Presentation to
Canadian Club of Montreal
Montreal, Quebec


Stephen A. Jarislowsky

INVESTOR PROTECTION IN CANADA

Without investments jobs are difficult, usually impossible to create. So investment is a major key to prosperity. Of course investment requirements are not equal for different industries. A hydro plant, an aluminium smelter or a pulp mill are very capital intensive. Service jobs are not. Future requirements to develop tar sand oil are estimated at well over $100 billion. Exxon through Imperial Oil alone will spend tens of billions in this area.

To attract money, investors must feel that their capital is safe and well administered. There is enough risk in any business investment not to have to worry about theft, dishonesty or just greed or a combination of all. If not safe, a country will have difficulties in attracting investment - if at all. Lack of integrity has traditionally been high in most of Africa and South America. Russia until recently was either a dictatorship in which laws meant little or a mafia - ridden land with its hazards. For all its current growth, China remains a Communist state and foreigners have little standing, etc.

Judging by the plethora of scandals, the USA and Canada are not exempt of fraud. Enron, Hollinger and WorldCom are no longer isolated cases. Hedge funds, mutual funds have by no means been exempt.

Laws have recently been tightened - excessively so in the way of paperwork, and far too little, especially in Canada, in the way of enforcement and prosecution. The Hollinger case is not atypical. Despite multiple warnings expressed to the Ontario and Quebec Securities Commissions by such as yours truly, it was a U.S. initiative which finally brought blatant looting to the foreground and even then the Canadian enforcement agencies did not act. Canada has thirteen securities commissions vs. one in the U.S.A. and no more than one in other advanced countries. At that the Canadian commissions lack power to prosecute criminal behaviour - that belongs to the Federal jurisdiction.

I frequently have expressed the view that it might be better not to have securities commissions in Canada, as then at least people would not be under the illusion of being protected and would need be more vigilant themselves.

What is evident is that most of the 13 securities commissions do little other than make people fill out forms and take in fees. Their staffs have sparce training in what it takes to uncover corporate fraud; the police know little about white collar crime and the lawyers on staff are versed in law but not in managing thorough investigations. Most commission lawyers historically earn far less than their confreres in the law firms and a number are in essence "on loan" and expect to return to their firms. No sense to prosecute zealously; it makes the re-entry to your old firm difficult, if not worse.

On top of that the Commissions labour with laws that have largely been politically influenced by the corporations and the financial firms in an effort to make the most money and be the least restricted by shareholders. These laws have led to many obvious cases dragging, some up to over 10 years in Court, which is certainly not a solution. Some laws are oppressive and allow companies to legally circumvent others. A 400-page prospectus written by lawyers and accountants protects no one and is a major capital "rip-off" by the professions preparing it, etc. Small shareholders, fleeced by unscrupulous brokers or investment dealers, rarely have the means left to prosecute redress. Mostly, the Commissions do little to nothing to alleviate this. Even with the best of intentions, the commissions will only go by the laws and regulations which today are hardly designed to protect, rather to delay and obfuscate. Mediation or arbitration by experts could be a more rapid and just process, but to my knowledge it cannot be imposed by current law. Moreover, if a crime such as insider trading is discovered, which is very rare, though the crime is possibly frequent, a small fine in relation to the gain hardly reduces the odds of getting away with it unpunished. Additionally, the moment a firm like ours has a single client in one of the 13 jurisdictions, it is expected to register there with the attendant fees and paperwork. What Canada needs is balanced and fair laws; an expeditious process and quality people (commissioner or arbitrator, etc.) to detect fraud and protect the public against it under a system which combines civil and criminal law. At present we are miles away from this, but the wheels are starting to turn in the right direction.

Today the problems can no longer be all blamed on government. The real problem had its origin elsewhere. For long years Canadian law prohibited for all intents and purposes for shareholders to get together and take joint action. Imagine owners of a company not being allowed to all act together to protect their own property. A few years ago, Thank God, this was changed, but for 45 years our company fought alone or with a small number of others permitted to take joint action. Our enemies, the corporation which we owned, moreover could pay investment dealers and brokers to vote for their slate and pay them for the positive votes they brought in. As most private investors, and certainly most of the clients of banks, brokers, investment dealers and mutual funds, don't have a clue of the issues, these intermediaries, many with major conflicts of interest, usually blindly support management. If moreover, they got paid for filing the "yes" proxies so much the better, as for easy trading, while not owned by them, the shares were registered in their nominee name. What is easier? What of their fiduciary responsibility? What of it? What of the professionalism of the advisors? What, even more serious, what of the fiduciary responsibility of management and especially the directors? The very people who have the responsibility of representing all shareholders alike on the Board? But the laws made by lawyers for lawyers and their big paying clients, made it easier and easier, as time passed, to get around what is "fiduciary".

