News & Events
Remarks by David Wilson
Chair, Ontario Securities Commission
“Canadian Securities Regulation: Looking Forward to 2006-2007”
The Canadian Club of Montreal
Montreal , Quebec
May 29, 2006
Check against delivery
Merci beaucoup.
Mesdames et messieurs, bonjour. Il me fait plaisir d'être ici aujourd’hui
à Montréal, une ville qui me fait toujours plaisir de visiter. Permettez moi, toute fois, de passer à ma langue maternelle, l'anglais, pour le reste de mes commentaires.
I’m delighted to be sharing the stage with Jean. After I conclude my remarks, Jean will join me so we can take some of your questions.
I want to congratulate Jean on his significant contribution to nation-wide regulatory cooperation. We’ve been getting to know each other pretty well. Successful cooperation across provincial borders on complex issues requires good personal chemistry between the leaders. For my part, I feel very comfortable with Jean as a CSA partner.
As you all know, issues in securities regulation don’t know provincial borders.
And that presents some challenges. But, as Lee Iacocca once said: “We are continuously faced with amazing opportunities presented in the guise of insolvable problems.” The Canadian Securities Administrators have opportunities to work together. I want to discuss with you some of the issues we are working on.
- Issues such as corporate governance, including governance of closely-controlled companies and disclosure of executive compensation.
- Issues such as the governance of pooled investment vehicles.
- And issues such as internal controls, and Canada ’s response to Section 404 of the Sarbanes-Oxley Act.
One issue I will not be addressing today is the question of a common securities regulatory structure for Canada . In a couple of weeks the Minister responsible for securities regulation in Ontario will be hosting a meeting of his counterparts from across the country. Also, in a few weeks time, we expect the Crawford Panel will release its final report on the subject of a common securities regulator. At the moment, the issue of a common securities regulatory structure for Canada is a matter for the politicians to consider. While that’s happening, we regulators need to put our heads down and do our best to develop as harmonized a system as we can.
Let’s look at the first issue that I mentioned, corporate governance. I think it’s fair to say that corporate governance structures in Canada are basically sound. There was a flurry of very progressive activity in this area in the aftermath of the Enron and WorldCom meltdowns – and that work is ongoing. The activity included the passage of the Sarbanes-Oxley Act in the United States and comparable new investor confidence rules here in Canada .
However, in some areas we do have more work to do.
One is the governance of closely-controlled companies. They represent a big share of Canada ’s capital markets. If a 20 percent ownership or voting threshold represents a significant degree of control, then almost two-thirds of the companies listed on the TSX are closely-controlled. In the U.S. , only about one fifth of companies listed on the S&P 500 fall into this category.
Given the proportion of closely-controlled companies in our market, do such companies warrant a customized governance regime?
If so, we have to consider whether the CSA’s corporate governance guidelines – minted about one year ago – are appropriate when applied to controlled companies.
Should controlling shareholders be treated like all other shareholders? Are their interests aligned with the interests of other shareholders?
For example, there are clear temptations when shareholders wield voting power that’s sharply disproportionate with their equity exposure. There’s the risk that one might extract private benefit from the situation.
But some see advantages offsetting that risk – some controlling shareholders insulate a company from a short-term mindset, allowing management − often the company’s founders − to pursue a long-term vision. When you have a lot of money on the table, you have a strong interest in effective policies.
Led by Quebec , the CSA are studying our Governance Guidelines – and related “comply or disclose requirements” – as they apply to closely-controlled companies. We’ll be seeking input from interested parties.
Another corporate governance issue we need to examine is the disclosure of executive compensation.
In the words of someone who has invested in a lot of companies, Warren Buffet: “Executive compensation is the acid test of corporate governance.”
Executive compensation is getting tougher for investors to understand. It seems like no one is just paid a straight salary anymore.
Of course, companies have to be able to align shareholder and management goals. But what’s the result we’re seeing in the marketplace? A lot of complex stock-option deals, deferred stock plans, and top-hat pensions.
Disclosure can’t just mean providing information. It also has to provide context and clarity. Shareholders who want to know how much a CEO or CFO earns shouldn’t be expected to juggle several financial tables and footnotes.
