I wanted to come here today to encourage the committee and Industry Canada to dig a little deeper with the CBCA and consider some further amendments. A lot of very good work was done in 2001 to bring the CBCA up to speed at that time with developments that had taken place provincially and territorially in the country, but some issues were left behind in 2001 for another time, and there was to be a five-year review.
Since that time there's been quite a bit of development at the provincial level in Canada, and I'll go through some of that and explain why it is important for the CBCA. What I'm really here to do is not to advocate for specific reforms, but more to advocate that these reforms be looked at and that there be a process developed that would include a consultation paper, some public consultation, submissions, and a serious look at keeping the CBCA competitive and cutting edge, as it should be.
Since 2001, as I mentioned, there have been some developments. They include, just earlier this year, in June, the Canada Not-for-Profit Corporations Act, which contains some differences between it and the CBCA, which are improvements over the CBCA, and highlight some of the deficiencies in the CBCA. So there's some need for harmonization with its own federal statute.
More recently, there has been the Quebec Business Corporations Act, which has received at least first reading on October 7 in the Quebec legislature, which is also built on the same statute but which contains further improvements, particularly for small business, and I think a number of innovations. I'll touch on just a couple of those.
In 2007 the Ontario Business Corporations Act was amended in some significant respects, and in particular to coordinate with the Securities Transfer Act that was brought into Ontario at that time. And a lot of other provinces have done the same.
Going back a little bit further, in 2005 Alberta, in their Business Corporations Act, brought in some amendments, some of which have been picked up in the Quebec legislation, which also should be looked at. And going back even further, in 2002 British Columbia brought in a new statute, which contained a lot of other innovations.
So since 2001 a lot of the leading provinces in the country—and I would also include Nova Scotia in that—have amended their corporate laws to not only catch up to the CBCA, but to surpass it in some respects. I'll go into some specifics, but the most compelling reason to take a look at it is the work that's been taking place in Quebec, where Quebec has, for the first time since 1981, amended their corporate law, or are proposing to amend their corporate law, and include a CBCA-like statute. This is a very positive development for the country, but I think, again, the statute contains some improvements.
Just to give you some flavour of what they've done in Quebec, if you have a one-person corporation and a unanimous shareholder declaration, you don't need to have bylaws. For annual meetings, you don't have to pay your lawyer to draft up the same forms every year. You don't have to have directors. So they've stripped away some of the formalities that are just hardwired into the CBCA, and other statutes that are built off the CBCA, and made things a little bit simpler for small business, which really don't need these formalities on an annual basis. Those are just some examples.
It's quite logical for a unanimous shareholder agreement that strips away all board powers. What's the purpose for having a board of directors of that particular corporation? So they've done some rather innovative things in Quebec that ought to be looked at, that's all I'm saying.
I divided the types of changes you could be looking at into policy issues, which I'll go into in some detail, and then some more technical issues, which I've listed on the second side of the handout. On the first page are the five policy issues. The first one has to do with the securities transfer laws and the advent of the securities transfer acts in the provinces; we talked about this in the spring of this year with respect to the not-for-profit corporate law.
In response to a request for a submission put out by Industry Canada and the Department of Finance in 2007, wanting input from the Canadian Bar Association and other stakeholders as to how federal security transfer laws should be updated and modernized, we responded in a 35-page brief. I believe that has been circulated or will be handed out.
At that time we noted that this would be a good thing for the feds to withdraw from, that it was really provincial law, modernized, comprehensive, and it was not fitting subject matter for corporate statutes any longer. That submission is out there. We never really got a response to that, but I think it's something that ought to be looked at, not only for the CBCA, but all the other cognate federal statutes--the financial services statutes in the Canada Cooperatives Act.
This would include some flexibility around the issuer's jurisdiction definition that corporate statutes can provide for--that's an option--and dematerialization, a corporation being able to issue its securities, its shares, without having a security certificate. Currently the CBCA doesn't afford that as an option. But Ontario does, B.C. does, and now Quebec will. So there is another instance when we don't have to go through the formalities of having share certificates if investors don't want them. So that's one area.
