All posts by mlamnini

Policy Papers

The Independence of Board Members

Leave a comment

In a report entitled The Independence of Board Members: A Quest for Legitimacy, the Institute for Governance of Private and Public Organizations (IGPPO) proposes that any organization governed by a board of directors should strive to constitute a board that is both legitimate and credible.

The issue at stake is not so much the independence of boards, but their legitimacy and credibility. Independence is meaningful only insofar as it reinforces the legitimacy of a board. And only through its legitimacy does a board acquire the authority to oversee the management of an organization.

For public or private organizations without shareholders or with no active shareholder owning more than 10% of the common equity, boards should include a clear majority of independent members. In addition, all standing committees should be made up exclusively of members independent of management.

However, the boards of exchange-listed companies with significant shareholders need to accommodate two forms of legitimacy:

  • That which comes from the independence of directors from management and significant shareholders as well as from the manner of their nomination and election;
  • That which comes from the financial and professional engagement of significant shareholders.

In these companies, both forms of legitimacy must be represented on the board and on all standing committees.

The issue is a key one in Quebec and the rest of Canada. The majority (133) of the 253 Canadian firms making up the S&P/TSX Index (i.e., the largest listed corporations in Canada) have at least one shareholder with 10% or more of the votes. In close to one-third of all large Canadian companies, at least one board member is a significant shareholder or a representative of that shareholder.

Current rules and guidelines dictate that the majority of board members and all members of standing committees should be independent not only from management but also from significant shareholders. However, in Quebec and elsewhere in Canada, a number of large corporations have one or more significant shareholders, including Couche-Tard, Bombardier, CGI, Power Corporation, Jean Coutu Group and Transcontinental.

As significant shareholders come with considerable legitimacy and credibility stemming from their financial, time and energy commitment, their presence of the board and on standing committees stands to reason.

Press Releases

Publication of a Policy Paper on director independance

Leave a comment

The Institute for Governance of Private and Public Organizations proposes a new and original approach to the issue of director independence

In a report released today entitled The Independence of Board Members: A Quest for Legitimacy, the Institute for Governance of Private and Public Organizations (IGPPO) proposes that any organization governed by a board of directors should strive to constitute a board that is both legitimate and credible.

The issue at stake is not so much the independence of boards, but their legitimacy and credibility. Independence is meaningful only insofar as it reinforces the legitimacy of a board. And only through its legitimacy does a board acquire the authority to oversee the management of an organization.

For public or private organizations without shareholders or with no active shareholder owning more than 10% of the common equity, boards should include a clear majority of independent members. In addition, all standing committees should be made up exclusively of members independent of management.

Press Releases

The Institute launches series of seminars on Governance

Leave a comment

All three seminars boast a unique hands-on approach and will be offered in the fall 2008 session.

The Institute for Governance of Private and Public Organizations (IGPPO) and HEC Montréal Executive Education offer three training seminars on corporate governance. These seminars are led by instructors with extensive backgrounds as directors and officers with various organizations. The emphasis is on good governance practices and is based on the concept of value-creating governance, as developed by Drs. Yvan Allaire and Mihaela Firsirotu.

Seminars:

  • Issues and Challenges Facing Board Chairs
  • Corporate Governance Training Seminar: Value-Creating Governance
  • Building and Managing an Strong Board of Directors: Tips for SMBs
Working Groups

Small and medium-sized businesses Governance

Leave a comment

A Working Group of 18 prominent members of the business community issues a set of proposals promoting flexible governance adapted to the needs of Quebec’s small and medium-sized businesses and entrepreneurs.

At a time when small and medium-sized businesses (SMBs) are facing bigger and bigger challenges, their owners and managers need to be able to turn to an advisory board or board of directors to obtain guidance and insight and to maximize their business development efforts. But governance at this level needs to be adapted specifically to SMBs to avoid weighing them down and unduly complicating their decision-making processes.

This, in a nutshell, is the main recommendation of the Working Group on the Governance of Small and Medium-Sized Businesses, created in December 2007 by the Institute for Governance of Private and Public Organizations (IGOPP). The Group is composed of 18 authorities in the support and growth of Quebec’s SMBs (see attached list of members). Together, they have come up with a series of concrete measures for improving governance among SMBs, especially non-listed companies that are not subject to regulatory requirements pertaining to governance.

