I call the meeting to order.
Thank you, everybody, and welcome back. This is meeting number 44 of the Standing Committee on Industry, Science and Technology. Pursuant to the order of reference of Friday, December 9, 2016, we are studying Bill .
Today, from the Department of Industry, we have Mitch Davies, assistant deputy minister, strategic policy sector, and Mark Schaan, director general, marketplace framework policy branch, strategic policy sector.
You have 10 minutes.
Go ahead, Mr. Davies.
Good morning, Mr. Chair and members of the committee. It's our pleasure to be here today with you to speak to Bill .
Innovation, Science and Economic Development's core mandate is to help make the Canadian economy and industry more productive and competitive in a global economy, thus improving the economic and social well-being of Canadians. One of the critical ways in which we accomplish this is by ensuring that our framework legislation is up to date and in line with international best practices. Maintaining effective legislative frameworks for business is a critical endeavour, since these laws lay out the ground rules for doing business in Canada.
We're in constant review of the laws administered by our department, how they compare to other jurisdictions, and how they meet the expectations and needs of Canadians. The Canada Business Corporations Act, or CBCA, is an important piece of framework legislation that sets out basic rules for federal corporations. This law establishes the legal regulatory framework for close to 270,000 federally incorporated companies. Allowing for ease of doing business by providing for clear and predictable operating rules is critical, as our laws act as a foundation for innovation in a growing economy.
Governing the relationship between a corporation and its shareholders is one of the most critical elements of a sound business landscape, and that's why it's important to make sure that the CBCA continues to meet its policy objectives. To this end, the department embarked on a broad stakeholder consultation in 2014 to canvass the views of those most affected by the CBCA. We received over 80 submissions with a range of viewpoints on how best to proceed.
Some of these areas we will continue to look into, where thought is still developing and experience abroad is still fresh. Others bore a clearer consensus among the competing viewpoints. It is this set of issues that we have chosen to address by way of Bill before you today, in order to optimize Canada's corporate governance law to allow our businesses to thrive and innovate within as modern and responsive a framework as possible.
The items you find in Bill concern the way corporate directors are elected, how diversity is promoted in the business sector, and how corporations communicate with their shareholders. Certain of these changes will be reflected not only in the CBCA but in its companion statutes that deal with co-operatives and the not-for-profit corporations as well.
Other elements of this bill concern the clear and unambiguous prohibition of unregistered instruments that can be misused for criminal means and an update to how affiliated entities are treated under competition law. The changes being made here are informed by best practices from here in Canada and at the provincial level, as well as from our main trading partners abroad.
To get more specific, Bill makes a number of discrete but important updates to Canada's corporate and co-operative laws, which I'll highlight briefly here, and we'll happily field questions that you may have afterward.
The bill makes three important changes to the process by which directors are elected. First, it ensures that elections are held for all directors annually, which is an update from the current requirement under the CBCA that allows directors to serve up to three years at a time, with staggered terms.
Second, it ensures that directors are elected individually, rather than as part of an all-or-nothing slate of directors. This rule, as well as annual elections, would bring the CBCA in line with existing TSX rules.
Third, if the number of spots open on a board of directors is equal to the number of candidates presented—that is, it is an uncontested election—voters will now have the option to vote against a candidate, rather than simply withholding a vote, and that candidate will only assume the directorship if a majority of votes cast are in their favour. This will prevent the nearly automatic election of directors on the basis of even a small number of “for” votes.
Bill will also support efforts to increase diversity on corporate boards and in senior management by encouraging an exchange of information on corporate practices in this regard between a company and its shareholders. The bill will require publicly traded CBCA corporations or distributing corporations, as they're referred to in the act, to make disclosures on diversity on their boards and senior management, including the policies they have in place. If no such policies exist, boards will have to explain why to their shareholders. It's a system commonly referred to as comply or explain.