The second area is trust indentures. This is part 8 of the act. The development there is that the Uniform Law Conference of Canada is just about to embark on a project to study trust indentures. There is a significant amount of lack of uniformity in the country, so this is an area where uniform laws would be helpful.
The problem with the federal law--if I can just give you one example of why the federal law doesn't work the way it is--is that a federal issuer is regulated in the CBCA. But there is an exemption if the trust indenture is subject to the laws of a jurisdiction that provides comparable protection. That exists in Ontario and British Columbia, for example, which have similar laws, and it also exists in the United States.
So if the CBCA issuer is subject to the Securities and Exchange Commission, an exemption is available. But if they're issuing in England, where they don't have a similar law, then you have this anomaly where the CBCA standard is applicable to this trust indenture where it's subject to the laws of England, whereas England doesn't require any similar provisions. So Canadian law is protecting investors in a foreign jurisdiction. It doesn't seem very logical.
The third issue is board residency. This is something that was left behind in 2001. It was reduced from 51% down to 25% in 2001. But other jurisdictions.... British Columbia got rid of their requirement, and in Canada now, of the 12 jurisdictions, I believe seven of them do not have a residency requirement. So that includes all of the maritime provinces except Newfoundland, Quebec does not and has not, and British Columbia got rid of theirs. And none of the territories have this residency requirement. So we have quite a patchwork of residency requirements. I think it's time to ask ourselves why we have such a rule, what it's doing, and if it serves any purpose.
The fourth issue deals with insider trading and tipping. Currently the CBCA provides for insider trading and tipping liability, both for publicly traded corporations or distributing corporations, and non-distributing corporations, private companies. It's really not too relevant in the case of private companies, I would submit, but it is very important in the case of publicly traded corporations. The flaw that the CBCA has adopted is that they require a matching between the buyer and the seller. So if an insider instructs his or her broker to dispose of securities in the market, there is no civil liability unless there is a person opposite that transaction who can be found.
You may wonder why that's a problem. Well, the way the securities markets work today is that it's the indirect holding system, so people trade into the market. They don't know who their buyer is going to be. There is going to be a buyer out there somewhere but the broker will be transacting a lot of transactions in the day. Everybody wants to buy and they'll match it against everybody who is wanting to sell and it may not be possible to then match buyer and seller.
There are models to avoid this kind of unnecessary complication. I would analogize it to people throwing dirty water in the lake, and the person who takes the dirty water out of the lake needs to be able to identify who put that water in there. It's very difficult, as a matter of proof, and unnecessary.
The final issue is the modified proportionate liability regime. Again, this is an issue that's being studied, this time by the Law Commission of Ontario. Professor Poonam Puri at Osgoode Hall is doing a study of not only the federal provision but also the more recent provisions that have been adopted at provincial levels through the securities act dealing with the liability of secondary market disclosure. The model is not the CBCA model, so again we're seeing a patchwork of proportionate liability regimes. There has been no case law at all under the federal provision. Unfortunately, or fortunately, it seems the federal law has very few options in terms of regulating liability for auditors, because constitutionally it's primarily a matter of property and civil rights in the provinces and it's regulated through negligence acts. Federally, you're limited by the fact that you have to have a federal corporation, so it is only regulating the audited financial statements issued by CBCA corporations and Canada cooperatives. It is a very limited scope provision and I think it's time to look at that again.
As I said, there were a number of other technical issues that I would also identify. I don't propose to go through all of those.
Thank you for your time.
:
Thank you very much, Mr. Chairman.
My name is Tim Draimin. I'm the executive director of Social Innovation Generation. We are a national partnership including the J.W. McConnell Family Foundation in Montreal, the PLAN Institute in Vancouver, the University of Waterloo, and MaRS in Toronto.