In a report made public today, the Working Group, chaired by former Quebec finance minister Michel Audet, maintains that the reason so few SMBs are actively engaged in corporate governance is because existing measures are poorly adapted to their realities, there is a lack of information and there are no clear links between governance and the concrete needs of entrepreneurs.

Mr. Audet stated, “Feedback from SMB owners and managers who have worked with an advisory board or board of directors proves that the presence of external expert advisors or directors can represent an invaluable contribution.”

“Directors who have no financial or vested interest in a company can contribute to its long-term prosperity and growth, work toward its sustainability and provide advice to executives as they face numerous management challenges,” he added.

The Working Group came to the conclusion that one of the major roadblocks for introducing governance measures within SMBs is the lack of information on how access to independent advisors can benefit entrepreneurs. There is also a significant need for training programs adapted to the needs of SMB directors and officers.

Yvan Allaire, the chair of the board of directors of the IGOPP, applauded the quality of the report and the relevance of the six recommendations it contains. “The Institute will take action this fall by offering a new seminar adapted specifically to the particularities of SMBs that goes beyond simply replicating the controls associated with fiduciary governance.”

“Quebec companies have achieved their competitive edge through the extensive experience and skills they have developed from the 1960s onward. Our SMBs – the major players of tomorrow – can tap into this to support their management and decision-making needs,” Mr. Allaire said. “We have to find ways of matching up this wealth of expertise with the dynamic spirit of today’s entrepreneurs so that our entire society can benefit.”

The members of the Working Group have agreed that a concrete action plan is required to promote improved governance practices among Quebec’s SMBs. They therefore invite all those involved in this sector, particularly institutional venture capital investors which have a decisive influence over the governance structures in place in SMBs, to play a part in this process.

The Group encourages SMB investors and lenders to develop a set of best practices with respect to governance to be applied by the companies with which they join forces.

With the support of government ministries and other organizations associated with economic development, governments can promote better governance practices at the SMB level by offering incentives rather than imposing restrictions.

After establishing an inventory of the available tools, the Working Group will bring together organizations working with SMBs to coordinate and align their contributions and develop a concrete action plan. This plan will be unveiled in fall 2008 at a governance conference organized by the IGOPP and other partners.

Press Releases

Dr Yvan Allaire selected one of Canada’s five-star gurus

Leave a comment

The Financial post Business magazine noted that there is an elusive quality to the guru business, and perhaps an illusive one too. The magazine selected Dr Yvan Allaire as one of the five gurus in Canada that the business world loves them. These are the ones who combine intellectual heft with glowing charisma and a startling ability to communicate.

This text brings a remarkable recognition of the role of the Institute and particularly, exceptional contribution of the Chairman of its board of directors.

Press Releases

Proposed Combination of Exchanges : the Institute’s opinion

Leave a comment

The Institute for Governance collaborators issued a report outlining their observations and viewpoints regarding the merger between the Montréal Exchange and the TSX Group.

As part of the public consultation process launched by the Autorité des marchés financiers (AMF) in February 2008 regarding the merger between the Montréal Exchange and the TSX Group and the Montréal Exchange’s request to change its status as a self-regulatory organization, IGPPO collaborators issued a report outlining their observations and viewpoints in this regard.

Press Releases

The Institute for Governance published his report on healthcare governance

Leave a comment

The Group of experts proposes concrete measures for improving the oversight of health and social services institutions in Quebec.

The Working Group on healthcare Governance has published today his report including 9 key recommendations for healthier governance practices in Québec. Thoses practical changes designed to improve corporate governance in the healthcare sector.

Working Groups

The Governance of Health and Social Services Institutions in Quebec

Leave a comment

A group of experts issues a report on corporate governance in the healthcare system and proposes concrete measures for improving the oversight of health and social services institutions in Quebec ?

Improved performance within the healthcare system requires the boards of directors of healthcare institutions to have broader powers and clearer responsibilities so they can provide more effective service and cost control.

This is the conclusion drawn by a Working Group on the governance of health and social services institutions. The Group maintains that the oversight of Quebec’s healthcare system must be decentralized rather than remaining under the nearly exclusive control of the Ministère de la Santé et des Services Sociaux (MSSS), as it has for the past 35 years.

