, on a comply or explain basis, the existence and substance of a diversity policy. We believe that diverse boards are more effective boards. For Ontario Teachers', diversity is not limited to gender but includes diversity across a number of spectrums. However, as we stated in our submission to the OSC during their consultation on diversity in 2013, we believe that focusing on gender diversity is an appropriate starting point to increase overall board diversity and to encourage issuers to develop a broader and deeper selection process that embraces and enhances diversity.

Furthermore, we believe there is a deep pool of untapped potential candidates that a broader and deeper selection process will reveal. We point to the thousands of individuals who have attained either an ICD.D designation from the Institute of Corporate Directors or are recognized as a chartered director from The Directors College as two potential sources of diverse directors.

Gender diversity improves board effectiveness because it brings different views to the boardroom table. Studies by Catalyst and others continue to show that company performance improves if there are women in senior management and/or on the board. A recent study by MSCI, published this past December, found that companies with at least three women on the board in 2011 experienced a median change in return on equity of 10% and in earnings per share of 37% by 2016. Conversely, companies with no women on the board in 2011 had an ROE change of -1% and an EPS of -8% over the same time period. The study also found that companies adding women directors to the board correlated with higher median increases in EPS compared to losing women on the board during the 2011 to 2016 time period. In addition, the MSCI study looked at gender diversity throughout the organization and found that companies with three or more women on the board had higher rates of women in senior management, including the CEO.

What we conclude from the MSCI study is that promoting a higher percentage of women on the board will have an impact on gender diversity across an organization. We are not suggesting that the CBCA establish any quota, but rather promote more diversity through the comply or explain regime articulated in Bill C-25.

The efforts of provincial security regulators, issuers, organizations such as Catalyst, the 30% Club—of which Ontario Teachers' is a member—and institutional investors have all contributed to increasing female participation on boards. While we are not where we need to be, Ontario Teachers' strongly believes that a sustained effort, as well as the comply or explain approach of Bill C-25, will continue to move us down the path of increasing gender diversity both on boards and in senior management. This will open organizations to a broader diversity of opinions, experiences, and outlooks in their decision-making. It is our hope that someday in the not-so-distant future, we will no longer need to have discussions on how to make boards and senior management more diverse.

In closing, I would once again like to thank the chair and the committee members for inviting me here today to reiterate Ontario Teachers' support for the passage of Bill C-25. I hope you found my comments useful. I would be pleased to answer any questions you may have. I would also like to encourage each of you to not hesitate to approach me at any time should you have further questions.

Thank you.

[The Chair, Liberal, Dan Ruimy]

Excellent. We have 20 seconds to spare. Thank you very much.

We are going to move on to Mr. Lalonde, coming to us from Toronto via teleconference.

Welcome, sir. You have 10 minutes.

[Paul Lalonde, President and Chair of the Board of Directors, Transparency International Canada]

Thank you, Mr. Chairman.

I would like to thank the committee for this invitation.

My remarks will be in English, but I will be pleased to answer questions in French.

Again, thanks for the opportunity to be heard by video conference. I think the technology is wonderful, and I appreciate the committee's efforts in using it in this way.

With me, present in Ottawa today, is Denis Meunier, a member of Transparency International Canada and of our beneficial ownership working group. He will have a few remarks at the end as well.

I'd like to make a few opening remarks about our recommendations with respect to Bill C-25, but first, here are a few words about who we are.

Transparency International Canada is the Canadian chapter of Transparency International, the world's leading non-governmental anti-corruption organization, with more than 100 chapters worldwide and an international secretariat in Berlin. Through advocacy, research, and capacity-building work, Transparency International strives toward a world that is free of corruption. Our chapter here in Canada has been at the forefront of the national anti-corruption agenda for more than 20 years. Our chapter's main concern related to Bill C-25 is on beneficial ownership of companies and the transparency of that beneficial ownership.

We welcome the Government of Canada's measure to reform current legislation that affects this area through the proposed amendments. However, we believe that Bill C-25 can go further to address the negative impacts of opaque beneficial ownership of companies in Canadian corporate registries.

To provide a bit of context, public expectations about transparency are changing and increasing. Whistle-blower disclosures like the Panama papers have provided concrete examples of how anonymous companies and legal entities are abused by those seeking to avoid taxes and launder the proceeds of crime and corruption, among other nefarious aims. The abuses exposed through these leaks and others have triggered widespread interest in what was once dismissed as a rather mundane or sleepy legal topic.

Governments around the world are also recognizing the threats posed by underregulated legal entities and arrangements. In 2014, recognizing this, the G20 issued its high-level principles on beneficial ownership, acknowledging the importance of transparency in protecting the integrity of the global financial system. In 2016 the European Commission mandated its 27 member countries to collect and publish information on the beneficial owners of companies registered within the union. More recently, the U.K. has already enacted legislation and implemented new disclosure rules, and other countries are following suit. That is not so much the case in Canada.