Our mission is to promote the use of social innovation to address intractable social challenges, with much of our work focused on the non-profit sector. As you may know, the non-profit sector, charities, and non-charitable non-profit organizations encompass over 161,000 organizations, with revenues well in excess of $100 billion, directly employing over 1.5 million people.
My objective in speaking with you today is to draw the committee’s attention to a major gap in Canada’s legislation governing corporate activity, specifically the lack of any hybrid corporate structure for business serving public benefit. By hybrid I mean a blend of an organization that would have the social purposes of a non-profit, like benefiting the community, with the business model of the for-profit sector.
Social Innovation Generation is proposing policy changes to assist Canada’s non-profit sector in becoming more financially stable and less dependent on the decreasing revenue streams from government and philanthropy in order that more innovative ideas, services, and products meet the social needs of Canadians.
You may have noticed in today's paper that Statistics Canada is announcing a big drop in donations to registered charities. While the dominant paradigm for the sector in the past half-century has been income primarily from government and charitable donations, that is changing. Earned income is now over 35% of total income, and growing. In fact, a significant expanding thrust is building new business models that allow non-profits to meet their mission in financially self-sustainable ways.
We propose that the Government of Canada introduce a new optional legal structure under federal law that enables the creation of a hybrid public benefit corporation or community enterprise. A hybrid structure would encourage much broader access to capital for the social and community sector. A hybrid structure would allow for contribution of charitable dollars as well as non-charitable shareholder investments.
The model we are suggesting has been successfully incubated in both the United Kingdom and the United States in the form of community interest companies, CICs, and low-profit, limited liability corporations, or L3Cs.
We all know the importance of the non-profit and charitable sector in terms of the services it provides, but we may not be aware of the revenue model that supports this work. Overall, non-profit revenue received is about half from governments, over a third from fees and earned income, and about one-tenth only from philanthropy.
In a recent Wellesley Institute research report, it was found that the most significant charitable issue, selected by 63% of respondents, was the requirement that “all of a charity’s activities must be charitable”, a requirement that is at odds with funder expectations that charities be sustainable and entrepreneurial. It is also at odds with reality if you take into account the percentage of revenue from earned income.
The existing legislative and regulatory regime was designed in a different era.
Canada’s community non-profit and social sector has challenges accessing capital and diversifying their sources of operating income because of restrictive tax regulations and capitalization options. These financial barriers are unnecessary obstacles for a new breed of social entrepreneur that is emerging and limits the potential impact of their innovations. The sector needs the flexibility to explore new forms of social finance.
Our SiG partner MaRS has advised hundreds of clients, including non-profit enterprises, on their marketing strategy, business plans, and funding options. Outlined here is just one example of a social enterprise that has encountered problems due to regulatory restrictions or lack of capital options.
As a social enterprise of Eva’s Initiatives, the Eva’s Phoenix Print Shop provides an award-winning print training program for homeless youth that works with businesses to offer them a socially and environmentally responsible commercial print service option. The print shop is located at Eva’s Phoenix, an internationally recognized transitional housing and employment facility for homeless youth.
Eva’s Phoenix Print Shop operates in a commercial environment and requires state-of-the-art printing equipment to remain competitive. While the print shop has sought to expand its services due to increased demand, it has faced significant funding challenges. In a traditional print shop model, a combination of revenues and working capital loans would be the obvious choice. However, this social enterprise must depend on grants and donations to expand.
In traditional non-profit structures, loans to the enterprise are considered risky and thus an option rarely considered by the boards of those organizations. Furthermore, they have no legal way to access any other form of financing, such as equity.
Expansion is an option that would rely solely on the generosity of donors and not on their increased revenue potential, which severely prevents them from being competitive in furthering their social mission. The proposal outlined in this document represents an opportunity for the Government of Canada to support the community non-profit sector in ways that build sustainability and resilience by enabling organizations to exploit opportunities for growth and independent financial well-being. Support for a new hybrid corporate structure will strengthen the country's community non-profit sector, and help it access much-needed capital. It will demonstrate that Canada wants to unleash the creative energies of previously unexploited financial resources and capacities in order to help advance social entrepreneurship sustainability and self-reliance in the community non-profit sector.