Before any consideration can be given to injecting more money into the system, and without prejudging the role of the private sector in healthcare, the Group stresses that it is essential that changes be made in the way these public institutions are run in order to improve their performance. The Working Group is made up of 10 experts who have met many times over the past year, at the initiative of the Institute for Governance of Private and Public Organizations (IGPPO).

Chaired by André Bisson, former chair of the Hôpital Notre-Dame board and current chair of the board of directors of the CIRANO interuniversity research centre, the Working Group has issued nine recommendations, which should serve as starting points for the improvement of oversight practices for healthcare institutions. Following are the highlights of its report:

  • The majority of board members must not be employees of the institution and must be chosen for their management and other relevant expertise. Each board must have a majority of external board members who are qualified, credible, competent, attentive to the concerns of the general public and able to contribute to the decision-making process of an organization with a budget in the hundreds of millions.
  • The current system of electing board members is not a true expression of democratic ideals. It needs to be replaced with a rigorous system of appointing independent board members.
  • Boards must have no more than 15 members. The ideal composition would be five members chosen by internal stakeholders, two members from regional bodies and eight independent members appointed by way of an internal board process.
  • Board members should receive a modest level of compensation designed to foster responsibility and accountability. The Group recommends a director’s fee of $300 per meeting.
  • For greater efficiency, boards should set up committees to study the more complex aspects of corporate governance in healthcare institutions.
  • The Working Group is of the opinion that boards must focus their attention on four core priorities :

– Appointing and assessing the performance of the executive director and setting the corresponding salary based on his or her ability to achieve specific objectives.
– Guiding, reviewing and approving strategic objectives to be integrated into annual action plans. Strategic partnerships should be considered a priority.
– Assessing the performance of programs and services based on objective data on the quality of care and services provided, user satisfaction and the attainment of budgetary objectives.
– Appraising the performance of the board of the directors on a yearly basis.

  • Boards must implement stringent reporting practices. The more self-sufficient institutions wish to be, the broader their responsibilities. Boards must ensure full public transparency and accountability with respect to certain service- and budget-related performance indicators.
News Articles

On Missing the Point:

Leave a comment

[Caveat: This brief is submitted to the Competition Review Panel as a personal statement and does not necessarily reflect the opinions of the Institute or of its board of directors]

The strength and size of the latest wave of foreign takeovers of Canadian corporations has spurred a sharp debate about their costs and benefits to Canadian society.

For some, this latest wave is but a passing phenomenon, largely offset by Canadian firms taking over foreign firms. On that side of the argument, people wax euphoric about “global” financial markets, an irresistible force for good, dispensing benefits to every society it touches. They marshal all fragments of past evidence to persuade one and all that there are few problems, and many gains, arising from foreign takeovers.

Canada, they claim, should learn from, and imitate, its big brother to the south, “a country with a significantly more liberalised [takeover] regime than Canada’s.” Foreign takeovers are not the issue; Canadians are. They are sentimental, emotional and uninformed about foreign takeovers. Unbeknownst, they suffer from residual bouts of “economic nationalism”, “mercantilism”, “statism” and “commercial xenophobia”.

All of the above have found their way into the Conference Board’s recent term paper “Hollowing out”–Myths and Reality” (February 2008). Not surprisingly, people of sound mind and sober disposition tend to run for cover and from the issue.

The other side, to which we belong, rejects this narrow definition of the issue. We agree that markets are good. They are indeed the citizens’ best friends…when properly regulated. Unregulated markets, the financial ones in particular, may well be harmful to society’s welfare and the citizens’ pocketbook.

Located in a broader frame of reference, the current wave of foreign takeovers becomes a mere symptom, a harbinger of what is to come. First, we must share a historical reminder.

A reminder

In April 1990, Senate Bill 1310 of the Pennsylvania legislature, the strongest anti-takeover bill passed by any state, became law. The prime purpose of that bill was to block the Canadian Belzberg family’s attempted take-over of Armstrong World Industries, a Pennsylvania company.