As more countries put up barriers to the criminal and corrupt, those looking to game the system will gravitate to jurisdictions with weaker standards. A recent Transparency International report, of which we're very proud, was titled, “No Reason to Hide: Unmasking the Anonymous Owners of Canadian Companies and Trusts”. We submitted the executive summary of this report to the committee clerk. In it, we highlight a 2015 Transparency International analysis that found Canada's performance was either weak or very weak in seven of the 10 G20 principles on beneficial ownership. In September of last year, the international Financial Action Task Force published a highly critical evaluation of Canada's corporate secrecy regime. The task force called on the government to make beneficial ownership information accessible as a matter of priority.

These reports demonstrate that Canadian companies are particularly vulnerable to abuse. Beneficial owners can remain entirely anonymous, their identities concealed even from the government agencies entrusted with enforcing laws and regulations—and collecting taxes, by the way. Anonymous ownership creates unnecessary obstacles for our law enforcement and tax authorities, fostering a climate of impunity due to low perceived enforcement risks.

Recently the Toronto Star and CBC showed how financial consultants abroad have a specific term for facilitating tax dodging and funnelling illicit funds in Canada. They call it “snow washing”. This is a stain on Canada's reputation that we have to clean up. By stripping anonymity from companies, Canada would make financial crimes and corruption easier to detect and prosecute, thereby deterring them.

Beneficial ownership reform presents an opportunity for Canada to adapt to emerging international standards and avoid becoming a beacon for the corrupt. To this end, we submitted recommendations to the committee in the executive summary of our report to address the negative impacts of anonymous beneficial ownership of companies. As a priority, we recommend that the Government of Canada adopt measures to require all companies in the country to identify their beneficial owners. The government should then publish this information in a central registry that is accessible to the public in an open data format.

We recommend that Parliament also conduct a study into such a public registry, but TI Canada believes that either way it will be a low-cost, high-impact way of preventing corporate beneficial ownership misuse and would improve the effectiveness of law enforcement and tax authorities. It would help the private sector comply with regulations and make better business and investment decisions by facilitating due diligence and know-your-client exercises. It would also bolster Canada's reputation for fairness and transparency both at home and abroad.

Nominee directors and shareholders should be identified as such in corporate filings. They should be required to name the natural person on whose behalf they are acting. Nominees should keep contact details of that individual and ensure that they are accurate and up to date.

Federal and provincial corporate registration authorities should be given adequate resources and a mandate to independently verify the information filed by legal entities, including the identities of directors and shareholders. Registries should be granted authority to apply sanctions for non-compliance with these requirements.

Additionally, TI Canada welcomes Bill C-25's measures to eliminate anonymous ownership of bearer shares. We noted that change, and we applaud the government for bringing it; however, we recommend that existing bearer shares should be converted to registered shares automatically upon a company's knowledge of the identity of the bearer of the certificate warrant or other instrument. In addition, we recommend that the holder of a bearer share who tries to receive dividends or exercise voting rights using the bearer shares should automatically have those bearer shares converted to registered shares.

The Government of Canada should establish and apply dissuasive and proportionate sanctions for non-compliance with beneficial ownership disclosure rules. These sanctions should include both criminal and civil penalties, and should be applied to ensure that beneficial ownership information is truthful, accurate, and filed in a timely manner. Reporting obligations and sanctions for non-compliance should focus on those in control of legal entities and arrangements, as well as beneficial owners themselves.

The Government of Canada should lead in the implementation of these recommendations, while also working with the provinces to develop supporting legislation at the provincial level.

I want to thank you for your time today. That was a very quick summary of our views and recommendations on Bill C-25 and beneficial ownership transparency.

I'd now like to pass it over to Mr. Meunier to introduce himself and say a few additional words before we make ourselves available for questions.

[Denis Meunier, Member, Beneficial Ownership Working Group, Transparency International Canada]

I'm a former public servant with over 36 years of service in the Government of Canada. I retired as a deputy director of FINTRAC, and previous to that I was director general of criminal investigations at Canada Revenue Agency. I worked four years for the International Monetary Fund on anti-money laundering and terrorist financing, and I joined Transparency International as a member of the working group on beneficial ownership. I hope to be able to answer any questions.

I will be pleased to answer in French.

[The Chair, Liberal, Dan Ruimy]

Excellent. Thank you both.

We are now going to move on to Dr. Cukier, from Diversity Institute at Ryerson University. You have 10 minutes.