Furthermore, the bill will leverage modern digital technologies and reduce paper burden by allowing corporations to send a notice to shareholders that sets out instructions on how to obtain documents from the corporation's website in advance of a shareholder meeting.
While it's not believed that bearer shares or bearer share warrants—unregistered financial instruments whose proof is in their possession—are in common use in Canada, the bill would nevertheless clarify in very certain terms that these instruments are prohibited. Any remaining holders of bearer shares would have the opportunity to convert them into a registered form of share ownership.
Bearer instruments have been identified as vehicles for money laundering and terrorism financing. These amendments would enhance transparency and support Canada's compliance with international standards.
Finally, the bill would make a targeted but important change to the Competition Act to provide business certainty and reduce administrative burden. The rules for determining which business entities are affiliated with one another would be applied more broadly to take fully into account modern unincorporated structures, such as partnerships and trusts. This revision would increase certainty for businesses by ensuring that they would not be needlessly investigated or sanctioned under law for dealings with their own affiliates as though they were competitors, and also sparing the Competition Bureau from a needless investigation or merger review in these circumstances.
There are other minor amendments in the bill of a more administrative nature, including streamlining documents required to form a co-operative and harmonizing English and French versions of these laws, but the items I've mentioned are the key features.
I and my colleague would be pleased to provide clarification and answer questions on these points. Thank you for your time.
Perhaps I can jump in here to indicate that in fact Bill actually goes an explicit step further.
Currently, under securities commissions' laws in eight of the securities commissions in the country, corporations on an annual basis already need to file the gender makeup of their board and the gender makeup of their senior management.
It's the explicit intent of the bill to go beyond that and ask companies to file their diversity policy and summarize it for their shareholders, facilitating a conversation between shareholders and the corporation. In fact, in the draft regulations, Corporations Canada has indicated that the policy actually specifically indicates a written policy relating to diversity other than gender amongst the directors and members of senior management.
It is actually explicit that it is in fact beyond gender, which would put us in a—
I'll start, and then I'll ask my colleague to add a few comments.
I'll go back to the intention of the changes in the voting rules, which is a part of the question. What's being done is to change from what's called a pluralist model to a majority-vote model, which has been called for by experts in corporate governance, particularly those on the owner side, in order to improve the responsiveness of the folks who are put forward for board positions to the shareholders by requiring they have majority support rather than simply perhaps one “yes” vote, with all the other votes being uncontested, or being part of a slate, which doesn't allow for differentiation between different directors. We're using this approach to extend shareholder democracy and create more responsiveness.
This equally applies if it's a distributing entity of any sort. Obviously, a non-profit isn't distributing to its ownership, so the policy doesn't apply.
The point is to make a stronger linkage between the interests of the owners of the firm and the activity of the board of directors that actually carries out that fiduciary role.
What's at the heart of the change, in terms of the notice and access system, is relieving companies of costs by using digital conveyance for a lot of paper that otherwise has to be prepared and mailed to shareholders. That's a big win in terms of the costs of doing business.
In terms of the rollout of these changes, I think we've been quite mindful that at one level we're addressing 10% or thereabouts of the market share of incorporated entities in the country. You can also incorporate at the provincial level, so we also have an overlay of provincial securities rules with which we're seeking to maximize our alignment. We don't want to be offside by creating a whole set of other burdens or requirements. That's something we've taken quite deliberately into consideration in crafting this bill.
With respect to preparing slates for voting and in order to respond to majority voting, I think the effort required there would really just be to find candidates who will be suitable, who will actually get the majority nod to be on your board of directors. I wouldn't describe that as a cost. I think that's a win in terms of overall governance.
On the diversity policy, here we're mainly extending or broadening the option to have a broader and fuller diversity policy expressed beyond what might now be required by a securities exchange, which might be limited to gender. This allows for companies to go further, and that option will be taken up by companies as they see fit.
Thank you to our witnesses for being here today.
It's true that this bill has taken quite some time to get to the House, given the fact that a lot of money laundering has gone on through processes that we can actually control rather easily, so I'm glad to see this come forward.