Thank you very much.
Institutional investors and their advocates—and SHARE is in the latter group—have recommendations for substantive amendments to the CBCA. The changes to the act that we seek indicate that it's been in force for eight or nine years now and over that time expectations and requirements of investors in our public companies, on which we're focused, have continued to evolve. The CBCA can and should keep pace with changes in our investment marketplace.
SHARE speaks primarily on behalf of socially responsible institutional investors. While these investors form no monolith, they have in common the view that the selection, retention, and realization of investments cannot be carried out in a fully informed manner without considering the environmental, social, and governance profiles—or ESG profiles—of those investments.
Socially responsible investors aren't alone in this anymore. Around the world and here at home so-called mainstream investors are learning that with respect to realities such as climate change they need to know if companies are paying attention and preparing their operations to minimize risk exposure. Investors need to be able to compare the ESG risks of various investments to determine which ones will best help them protect and grow the assets with which they've been entrusted.
What they need is relevant and detailed information, and they aren't getting enough right now under either Canadian securities or stock exchange disclosure requirements. This is a huge topic and we're going to deal with it at length. We are trying to find out what can be done within the CBCA to help with this. We will treat this matter in our written submission, which we'll provide in the coming days.
There are other aspects of the CBCA that we think warrant broad consultation. I want to start by saying that I've had the opportunity to speak with Judy Cotte about the CCGG's position on the issues. With respect to the issues she will raise with you, I'd like to say that SHARE is supportive of the CCGG's views.
I'll move on to the matter of how shareholder votes are conducted under the requirements of the CBCA and its provincial counterparts.
By virtue of section 141 of the CBCA, shareholder votes on proposals may be carried out by a show of hands rather than a ballot. You look out to the shareholders that have gathered. Everybody in favour, up with the hands. Those hands all represent different numbers of shares, sometimes very different numbers of shares. But it's just a look-around: if it looks like enough, great, it's passed. We want to see actual votes recorded on a ballot. It's a public company we're dealing with here.
A public company's report on the results of the votes on resolutions considered at its annual meeting often reads like this: “All of the resolutions we presented at the meeting were passed by a show of hands”. Then they list the resolutions. There's less information there than on the ballot in the first place. When a company holds votes by a show of hands, it makes the report spectacularly uninformative.
The most frustrating thing about show-of-hands voting is that the overwhelming majority of shareholders vote by proxy, so the numbers are readily available to the company. They've tabulated them. All they need to do is keep track of the shares held and votes cast by the much smaller percentage of shareholders who actually attend the meeting.
In the U.S. and the U.K., public corporations must provide numerical tallies of their vote results, and that information helps us as we analyze the vote outcomes in those jurisdictions. We can get a much clearer sense of shareholder sentiment. The CBCA should be amended to require that votes at a shareholder meeting be by ballot so we all know on each issue how many shares were voted for and how many against.
I want to address the issue of electronic or virtual shareholder meetings as permitted under subsection 132(5) of the CBCA. This option makes sense for private companies but not for public ones, in which the owners and the managers of the company are typically not the same people.
Recently Intel, which is a large U.S. corporation, announced that it was going to do a web-only annual meeting in 2010. In a letter to Intel, U.S. investment firm Walden Asset Management, which would fit firmly within the socially responsible investor category, noted that
There is no substitute for the personal and sometimes subtle interactions that can take place at in-person meetings. These “look you in the eye” moments between shareholders, management, and directors at an official business meeting are available just one time a year.
I've attended quite a few shareholder meetings and I agree with that statement. It can be powerful and constructive to put management directly in touch with the owners of the company and the shareholders. Subsection 132(5) of the CBCA should be amended to exclude public companies from its application.
Finally, let's consider the shareholder proposal mechanism. There was much ado about this in 2000, the last time the CBCA consultation was held.