[Professor Wendy Cukier, Director, Diversity Institute at Ryerson University]

Thank you very much. I appreciate the opportunity to address the committee face to face. I apologize in advance for not having a written brief in both official languages, but I will follow up my remarks with the written submission.

I should also note that my presentation today is on behalf of a number of organizations, including the Information and Communications Technology Council's diversity committee, the Toronto Region Immigrant Employment Council, the Mosaic Institute, the Canadian Women's Foundation, and prominent individuals such as Phil Fontaine.

I'm here to focus only on the sections of the legislation that apply to diversity on boards.

I first want to congratulate the government and in fact all parties for supporting this very important initiative. I think we have seen good success and results from comply-or-explain approaches. If we think about Canada's employment equity legislation, for example, our research would suggest it has helped level the playing field so we can advance a true meritocracy.

However, I want to focus my comments on one point, and one point only. As important as it is to advance women on boards, using a definition of “diversity” that only focuses on gender, I think, is consistent neither with Canadian values nor with our economic and social interests. I want to take the few minutes that I have to articulate the argument about why that is important and to suggest ways in which you might use the regulations associated with this bill to accommodate these concerns, which I think are shared by many.

Put simply, if all we do is replace white men with white women on the boards of our corporations, we are not, in my view, behaving as we would expect in the 21st century.

Diversity Institute was founded with the intention of providing evidence-based approaches to increasing inclusion. I am from the Ted Rogers School of Management. I've been an industry and a business professor for 30 years, so I come at this very much from a perspective that is grounded in human rights and a commitment to equity, but also with a very strong recognition of the business case for diversity.

My sector is primarily information communications technology, although I work in other sectors as well. In that sector in particular—which, as you know, is driving economic growth and innovation in this country—gender is important, but so are visible minorities, so are people with disabilities, and so is the growing population of aboriginal people.

I want to highlight some of the research that brings us to these conclusions.

One of the big projects that we have undertaken for the last number of years focuses specifically on diversity in leadership roles in the public sector; in government; in elected officials among non-governmental organizations, agencies, boards, and commissions; and the education sector, and of course what is particularly relevant today is the work that we have done in the corporate sector. In addition to looking at overall data for the country, we have focused particularly on large urban centres. We have done research in, for example, the greater Toronto area and we recently released a study on the greater Montreal area.

Unfortunately the pictures in my presentation are only in English, so I can't distribute them at this point in time, but there are really only a few key points that I would like you to think about and urge you to consider.

First of all, when we look at the greater Montreal area, for example, women are half the population. They're about 37% of senior leaders overall, and 21% or 22% of corporate directors and CEOs in the largest corporations headquartered in Montreal. They're 50% of the population, but they make up only about 22% of the boards of directors and C-suite executives in large corporations. On the other hand, racialized minorities, while 20% of the population, make up only about 6% of senior leaders and just over 1% of the leaders in large corporations. It's a huge difference in the level of representation. It's, in my view, something we simply cannot ignore.

The second point I want to underscore is that while the percentage of women in leadership roles has increased dramatically over the last three years—it's still not where it should be, but it's definitely moving in the right direction—the percentage of racialized minorities in leadership roles in Montreal has declined. That should be cause for concern, given that we all know that this segment of the population is growing and that all employment growth in the next decade is likely to come from immigration and therefore largely from racialized minorities.

If we look at Toronto, we see a similar phenomenon. Toronto is really easy, conceptually. In the greater Toronto area, 50% of the population is female and 50% of the population is visible or racialized minorities. If you look at the representation of women and racialized minorities at the most senior levels, a very different picture appears. Women account for 33% of senior leaders across sectors, but racialized minorities account for only 12%. If we look at racialized women compared to white women—and remember, for every white woman there's a racialized woman in the GTA—we see that white women outnumber racialized women by seven to one. This is not an equitable situation.

When we look at corporate leadership in the GTA, we see more progress than perhaps has been made in other areas, but it's still only 5%. Only 5% of the most senior leaders of large corporations and board members in companies headquartered in the GTA are racialized minorities, even though racialized minorities are 50% of the population and 50% of the workers, and in many cases better educated than others. I can elaborate on this in the questions.

The third key point that comes out in our research is that the overall averages—the percentages I've cited—mask huge variations between organizations. For example, in Montreal, in the corporate sector, 9% of companies—not a big number—had more than 40% women in senior leadership roles. That's getting pretty close to parity. Another 25% had none. When you see some companies with 40% and some companies with none, the only thing I want you to remember is that it proves it is not a question of the pool. What that proves is that it's a question of intention among those organizations.

I hope that makes sense. I know it's hard to talk about data when you don't have it in front of you.

Similarly, when we look at racialized minorities in Montreal, we see that only three of the largest 60 companies had any visible minorities on their boards, and only nine had one on their executive team.