The wave of hostile takeovers in the 1980s, fuelled by junk bonds, leveraged buy-outs, raiders of all sorts and “green-mailers”, triggered legislative action in some thirty states in the Land of Free Markets. These anti-takeover legislations vary from state to state but they all aim at shifting the balance of power to the board of directors. Even in the investor-friendly United States, governments acted to control “hostile” takeovers.

The nationality of these raiders or hostile bidders was of little consequence as most were American outfits trying to takeover American companies. The governments of Pennsylvania, Indiana, Delaware, Ohio and many other states, believed, and were strongly supported by their population, that these hostile takeovers were not in the best interest of companies nor of society at large. It is certainly not a case of Americans suffering from “economic nationalism” or “commercial xenophobia”, unless of course the residents of the state of New York are considered foreigners in the state of Pennsylvania.

Ever since American states enacted these laws, the financial community and various economists have lamented the “discount” in share value that results from such protection from takeovers.

Yet, these laws are still very much on the books. They empower a company’s board of directors to reject an offer to buy the company if they deem that it is not in the long-run interest of the company. In some states, they may (in two states, they have to) consider the impact of the proposed takeover on all stakeholders (employees, creditors, suppliers, the community).

At this very moment, Microsoft is keen on buying Yahoo, a company incorporated under Delaware laws and without a staggered board. In the United States, that is the most propitious circumstance for a would-be acquirer. Yet, the board of Yahoo has rejected the Microsoft bid (which offers a 62% premium over the share price before the announcement), declaring that it “substantially undervalues” Yahoo   (The Wall Street Journal, February 11, 2008).

That may be a negotiating stance but the fact that the board of directors can reject the bid gives them some leverage in extracting a better price. That is in the interest of all shareholders. The alternative to negotiation is unappealing for Microsoft. It would have to engage in a proxy fight to get its nominees elected to the board of Yahoo. Imagine if Yahoo had chosen to stagger the election to its board of directors over three years!

Compare this to the Canadian situation, in the Alcan-Alcoa case for instance. Alcan’s board of directors could not have rejected outright Alcoa’s hostile bid. It had to let the bidder make its offer directly to its shareholders, who may well have accepted the offer, in spite of the board recommending against it.

Alcoa is incorporated in Pennsylvania. Here is what an American legal scholar writes on the subject of the Alcan-Alcoa battle: “The effect of all this [the Pennsylvania anti-takeover statutes] would be to permit Alcoa to effectively undertake a “just say no” defense to any Alcan pacman bid [i.e. a counter-offer by Alcan to buy Alcoa]… Compare this to Quebec [i.e. Canadian] law, which permits Alcan to keep its poison pill for only a short period of time and has similar time limitations on other explicit anti-takeover maneuvers.” (Steven M. Davidoff, May 16th, 2007)

In addition, Alcoa, typical in that respect of some 60% of companies in the Standard and Poor’s 500, has a staggered board, which means only a third of directors are up for election every year. That is a very effective measure against unwanted takeovers, a measure much decried by institutional investors.

Where again does one find the more permissive, “liberalized”, takeover regime? In Canada or in the U.S.?

In Canada, once a company is “in play” [i.e. an offer to buy the company has been received from a credible entity], the board’s role is limited. It must organize a proper auction for the company and, in the end, recommend that shareholders accept or reject the best offer. Shareholders may disregard this recommendation. If they hand in their shares in sufficient number, the deal is done.

Anytime a company is put “in play”, by decision time, a large percentage of the shares will be in the hands of arbitrageurs and other hedge funds. They will play a significant role in deciding the fate of the company; but their motivations are simple and well known: make sure the buyer likely to offer the most money in cash is lined up and go for it. That has happened in the case of Falconbridge and Inco. It is the way it will work for years to come.

The Canadian debate should not be focused narrowly on foreign takeovers but more broadly on who should decide the fate of a company and through what process. Canada does not need to imitate the actions taken some twenty years ago by these American states, though we should draw lessons from them. We need to define the proper legal framework for our own circumstances and for our own time.

That debate should take into account two important aspects missing from the current discussion:

The transformation of global financial markets over the last twenty years.

The role of stable ownership in developing internationally competitive companies.