There are some chances to make improvements to the bill. I would recognize that this is only the second time that the bill has come to Parliament in over 40 years. Hopefully we'll see this get done much more efficiently.
Importantly, some changes are warranted. I know we've had some discussions here about the definition of diversity. In terms of consultations from 2014 on, who did you consult and where? Is that list available for members? I didn't check your website to see if it was up there. I imagine it might be. Could you give us a little background on that? That would be helpful, please.
Thank you for the question.
In 2014, we did consult, using a document that posed a wide array of corporate governance issues within the Canada Business Corporations Act on a whole series of elements. In fact, we received over 88 responses, all of which are publicly available on our website.
On the issue of diversity, for instance, we actually had 43 submissions. Not everyone responded to every single element that we asked about, but we asked about over two dozen elements of the Canada Business Corporations Act to try to get a wide range of views. Those elements included diversity, organizations, corporate governance organizations, law firms, the corporate community, pension funds, etc.
I get that. I only have a limited time here, so I'm sorry to interrupt, Mr. Davies, but....
There was a blank opening, so I would suggest that the only other bill this committee really dealt with was the Marrakesh treaty, which went rather quickly through here. This was with regard to print availability for the blind. We have over 50% unemployment for persons with disabilities who are looking for work in the workplace. That doesn't count all the ones who have given up. I hope to deal with that a little later.
I am going to move to the “comply or explain” idea. Comply or explain is not a new concept in this situation. In fact, several provinces and some territories already have this in place. Alberta is moving towards it as well. British Columbia is about the only one that doesn't have comply or explain.
This has been in place for a number of years. Since 2014, the diversity of boards of major corporations has gone up only 2.4% for women. I think that by math alone you'd be able to get better than 2.4%. What type of consultation has been done with the provinces, and what's failing in their system to raise the tide of women?
Finally, what types of penalties are there on comply or explain? Is “comply” basically saying, “I'm going to do this. I've added one position in three years”, and “explain” saying, “We're just not really good at this, so we've had only one position in two years”? That doesn't even count the other diversity issues with visual disabilities, other physical disabilities, or race and ethnicity diversity. What penalties are in place, and what have you learned from the provinces? It just doesn't seem to be working very quickly.
I'll start and go back to the point about the provincial systems that have taken on comply or explain. The TSX would be notable, and it applies to most of corporate Canada.
I can't speak to how they would view how this is unfolding in what they have put in place. I certainly acknowledge the statistics and the points you are raising in terms of the progress made so far. I would say that obviously it's not finished and it needs to improve in terms of the trends.
The United Kingdom and Australia are jurisdictions we looked at that have implemented comply or explain. In the U.K.'s case, they had a doubling of representation of women on boards and in senior management. Australia actually exceeded that, coming close to tripling representation. I see no particular reason why the Canadian corporate community wouldn't be able to meet or exceed this sort of progress.
The minister has also made it very clear, and has done so publicly, that there is a loop-back in this mechanism, which is that all these filings will come back to the director of Corporations Canada so that we can analyze and look at the improvements and reflect on whether or not more needs to be done. The minister has been open to that possibility.
As for a penalty, there is no penalty structure, other than bringing more transparency to the matter, bringing formality to it, making it something that corporations have to do and take account of, and then obviously providing a feedback loop to the public so that we can evaluate whether we are making progress and decide on the next steps.
The changes called for here today do take a look at the ease of doing business within the corporate statute and try to facilitate an appropriate mechanism by which corporations can go about their business and govern themselves accordingly.
There are a couple of zones here where.... For instance, on notice and access, currently there is an exemption requirement that corporations have to request the permission of the director of Corporations Canada to pursue notice and access. This will now be the standard and minimize the administrative burden of having to annually ask whether or not it's okay to use a website to share their corporate information. They will now be able to pursue all of that electronically, which also has a benefit to shareholders in terms of allowing them to more easily propose measures to their boards without having to overcome the administrative burden that the corporation sometimes indicates is a challenge to those proposals.