These are important things to consider, given that this segment of the population is increasing across Canada.

The other important point I wanted to underscore is that, as was already mentioned, these issues and who you see in leadership roles have a direct and profound impact on corporate performance, and this doesn't just apply to women. We know from large corporations like Xerox that the engagement of immigrants and diverse populations has driven productivity and innovation.

The final point I wanted to make is really a plea on behalf of all Canadians. It's very important to address the inequities that continue to face women in leadership, and you've heard from many women's organizations on these issues. As I said at the outset, though, if we only focus on gender diversity, we are missing a huge opportunity. The percentage of women in the Canadian population is not going to increase dramatically over the next five to 10 years. The percentage of racialized minorities, of aboriginal people, and of people with disabilities is. We should be looking to the future, not to the past, in crafting this legislation.

Thank you.

[The Chair, Liberal, Dan Ruimy]

Thank you very much, Professor Cukier.

We are going to move directly into questions.

Mr. Arya, you have seven minutes.

[Chandra Arya, Liberal, Nepean, ON]

Thank you, Mr. Chair.

Professor Cukier, I'll come to you later.

Mr. Schneider, how do you define “diversity” beyond gender diversity?

[Paul Schneider]

It's across a broad spectrum. It would be gender, nationality, experiences, and geography, so it's a very broad definition that we have of diversity.

[Chandra Arya, Liberal, Nepean, ON]

How do co-operatives formulate policy if you can't define it?

[Paul Schneider]

Well, we are focusing on gender right now, as I said in my—

[Chandra Arya, Liberal, Nepean, ON]

Is it your view that this bill focuses on gender diversity?

[Paul Schneider]

Yes.

[Chandra Arya, Liberal, Nepean, ON]

Thank you.

Professor Cukier, it's quite an interesting thing. You talked about diversity, which is not defined, and you said it is not consistent with Canadian values. The powerful numbers you have show that there is something missing here. How do you define diversity?

[Prof. Wendy Cukier]

I take the easy way out.

I know that there are some people who would argue, for example, that the categories of designated groups in the employment equity legislation could be rethought. However, for the purposes of this legislation, I don't understand why the government wouldn't simply build on federal legislation that already exists, which defines visible minorities, women, people with disabilities, and aboriginal people as designated groups that require particular interventions.

[Chandra Arya, Liberal, Nepean, ON]

We have here a senior officer of the Ontario Teachers' Pension Plan, which invests in a lot of corporate entities in Canada and around the world. If he thinks that the text of the bill, as it is, appears to be only for gender diversity, is that a matter of concern to you?

[Prof. Wendy Cukier]

It is a matter of concern to me. Perhaps I'm wrong because I'm not a lawyer, but as I read the legislation, it leaves the matter of diversity to be defined by regulation. Is that correct?

[Chandra Arya, Liberal, Nepean, ON]

Yes.

[Prof. Wendy Cukier]

I think that provides you with an opportunity to pass the legislation, which is critically important. I would add a specific reporting requirement in the language. I have a proposed amendment. I think that then gives us more time to work through some of these issues with respect to diversity.

One solution, for instance, might be to define mandatory requirements around gender, but to allow for voluntary reporting around some of the other areas. I think this might be a compromise that works, because so many large corporations are federally regulated. They report on those four categories anyway. It's a competitive advantage in this current environment to show that you take diversity seriously.

Also, I believe that federally regulated corporations as well as federal contractors will report on all forms of diversity, and that will help push others forward.

My preferred state is to completely define diversity in the regulations associated with this law and to make the definition consistent with the employment equity legislation, because that is something that has been in place now for 30 years, and in my view it has produced results.

[Chandra Arya, Liberal, Nepean, ON]

I'm glad you mentioned employment equity legislation, because here we are not just focusing on the board level but we're also focusing on the senior management level.

Mr. Schneider, it's quite surprising that you saw this as just limited to gender diversity, because the intent of the bill, if I am not wrong, is to go beyond gender diversity here. If a person like you is not able to get that, I'm worried that if the bill goes to the corporate sector as is, there may be a lot of confusion and it may not allow us to achieve the objectives we set forth.

[Paul Schneider]

I guess that could be a concern. I just would like to reiterate our view that we are very supportive of all forms of diversity on a board and in senior management because, as has been proven in studies, it does lead to better performance, and at the end of the day, Ontario Teachers' Pension Plan is interested in providing retirement security to our pensioners, so we need companies that will grow. As I've said, we support any action that would do that.

[Chandra Arya, Liberal, Nepean, ON]

Your pension board invests all across the world.

[Paul Schneider]

Yes, we do.

[Chandra Arya, Liberal, Nepean, ON]

Do you have any knowledge of the diversity policies in, say, other OECD countries?