SHARE supports the right of shareholders to file proposals. Indeed, we assist our clients as they exercise this right in Canada, most recently to ask the shareholders of a number of large public companies if they want a say on executive pay. The CBCA framework on shareholder proposals clearly works pretty well, because all of the companies where our client, Meritas Mutual Funds, filed “say on pay” proposals in 2006 and 2009 will in fact be polling their shareholders on pay in 2010.
There is one amendment to section 137, however, that we think is worth considering. It actually echoes something that Wayne mentioned.
As you likely know, Quebec has recently completed its public consultations. Bill 63 is now before the National Assembly, as Wayne indicated. Clause 199 of that bill contains a very useful provision that isn't in the CBCA or any of its provincial counterparts:
The presiding officer at a shareholders meeting must allow the person presenting a shareholder proposal to speak in respect of the proposal for a reasonable period of time.
I've attended annual meetings where the chair of the meeting treated shareholders as if that provision already existed, but I've certainly seen situations where it was sorely needed.
We have a few other recommendations involving the regulations to do with shareholder proposals. We still have some niggling concerns about subsection 137(5), which outlines the reasons why a company can reject a proposal, but they don't have to do with, and our solutions don't have to do with, the act itself, so I won't take up your time with them now.
Like Wayne, I was going to go through the effect of the CBCA over the years, and over the various years when the other provinces followed suit, but he's covered that, so I don't need to.
The CBCA is the corporate law bellwether for the Canadian marketplace, and it's certainly time for a broad consultation on how it can continue to fill that important role.
The CCGG thanks the committee for the opportunity to appear before you and provide you with our perspective on what we think are important changes that should be made to the CBCA.
First, by way of introduction, the Canadian Coalition for Good Governance is a coalition of approximately 45 of Canada's leading institutional investors representing pension plans, investment managers, and mutual fund managers, and our members manage retirement assets of over $1.4 trillion, approximately half the retirement savings of all Canadians.
We promote good governance practices in Canadian public companies, and the improvement of the regulatory environment to align the interests of boards and management with those of their shareholders and to promote the efficiency and effectiveness of the Canadian capital markets.
The changes we're looking for are focused on shareholder democracy. Although we have managed to persuade some companies to adopt democratic reforms that aren't required by law, the CBCA should be updated to require all companies to adopt those reforms. We will be providing you with a written brief that will set out our submissions in more detail after today.
Prior to getting to the changes we would like to see, I'd like to take a minute to talk about why shareholder democracy matters. As the providers of capital and the ultimate owners of the company, shareholders delegate powers to the board of directors, including the power to set corporate strategy, to hire and fire executives who are supposed to implement that strategy, and to deal with risk management and crisis management. Directors really are the cornerstone of good governance for public companies. There's growing evidence that good governance leads to more efficient uses of capital and better returns.
We're looking to improve governance in CBCA companies in two basic ways: first, by requiring basic democratic norms, including a fair process to elect directors, and the ability of shareholders to remove directors, and a voting system that accurately records votes cast; and two, by having the CBCA enforce basic governance norms such as the separation of the chairman of the board and the CEO.
Turning first to basic democratic norms for investors, we'd like to see changes in four main areas.
First, the CBCA should give shareholders the right to vote for each director. Currently it's common practice for companies to propose a slate of directors and require shareholders to vote for all or none of them. This seems to happen simply because the act doesn't prohibit it. Approximately 25% of Canada's largest public companies still have this type of voting, which is referred to as slate voting, and I suspect that percentage would be even higher for smaller companies. The CBCA should be amended to prohibit slate voting.
Second, the CBCA should require directors to be elected by a majority vote. Currently, under the CBCA and securities legislation, shareholders do not have the power to vote for or against directors. Their only right is to vote for them, or to withhold their votes. As a result, a director can be elected if they receive only one vote; and if they are a shareholder, as they inevitably are, that vote can be their own. So as elected representatives, I'm sure you can see that while that system is advantageous for directors, it really doesn't benefit anyone else. What it really means is that a director can lose an election by any reasonable measure--getting less than 50% of the votes, or even getting one vote--and still not have to vacate their seat.