[…] Read more

News Articles

Two cheers for canada’s securities regulatory framework

Leave a comment

Calls to eliminate the current architecture of the securities regulatory apparatus in Canada and replace it with a single, national securities commission have reached fever pitch over the last few weeks. Unsubstantiated claims that “Canada is the laughing stock of the rest of the world” are bandied around as if that were a compelling argument likely to silence opponents.

However, independent international studies tell a very different story. Canadian capital markets rank amongst the best, particularly on the dimensions related to the quality of securities regulations. For instance:

  • In a 2006 international comparison, the World Bank and Lex Mundi have rated Canada third in terms of protection of investors. The USA ranked 7th and the U.K. 9th;
  • Canada was ranked 2nd in terms of the quality of overall securities regulation in the OECD 2006 report “Going for Growth”, ahead of the US (4th), the U.K. (5th) and Australia (7th).
  • Based on the largest, and most authoritative study on the subject (LaPorta, Lopez-de-Silanes, Shleifer and Vishny , “What works in Securities Laws”, Journal of Finance, February 2006), Hail and Leuz (2006) have computed scores for the effectiveness of securities regulations in 40 countries. The results: Canada gets the second best score (0.91) on a scale where 1.00 is the maximum score. The U.S. scores 0.97, the UK, 0.73, Australia, 0.77 and so forth.

Then, to the plethora of arguments put forward by advocates of a single commission, a new red herring was added over the last few weeks: Canadian public companies incur a higher cost of equity capital than US firms, possibly because Canadian securities regulations are inferior to those in the United States, a result, possibly, of the architecture of our system. This higher cost of equity capital would impact Canada to the tune of “around $10 billion in annual GDP and 65,000 jobs”. These fantasy numbers were greeted with a willing suspension of disbelief.

Whether the cost of equity capital is higher in Canada than in the United States and other developed economies is a serious policy issue as a higher cost of equity directly affects the cost of capital of firms and, hence, their investment hurdle rate and a country’s economic growth.

However, empirical studies bearing on the cost of equity capital in Canada do not generally support the conclusion that the cost of equity for Canadian firms is higher than in the United States, once relevant factors are taken into account.

For instance, a working paper published by two researchers at the Bank of Canada earlier this month (Witmer and Zorn) concludes that, when adjusted for differences in risk-free rates (essentially the yields on government securities), the Canadian cost of equity does not differ significantly from the American cost of equity! In another study, Hail and Leuz (2006) compare the cost of equity capital across forty countries. They estimate the cost of equity capital was 10.53% in Canada, 10.24% in the US, 10.64% in the UK, 10.72% in Australia. There is little empirical support for a blanket statement that the cost of equity capital is higher in Canada and no support whatsoever for the claim that any difference with the US cost of equity is caused by differences in regulatory regimes.

Beyond these sensational claims, the arguments in support of a single national securities regulator are flawed in three important aspects.

First, proponents never demonstrate how a single, national system would correct what they claim are the costs inefficiencies in the present system (lack of harmonization, duplication, uncertainty and delays). It is remarkable that there is no credible analysis of the cost savings with a single national securities commission committed to operate well-staffed local offices in each Province and Territory, plus a well-staffed central office.

No doubt that we must strive to get the best, most efficient, regulatory system in Canada. Indeed, to that aim, provincial securities regulators have established systems (SEDAR, SRDI, NRS, NRD) and harmonized policies to such an extent that they are now truly national in scope. It is incumbent upon the proponents of a single national system to demonstrate how the costs of their proposal would compare with the passport system currently being implemented.

Second, any system of regulation must be adaptive to different circumstances and flexible as markets change over time. A strong case can be made that the passport model the Canadian Securities Administrators have committed to implement by 2008 (save Ontario) is much more dynamically efficient than would be a centralized regulatory body. The Canadian system, after the full implementation of the passport model, would combine greater flexibility, a better capacity to adapt to changing circumstances and greater responsiveness to particular industry or regional needs.

Professor Suret and his colleagues at Laval University have reviewed the evidence in a CIRANO research paper (2003) and in an article in Canadian Public Policy (No. 4, 2003). Their analysis points to major flaws in the arguments supporting a single commission in Canada. For instance, Suret et al. present data on the cost of IPO issues, which show significantly higher costs in the United States than in Canada. They argue that our decentralized system has been a contributor to several innovations and a spur to adaptation to the varied regional circumstances in our country.

