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 . 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 . 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 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 .
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 , 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 . 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, 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 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 '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 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.
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 very much, Mr. Chair, and thank you so much to the witnesses.
These are very interesting discussions and perhaps, Wendy, if you don't mind, I will go through some of the things you said.
I spent some time formerly with the committee on aboriginal affairs in northern Canada and had opportunities to meet with aboriginal leaders, and that certainly was an eye-opening experience. Spending some time sitting around the table with them, you realize that the rest of the country could be choosing their CEOs from there, let alone picking folks for boards.
I think that's really where I want to come from, because when we look at what is happening south of 60, we don't see the diverse groups, the aboriginal groups, going into the pool so that they get the leadership training and can go from there, and I think it's important that we work on that first if the overall focus is to try to get more people there. I think that's where a lot of people might say, “Oh well, you have to have a quota. You have to make sure that you've got people trained up so that they understand.”
I believe as well what you indicated—that once people look at your operation and they see that you have that diversity, the way in which they perceive you changes as well, so I think that's one of the first things. Can you see a way that leadership training could be expanded so that everybody gets that opportunity? If there are some groups that simply say, “You know what? That isn't my thing. We don't do that. We've got four or five people”, that isn't fair either. Could you expand on that for a bit?
Good morning, Mr. Chair.
Thank you to the witnesses for coming.
Before I start, I'd like to go on the record by saying that having spirited discussions in the committee is part of our job. I thank you for coming and for the detail provided and for allowing us to be able to ask the questions that we may not be able to ask once we are reading the bill. By no means does that mean that we will opposed this bill. When it comes to the House, I personally will be supporting this bill.
I'd actually like to borrow some of the comments from both Mr. Schneider and Wendy. That will frame the question that I'm about to ask.
Mr Schneider, I heard you talking about the availability of a “broader and deeper” selection pool of board members, which lends itself, I think, to the broader definition of “diversity” that we've been discussing.
Wendy, I heard from you that it's not a question of the pool anymore, but a question of intention, which is great. It gives us a way forward, which means that, based on well-defined selection criteria, there is enough talent in the pool for us to really expand the base of diversity.
Those are great. You also talked about targets versus quotas. As a former engineer and an alumnus of Ryerson, again, I welcome you. It's great to see that Ryerson is representing itself in many other aspects in our government.
You also talked about the criteria of the director qualification and developing the pool. Now, once again as a former engineer, I believe that we set targets or quotas; we also put robust tracking, rigorous evaluation, and transparency in place. One of the concerns that I have was the fact that there is no mechanism in place to be able to assess the impact of this legislation, and this is one of the concerns that you raised in the article you wrote called “In Montreal, leadership diversity remains a work in progress”.
Can you please give us some idea of what mechanism you would suggest? Also, you had indicated there is no penalty regime. What would you recommend as a penalty regime?
Thank you to our witnesses for being here today.
My first question is for Wendy.
One of the things you outlined—I believe it was in a back-and-forth with one of our colleagues across the way—was regarding targets. On Tuesday, I actually brought up this exact item.
I come from the private sector. Everything I do in the private sector has targets. You set something that's reasonable, rational, and attainable, and you set a path forward to your board of directors, etc., yet in government, it never, ever happens. Can you outline what types of targets you would like to see set with regard to diversity?
I think there are two pieces to diversity. I may be oversimplifying it, but for the sake of my intelligence, I'll do that. The first one is diversity in terms of the participation of women on boards, and the second one is diversity outside of what I'll refer to as the WASPy Bay Street that exists. For those two, could you set what you believe would be fair and rational targets for me at this point?
You know, it really depends. In some laws, for a whole variety of reasons, a great deal of specificity is built into the legislation itself, and there are lots of reasons people do that. When you distinguish between the legislation as a framework and the regulations, you do build yourself more flexibility around adapting and adjusting and so on.
I read the comments of the minister as saying that we're going with a rather flexible model at this point in time. We believe in the good faith and intelligence of our corporations to let them see where their best interests lie, and their best interests lie in embracing diversity. We are looking at the strategy of comply and explain, but make no mistake about it: if we don't see progress, we may look at something else.
I do think that because this is a very broad piece of legislation, it does make sense to try to provide a framework. The risk, of course, is that if you have changes in government, it's really easy to change regulations and move in a different direction. The way the legislation is written—as I said, with some language I would like to see around transparency, accountability, and reporting baked in—does allow the flexibility and the time that is needed to get this right. I know you have a lot of people very anxious to get this through, for a whole variety of reasons.
I haven't forgotten about you. I was interested in your testimony and the analysis that was done. When I had a real job, I was an employment specialist for new Canadians, for persons with disabilities and youth at risk. Basically, I'd open up the doors and get jobs and so forth, and I'd literally have employers say, “Well, I'll take the person with the disability for an interview, but they can't be this,” or “We'll consider one of your youth at risk, but don't give us somebody from this country or with this colour.” I literally had those questions. Apparently one of the benefits of being a white male is that at times you get inappropriate information that it is thought can be spread to you.
Regardless, you've taken the position that the minister did note it, but the reality is that's just a commitment from the minister. There's nothing binding about it.
Therefore, what do we do and how long do we wait before we see any types of things...? Should there be penalties or anything on...? For example, you cited Montreal, a good example where we have the evidence that it works. It's all there in front of everybody. They're choosing not to do it; that's what is happening. If they're not doing it, given that it's making money and it's complying with a number of different things for them. I'd like them to choose my lottery numbers. There's just no way you can avoid the success that's been seen, and they're still not doing it, so what do we do? Do we wait for another 40 years?
In this legislation, I'm going to be proposing a mandatory review as one of the things that should be done. That's normal, especially for updated legislation. What should we do if we're not going to go with a target, or is there a potential for a medium target to be set, or an aspirational target? What do we do if no compliance by certain companies is taking place?