There was an article in the Wall Street Journal at the end of September that was making that exact point, and pointing out that as of the end of September in 2009, 93 board members in the U.S. in 50 different companies had all received less than 50% of shareholder votes, and not one had vacated his or her seat.
We have developed a majority voting policy that provides a framework for companies to get around the law as it stands, and to date our policy has been adopted by 98 of the 209 largest Canadian companies. But in our view, that isn't enough. The law should be changed to require majority voting in all CBCA companies.
Third, the CBCA should require that directors be elected annually. Currently, directors can be elected for up to three years and can be elected for terms of different lengths, referred to as staggered boards. Staggered boards impede the ability of shareholders to change the board because not all directors will come up for re-election at the same time. In our view, the CBCA should be amended to require annual director elections.
Fourth, the CBCA should require that voting results be reported, and Ms. O'Neill has touched on this already. The act provides that voting can be by way of show of hands, unless a shareholder present at the meeting demands a ballot. And if it's done by way of show of hands, companies are only required to publicly report the issue voted on and the result, not the actual numbers of votes cast for a director. We're particularly concerned about this with respect to director elections.
Again, as an analogy to our democratic system, imagine a federal election where the only result reported was the Liberals or the Conservatives won and the electorate was effectively asked to just trust that report.
As Ms. O'Neill also pointed out, the companies already have all the information about votes cast for or withheld in a scrutineer's report, so requiring them to publicly report those results would not impose any additional administrative burden.
We've been urging this as a matter of best practices, and some companies have already adopted it voluntarily, but 38% of Canada's largest public companies still do not report the details of the results of a director election.
We will deal with several other problems with the voting process in our written submissions. For example, shareholders who hold their shares through an intermediary, which almost all of us do, don't receive any confirmation that their votes have been received and tabulated, and that needs to be addressed.
With respect to basic governance norms that should be required, we would like to see two main changes. The CBCA should require the separation of CEO and chair of the board. The role of the board is to oversee management, particularly the CEO. If the chair of the board is also the CEO, it is impossible for the board to properly carry out that supervisory function. Good governance requires the chair to be independent of management.
We have been urging companies to separate the role of the CEO and the chair for some time. Of 157 of the largest issuers in Canada, only 72 currently have an independent chair of the board. The CBCA should be amended to require that the chair be independent of management.
Shareholders should also have the right to approve dilutive acquisitions. Under the CBCA currently, shareholders have a right to approve the sale, lease, or exchange of substantially all the assets of a corporation. Shareholders should similarly have the right to approve significant acquisitions paid for in shares that will dilute the holdings of existing shareholders in excess of 25%. The TSX recently changed its listing requirements to require shareholder approval in those circumstances; in our view, the CBCA should do the same.
The committee might find it interesting that of all three major pieces of legislation that have been introduced in the U.S. after the financial crisis, two of them will call for an end to staggered boards and all three will require a majority voting for director elections and the separation of the chair and the CEO. Internationally, there is an emerging consensus that these reforms are necessary to ensure that companies are well run and boards are accountable to their shareholders. Canada has an opportunity to become a governance leader by enshrining these reforms in the CBCA.
In closing, we would like to see improvement for shareholders in a few areas--for example, changes to minimize the cost to shareholders who seek a remedy under the act, but we will address those in our written brief.
Also, I would like to urge the committee to consider a broader consultation, as the other witnesses here today have. A number of groups would likely have useful input into ways to improve the CBCA, including academics, securities commissions, and other shareholder groups.
And finally, I would like to add that the coalition also supports the proposals put forward by Ms. O'Neill on behalf of SHARE.
Thank you.
:
There's definitely a problem that charities have right now. To the enterprising charities that have created smart modes of operation, a lot of their funders will say, “You're doing really well, so I'm not going to give you any more.”
It's kind of perverse. Successful organizations, if they were in a marketplace, would get more capital attracted to them because they were successful, as opposed to the non-profit sector where, if they're successful, they can have less capital. That's one of the anomalies of the current system.