A good example of cost-saving adaptation is provided by the fact that companies (often smaller ones, western-Canada based) which do not need to call upon Quebec investors do not have to bear the considerable costs of translating (and legal vetting) into French all documents filed on SEDAR. (It is hard to conceive of a single, national commission not requiring that all filings be in both languages.)

Third, the competitiveness of the Canadian capital markets is determined in large part by the efficiency of the various players of the industry. The cost inefficiencies in regulations, be that as they may, constitute a small proportion of total “overhead costs”. More attention should be paid to the efficiency of the Canadian securities industry relative to that of other countries.

Canada is ill served by official sweeping statements to the effect that the present Canadian securities regulations are gravely deficient and, as the chairman of the B.C. Securities Commission lamented, “by the spinning of the same misinformation abroad that they do at home”. Canada deserves a more sober assessment of the state of its securities regulations.

Working Groups

Working Group on University Governance

Leave a comment

Working Group proposes principles for the governance of Quebec universities.

In order for universities to achieve good governance, their Boards of Directors must include a majority of members who are independent of internal stakeholders. Boards must also enjoy autonomy in carrying out their functions – a prerequisite for accountability. They must follow clearly-established reporting requirements, and act with transparency. Moreover, the process of appointing the Executive Head of a university should be simplified, and should ensure that external, as well as internal, candidates will be considered.

These are a few of the findings of the Working Group on university governance in Quebec, made up of ten prominent public figures (see attached for a full list). Chaired by Jean-Marie Toulouse, former Director of the HEC Montréal business school, the Working Group was formed under the auspices of the Institute for Governance of Private and Public Organizations (IGPPO). The Working Group has put forward 12 principles that, while flexible enough to accommodate the individual traditions of each institution, should serve as a guide for improving governance practices in the university milieu:

  • Boards composed primarily of independent members: Members should be chosen through a process that ensures a diversity of points of view and adequate representation of different constituencies (principles 5 and 6). Members should be appointed to a three-year term, renewable twice, for a maximum of nine years, in order to strike a balance between stability and renewal (principle 7). The Board should carry out six essential functions (principle 4).
  • Three essential Board committees – Audit, Human Resources, and Governance and Ethics: The members of these committees should be drawn from the independent members of the Board. The mandate of each of these committees should be clearly defined (principle 8).
  • Number of decision-making bodies and adoption of a code of ethics for Board members: Decision-making bodies should be as few and as streamlined as possible and effective mechanisms for coordination among them should be established (principle 10). All members of the Board must act in the interests of the university as a whole, rather than advancing particular interests (principle 9).
  • Selection of an Executive Head: The selection process should be designed to promote the selection of an Executive Head with the standing required to carry out the duties associated with the position and to meet the challenges facing the university: The selection committee should invite candidacies from both members of the university community and those external to the community. The process should be carried out with discretion and rigour, and with respect for the individual candidates (principle 11).
  • Comprehensive, transparent processes ensuring accountability: Mechanisms to ensure accountability must address efficiency and effectiveness in using financial and other resources. Performance indicators should be developed to measure the quality of teaching and research, draw comparisons with peer institutions and assess results as a function of the university’s mission, values and strategy (principle 12).

“These recommendations are clearly consistent with the notion that an institution cannot seek increased autonomy without first showing a commitment to good governance. The Working Group has come up with 12 principles that respect the diverse traditions and values of different universities,” said Yvan Allaire, chair of the IGPPO board of directors.

“The impact of these principles will stem from the fact that they respect each university’s mission, (principle 1), and the variety of cultures, values and traditions within each institution (principle 2). These principles emphasise institutional autonomy and the accountability of Board members and of university executives (principle 3),” added Jean-Marie Toulouse, chair of the Working Group.

The Working Group consulted a number of current members of the Boards of Quebec universities, individuals who have previously served on Boards, and others interested in sharing their opinions on governance issues. It undertook an analysis of the legal frameworks of the various institutions, as well as research on governance in universities and other public-sector organizations. Members of the Working Group were selected for the personal experience each could bring to bear on issues of university governance.