Shareholders have a right to a simple answer to a simple question: How much are they – the shareholders – paying the managers – in total?
And shareholders have a right to know whether – and how – directors have rigorously linked rewards for senior executives to overall corporate performance. Does compensation reflect how the company is actually performing?
Regulators in Canada have been trying to bring more clarity to issues related to the disclosure of executive compensation. We’re considering to what extent we can move in the direction of a principles-based approach, rather than a strict rules-based approach. The SEC took 370 pages to describe their proposal on executive compensation disclosure. I’m hoping in Canada we can do it in a way that requires cutting down fewer trees.
What other areas of corporate governance are we examining? The governance of mutual funds and other similar pooled fund vehicles.
Individual Canadians have invested a staggering $650 billion in conventional mutual funds − 25 billion new dollars last year alone.
Mutual fund investors are the ultimate passive investors. When their interests come into conflict with the interests of the fund managers, they need someone in the room representing their interests. The CSA have been working to fill that gap.
We expect to publish a rule this year to establish a minimum, consistent standard of governance for all publicly offered investment funds. It would put in place an Independent Review Committee for investment funds – providing increased protection for investors when their interests come into conflict with the interests of the fund managers.
This is an example of how we are working together, beyond our own provinces, to shape policies that benefit the entire market. I look forward to all CSA members re-examining this issue and deciding to join in this policy.
Of course, one of the most widely-discussed issues of corporate governance is the matter of internal controls. In the U.S. that was addressed by Section 404 of the Sarbanes-Oxley Act, commonly referred to as SOX 404.
The consensus was that any policy we arrived at had to be right for the Canadian market.
The cost of meeting the SOX 404 requirements appears to have had a significant impact on the U.S. market. Of the 10 largest global IPOs last year, not one chose to register in the U.S.
We Canadian regulators had to ask ourselves: Was this policy right for Canada ? It would entail additional cost and effort for all of the TSX-listed companies that are not interlisted in the U.S. or who do not require SEC registration. That means 1,100 TSX-listed companies – 3,000 companies when you include the more entrepreneurial TSX Venture Exchange issuers. The CSA had to make a determination that would have an impact on companies with an aggregate market cap of about half-a-trillion dollars.
I’m very encouraged by the way Canadian securities regulators worked together to address this important issue – using a national approach.
Last March, the CSA announced a proposal that will improve the transparency, quality and reliability of financial reporting without unduly burdening our publicly-traded companies.
Companies in Canada would be required to report on and certify the effectiveness of their internal controls over financial reporting. But they would not be required to obtain an opinion on that from their external auditors.
This is a Canadian proposal that meets the needs of the Canadian market. We’re committed to ensuring that investors have the information they need to make an informed decision. We’re determined to make sure that boards of directors serve as the eyes, ears and voice of shareholders inside the board room.
But Canadian investors also depend on an efficient, competitive Canadian capital market. I believe that the proposal we arrived at on internal controls is the right policy for Canada .
And I believe the process demonstrates the potential for inter-provincial cooperation. No one ever said that Canada is an easy place to try to make national policies. Ours is a diverse country – geographically, politically, culturally and economically. If we asked, Canadians would not give up our diversity. But we also believe in a core of shared values. One of these is the need for fair, honest and transparent securities markets.
That’s also why we’re working together to improve enforcement. As former SEC Chairman Richard Breeden told me recently : You can have the best regulations in the world, but if you don’t enforce them effectively, the greatest policies don’t mean a damn thing.
Market abuses are an attack on the core characteristic that is crucial to our markets – trust. It isn’t enough to enforce the rules after they have been violated. That’s why I strongly agree with Jean that our common goal must be to prevent, detect and deter market abuses – before people get hurt.
Jean and I – and our CSA colleagues across the country – are committed to similar goals. While we cannot expect unanimity on every issue, we do approach these issues in a spirit of goodwill and collegiality. That’s the only way to effectively represent our common stakeholders.
Together, we must continue to build a national consensus on issues that have a national impact.
Together, we must work to ensure that Canadian securities regulation is competitive with the best in the world.
Together, we must ensure that Canadian capital markets continue to command global respect – and help grow prosperity across Canada .
Thank you.