Again, I wouldn't want government to say that because this is happening we should be cutting back on non-profits. Our non-profit sector is sorely underfunded. Most organizations have been cannibalizing their core assets. The maximum that non-profits spend on technology, for example, is something like 2.4%. The minimum that businesses spend is something like 2.5%, up to 8%.
The non-profit sector is not spending on itself right now. It needs the money. So I wouldn't be advocating that if they were able to succeed by doing this, government should cut back. What we'd be seeing is a more effective, more competitive, more innovative non-profit sector able to meet the needs of communities. That's what this model would help people move towards.
I did a study a decade ago on enterprising non-profits across Canada. Where you have a non-profit that is thinking about employing market means, it has a cultural impact on the way the non-profit operates. It lets people think more strategically about their organization. It builds in more sensitivity to the economics of how the organization works.
I've never really understood why non-profits operate on the basis that they create a budget, fundraise for it, spend it through the course of the year, and at the end of the year reach zero, and then start the whole thing all over again. Somebody has described this to me as the cha-cha-cha version of non-profit survival, as opposed to creating ideas whereby non-profits have the ability to build up assets, just like families, individuals, and companies do. They should be encouraged to take on these kinds of strategies to create a more resilient and diversified sector serving Canadians.
:
It's very helpful to know that.
Mr. Draimin, I'll turn my questioning to you. I actually worked in the not-for-profit sector for over ten years, and I just want to clarify one thing. It's an interesting model; I'm going to give it some serious review.
I have a private member's bill, Bill , that adjusts the charitable giving act to replicate that of political party and organization, that it return to the current structure past the $1,275 donation limit to individuals in politics or parties. What's happened over Canadian public policy in the last 10 or 15 years is that as we've reduced corporate and personal income taxes, it's had an adverse impact on charitable giving because it's tied to the lower income at income tax time, so charities are going to be able to bill back less at giving time. In fact, we're talking about 8% of the Canadian economy here that's had no effective policy over that period of time, because lowering corporate tax cuts for not-for-profit agencies doesn't do anything for them.
Just to be clear, one of the things is that many agencies can carry over only certain amounts of funds. That's when you saw, at the end of the year--and it happens here, even in the offices of Parliament--if you had a budget, you'd go out and buy your fax, your computers, at the last minute, and do unnecessary upgrades that probably wouldn't have been the most important things that you would decide to do. It happens all the time, because what ends up happening is you can't get the funding for other programs.
But if you move along a model like this, how do you ensure that the core value of the agencies is maintained? Because then we would have other types of interests at stake. Often not-for-profits are formed for social issues that aren't being administered by governments--for example, community action groups that get together to create the entity that isn't being provided out there. Would there be some shareholder thresholds or voting restrictions? How would it operate in terms of making sure it stayed within the mandate of so much investment of people over so many times?
:
Thank you very much for your question.
First, I should just clarify that when I said non-profits were eating away at their core assets, I meant that instead of investing in themselves, they stopped doing things that mainstream companies do because they were so hard pressed by the lack of access to capital or donations.
In terms of the needs, right now we know the profile of non-profit income is that at least one-third is already earned in some way or another, but the ways in which that is happening are very complicated.
I'll give you an example. I can't talk about it because they don't want to be talked about publicly, but there's a major charity that has a really successful social enterprise inside the charity. It basically recycles things, generates income for them, and keeps stuff that would go to landfill from going to the landfill. However, in order to do that, they violate the CRA rule, which was created at some time by somebody for some reason, that 90% of the labour going into the social enterprise has to be volunteer labour. There's an arbitrary rule that is basically undermining an organization that has a great social enterprise that seems to be working okay within the existing charity. They would need something like a CIC to have an alternative. If you're located in Ontario, there's an arcane rule that states you can't hold more than 10% of the shares of a business for a long period of time, so you couldn't even set it up as a subsidiary.