In terms of the filing requirements to the director of Corporations Canada, we have added the diversity requirement, but in most other cases this is all easily filed through the securities commission for distributing corporations. It's one form, essentially, that allows them to meet all their requirements, both under our act and under the securities commission's rules.
I'll just take the opportunity of your earlier question and build on what you've asked.
Mr. Chair, I think the bill doesn't address this specifically, but another matter that's under consideration is arrangements on internal trade in order to make it easier to do business across the country. One of the areas that has been identified by the business community as a long-standing issue is multiple registration across jurisdictions. This is an area where we've worked to advance conversation with the provinces that also have jurisdiction to look at how we can streamline this process. Filing paperwork and providing information to multiple levels of government are things that we need to work on and find solutions to, in particular with the opportunity of technology allowing us to do this sort of thing. I think that's one of the trends.
I think the other is a broader trend in the shareholder democracy provisions here. There's a very active debate. I would say that the matters in the bill are those on which there is a solid consensus on bringing them forward, so obviously they are met with support here, and obviously we can see this pass through. However, there's a debate on the different approaches to enhance democracy and the overall objectives of corporations. There's a broader debate about socially beneficial corporations and social responsibility, so there's actually a wide range and a wide, broad debate. I think all of those debates will continue, and we'll continue to participate, and I take the earlier question that we need to also reflect and come back to these laws on a more regular basis to make sure we're keeping them up to date. That's a very well-founded point.
Thank you, gentlemen, for appearing today and for taking the time to present on this bill.
One of the things that has been brought up by me and by a couple of our colleagues across the way is targets. A frustration I have with government, coming from the private sector, is that we come forward with these things that are intended to achieve something, but we never actually determine what it is we're trying to achieve in terms of measurements and a timeline to do so, which is integral to any plan.
I understand this bill was first written or at least conceived for the 2015 budget, and now it has come forward two years later. I guess the question I have is, what is the target for the participation of women on boards of directors and in senior positions? What is it you're trying to achieve over what timeline, so that we can measure the results of these changes against whatever the measurements are?
I would say, just to represent the process we went through to get to this enactment of a comply and explain model, that this is where there's more consensus on the usefulness of putting this into a federal statute. I think what has been done by adding to that further is to also extend this beyond gender to diversity in the broad sense. These are both constructive.
As to consideration of targets, this is a very active, rich debate. For some parts of what we would be trying to measure, there is some decent measurement on it. Gender diversity is fairly well measured. For diversity in respect of other dimensions that could well form under this statute, those measures will have to be developed over time to get the right kind of data to be able to track it.
I think it's important that the minister has emphasized, in presenting this bill, the need to see improvement. Obviously you want to see the trends moving in a positive direction. On gender diversity, we know where we are and what improvement would look like. It's definitely north of where we are. He's obviously said that based on the experience under this act, he would decide on whether further measures would be required. I think that's as far as it goes at the moment, as this statute is being brought forward at this point.
As colleagues around the table have indicated, there's a whole diversity of corporations that are covered by our act, the Canada Business Corporations Act. Distributing corporations come in a whole series of forms.
What this bill does is facilitate a conversation between shareholders and their boards about what diversity looks like for them. Overall, we'll be able to see what progress looks like.
There's a whole host of civil society actors that are active in this space. There are organizations like Catalyst Canada. There are organizations like the Women's Executive Network. There are organizations like the centre on board diversity. All of those organizations have been actively working with the shareholder community to be able to arm them with the right kinds of discussions to be able to put pressure on their organizations to be able to say, “What does good look like for your company and your organization?”
Then at the aggregate level they've made things like the 30% Club or other organizations. I think that conversation is what this bill facilitates. Shareholders and corporations will now have an annual discussion on these issues, and civil society actors will continue to be exerting pressure from the outside as well to be pushing the marker upward.