Boards, moreover, which have even more than the securities commissions the duty to protect all shareholders alike, as often as not were in the pockets of management or the controlling shareholders. They were in fact nominated by the latter in almost all cases.

The other watchdog - the auditor - whose job it is to report on the fairness and correctness of statements to the shareholders (i.e., to their representatives, the Board of Directors) went out of their way not to alienate management and so retain the mandate of doing the "audit"! Statements in time have become so complex that I often can make but partial sense out of them, unless I spend a full day on each. For the average investor to understand them would require quite a different format.

Why didn't the shareholders insist on less shabby treatment? The small shareholder doesn't have the vote, or the funds to organize. The large investors, as I said, could not act jointly and most of them also have conflicts of interest as they look to the Companies for business and to the investment dealers and brokers for preferential treatment. The most vocal shareholders have been the government pension funds, California in the USA, Ontario Teachers in Canada. Why? Because they have no potential conflicts. They are not looking for more business unlike our firm or a mutual fund.

However, some two years ago when the law of owners working together had changed following Enron, Claude Lamoureux of Ontario Teachers and I put our heads together and decided to form the Canadian Coalition for Good Governance (CCGG). Today we have as members almost all the big Canadian investment institutions (the "buy" side) or over $850 billion of combined assets. As such for investment grade and many other companies, unless there is a majority shareholder, either direct or through multiple voting shares, in theory we jointly hold control, not that we would always vote together, as each of us has individual fiduciary responsibilities. The corporations and their boards know this and we need little reminder. This then has become a potent force for shareholder protection. As you can imagine our points are usually well taken by corporate boards.

The first year we dealt with Board composition and good corporate governance. We published a document of what we considered such and we update it regularly. We have a website, but also grade companies and visit those where we feel progress is requisite.

In the second year we tackled compensation in companies and as we speak, we are making our document public on what we expect boards to be guided by. Again where we do not see progress, chance is we will visit and develop a dialogue. We try to do this with a minimum of publicity as voluntary compliance is desirable.

In the fiscal year now commencing we will study investor law and in time make recommendations to the Securities Commissions and Government. As the Investment Dealers Association got wind of this project they decided to work together with us and so we have set up a committee on which we have two voices with a budget of $7 million. This is a great help as, unless we find that it is not what we can go along with, a joint recommendation leads to less debate afterwards. Our public affairs committee will monitor progress and if needed go in our direction if the IDA's proves different. My foundation is also the key donor to a projected Chair in Investment Law in Canada at York University and the Schulich School of Business. Simultaneously, last Saturday HEC and Concordia announced a Corporate Governance Centre for Quebec to which The Jarislowsky Foundation will contribute $2 million to in endowment.

Essentially, the CCGG wants to see but one strong security commission in Canada with real teeth. We would also like to see a gradual sunset for multi-voting shares. We have an "Accounting Committee" which wants to strengthen rigour in that profession and not only in accounting proper but in the terms of engagement. Audits have become little but exercises to see that approved accounting rules are applied. What we want to see is auditors following rules that close loopholes and produce statements that investors can rely on beyond what management states.

So for once in my 50 years in the Canadian investment business, we see light ahead and we will persist in moving in the direction of this light.

Our lives would be much better if boards of directors truly became fiduciaries for all shareholders alike rather than, as some, the minions of the executive of the corporation. Today anyone can become a corporate director. Unlike engineering, law or accounting, no examination or even knowledge is needed. The Board is by law the boss of the executive, not vice versa. But how can you be in charge if you do not thoroughly know the economy of the areas where the company operates; the industry and the corporation itself with its strength and weakness both of physical assets and especially of the item that never makes the balance sheet - the leadership and human resources of the firm? Additionally a director requires knowledge of accounting, of law, production, marketing and human resources. It is not acquired by just walking through the door. A good Board is the mentor of the Chief Executive and of top management. It has the fiduciary responsibility towards all shareholders that the company is in good hands. A good Board develops strategy together with the executive and monitors the execution thereof. The development of top boards and top board committees still has a very long way to go in most corporations. Here too there is finally progress. The CCGG is setting the guidelines and some good courses have sprung up (Rodman School, McMaster University). The Governance Centre of Quebec also aims in this direction - to develop sound boards in public and private corporations.

This still is not the end of the long road we must travel, but at least it tackles the essentials, essentials to help bring investments and thereby jobs and wealth to Canada in a Century that finally may turn out to be the Canadian Century. In many ways through the CCGG we are now in the forefront of governance progress worldwide, but the proof of the pudding is in the development of strong truly fiduciary boards; superb and honest managements and laws and regulations that are simple, bring fast results and force a corporate culture in Canada of pride in integrity and investors who can have faith in a single, strong, well-staffed regulator with both civil and criminal law backing.