We have a patchwork quilt of charity and non-profit rules that were created a long time ago and don't really serve the modern needs of charities, and those charities are finding new ways to meet their missions. As a matter of fact, our rules for charities are based on the idea that they don't deal with root causes of things but with the symptoms of things, so what we're trying to do is empower charities to be able to move toward working on the root causes of things, such as training people so they can get jobs or whatever it is.
The innovative capacity of the sector is growing really quickly. I don't have a statistical way of telling you how big the market is, just that it's growing a lot. This week in Toronto the third national congress of social enterprises takes place. The first one had 200 people. The second one had 550 people. Going back now, it's six years, so the movement is growing a lot. Between that fact and what we know about the general numbers--a third of the income is earned--there would be a huge opportunity here.
How do I know they could raise capital? Well, that's basically the test that we see in the U.K. They have been able to raise capital. We see a growth in these companies. It basically opens the door to them to escape that zero-sum universe of the existing restricted pool of donations or government funding and be able to go out to mainstream capital and gain that.
Mr. Draimin, I want to use an example here to see if I can get really accurately how a hybrid model would work. I'm going to give the example of P3s. Some of the concerns I have over P3s really came to light in Windsor, in our area, where we've decided, in the provincial government, to outsource long-term health care facility beds. So they put out to tender a number of different options, and what ended up happening is that an agency called Versa Care picked up the contract.
Later on they abandoned the contract because it wasn't going to make enough money. It was going to make money, but not enough money. So what this meant is that another bidder came in and picked up extra beds and it delayed their actual facility—that's what they claimed—so we didn't get those beds built for seniors who are still in hospitals, and also in group homes, and so forth, without the proper care.
Now, what's happened, we just learned this week, is that developer owes the city $800,000 in back taxes, and that property has been basically just harvested for steel and so forth—it's an older facility. So once again the public is paying through the nose for this, because obviously with people in hospitals it costs a lot more to care for them there than it does for the daily system that you get.
Say, for example, in your system here, it was an organization like the Victorian Order of Nurses, or some other. Would they then issue out almost like a share? And then you say it's capped at a certain amount, so it's almost like people want to lend money to an organization so they can get some capital and might get their return later on. And if they actually then lost on it, say the value went down, would they be able to claim that at tax time as a loss? How would that work? It was really helpful to get your input with regard to the oversight model from the government that is in the U.K. But also, how would it work operationally?
So, really, is this about getting some capital lent, but maybe not the big gift that people would give right away?
If I understand your question, you're asking, for the Victorian Order of Nurses, how would that work in getting the capital?
Maybe something that links where I'm speaking from with what Laura is speaking about is that there is a change happening in the investor universe towards what people talk about, double or triple bottom-line investing, or some people now call it impact investing, or other people call it blended value investing. Investors are willing to make an investment, and they want to get a financial return, but they're also interested in understanding what's the social and/or environmental return that they're also getting. Right now, we have a reporting system that primarily gives us financial returns but doesn't do anything on the social or on the environmental side.
The metrics on that latter piece I think are starting to really grow, and there's going to be a lot more happening that will be useful to organizations like the Victorian Order of Nurses, or other non-profits who decide they want to create a social enterprise that would be like a CIC.
I think that basically it's almost like what you're saying: the Victorian Order of Nurses, or somebody, would create a particular entity to carry out a particular project, they would issue shares, there would be a set price for the share, and people would be buying the shares. In a certain sense they're called shares, and they operate like shares, but in one sense, as you allude to, it's almost like putting out a bond and breaking it up into little pieces and calling each of them a share. Presumably if when they sold it the value was less and they had a loss, it would be a capital loss, and people could include that on their tax return.
But, yes, that's how it would operate: they would be appealing to people who would want a financial return on the share, almost like buying a bond in a sense then, and who also were interested in a social return, and that would be another aspect of what the entity would be reporting on. So people would get a financial return sheet at the end of every year, but they would also get a social report of this is how many beds we were able to create, these are how many people we were able to serve, this is what we're able to do for the community.