On the last question about a periodic review, I understand it's been offered as a suggestion, and this is a matter for debate. The bill doesn't have that provision in it, and I imagine that can be debated in respect of this enactment. I wasn't there in 2001, so I can't directly speak to the experience between then and now.
I would only add one point of context. Some of this has to do with the places where some of the reform is unfolding. In the area of securities law, and particularly shareholder democracy, we see very active engagement in the provincial securities exchanges. In our country, we have this debate being carried out at multiple levels—provincial statutes, the securities exchanges, corporate statutes, the federal level. I would say that this change and this act intend to bring diversity front and centre, diversity in its broadest possible sense, as a policy objective and as a conversation between shareholders and the management and directors of the company.
The intent is also to bring shareholder democracy forward, and in particular to bring forward the majority voting standard. Those are the two big-principle policy aims of this enactment that are trying to move things forward at the federal level. What you will see over time is the interplay of things between the federal and provincial levels. Obviously it's a question for debate. Should there be more going on at the federal level at various times? That's something people can comment on.
Thank you, Mr. Chair, for the excellent question.
I think this goes back to leaving quite open the diversity of approaches to diversity. I think you picked up on another one—representation of young people in a management company, people from different walks of life, young entrepreneurs. I think all this is possible in terms of how a company chooses to take this statute and use it in its operations. We expect to see a number of approaches taken to that, so pick one of them. Because it's not prescriptive, it allows for that.
I think at the early stage of a company, when it's probably not moved to a publicly traded position, these statutes, these changes, wouldn't apply. It's only when they've actually gone through an IPO and into the public market that they become a distributing corporation.
I think the emergence in the corporate sector of young leaders is an interesting phenomenon linked to the new economy, the digital economy. Some of the biggest companies in the world now are run by very young people, looking at the corporate sector as a whole. A lot of young people are managing very large enterprises, and often with a different mindset. I think this bill encourages people to embrace diversity in its full sense, because a lot of those companies are incredibly diverse in their makeup and include people from all over the world and from different backgrounds.
I'll just highlight two considerations among many.
First, yes, there wasn't a consensus, so that was important. Second, where best to address that issue is also important. With respect to what we put forward in this bill, when you look at the comments from the bar, the people who are in this for a living, you see there's a lot of comment about being sensitive to how this works with TSX requirements and securities requirements, being sensitive to how it's playing out at a provincial level, and not creating duplicate or contradictory or different standards, so where and how that issue could best be moved forward is something we have to take into account.
I think a lot of representations are being made to securities commissions with regard to this issue. There are a lot of forceful voices speaking to how this could be evolved. At the moment, that's probably where the debate is playing out.
In this bill the federal government is putting the emphasis on the two matters that I spoke to earlier: first on diversity and—
Oh, jeez, I thought I was going to get away with that.
I'll continue with the say on pay. Canada is actually considered a laggard in that respect. One example is Steinhafel, from Target. I think it was 11 Zellers stores that were operating. They were doing okay, but they weren't exceptional. Zellers was taken over by the owner of a U.S. corporation, a giant that ran them into the ground essentially. He threw out a bunch of workers who had pay and benefits. Zellers was a profitable corporation. It essentially went bankrupt, and he walked away with, I believe, $61 million in compensation from that endeavour.
What is it that makes us different, that we can't have some say in pay with part of this amendment? You were mentioning consensus a lot. Don't they have consensus on gender equity? Some of these boards are in some of the most diverse places in Canada, and they don't actually have diversity on the board, and there's no penalty for it as well. I think that when we're looking at changing a bill only twice in 40-plus years, it's a major opportunity to correct and empower shareholders in a much-changing society. Norway has done it differently from the way we have, as an example. Where do we have an option?
Maybe we don't want absolute consensus on this—I don't know what your definition of consensus is—but what specifically can we do in the immediate and maybe long term to include more say on pay?