Law Times

Law Times • November 23, 2009 Liberals need a lot of lipstick to dress up HST lipstick on a pig? Well, yes, you can W hat was that about Inside dress some things up, but they're always go- ing to be what they are. Such is the case with the harmonized sales tax, which leapt back into the headlines with the introduction of the provincial part of the legislation that will marry Ontario's sales tax with the federal goods and services tax. Ottawa has yet to introduce its version, but the Ontario bill predictably triggered a fusil- lade of press releases from lobby and interest groups, each vying to be more outraged and apocalyptic than the next. Fully aware they are stumbling into a political minefield, Queen's Park By Ian Harvey Premier Dalton McGuinty and company are dressing it up as best they can. Sure, there's going to be a little adjustment, they're telling us, but in the long run we'll create 591,000 more jobs and lower personal income taxes. Both are politically sexy ideas. I'm not going to rehash the HST, nor whether it's a good thing or a bad thing. But I'll suggest we take a step back and watch the story unfold because the McGuinty government is about to tap dance across that aforementioned minefield. This will be the art of politics at its finest or its worst be- cause between now and next spring, and especially in the upcoming budget statement, we should expect a series of carefully choreographed announcements and events that will slowly chip away at the resistance to harmonization. The soft-shoe shuffle has already started with the disclo- sure that meals under $4, children's clothing, women's sani- tary supplies, and newspapers will not be subject to the tax and that in addition to the rebate cheques sent to Ontario households, personal income taxes will also be cut. Also, we learned earlier this year, resale homes will not be subject to the tax unless they exceed a $400,000 sale price and then, only on the portion above that threshold. We're also told these magnanimous gestures will cost the government $3.4 billion over the first four years in forgone tax revenues and that no more exemptions will be announced. What we're not hearing is how much of a windfall the government coffers will reap. I'd suspect that number is obscenely high. There's a good reason to be somewhat skeptical here. For one, McGuinty and company know the real art of politics is staying in power and to do that they will have to sell a tax grab that has already infuriated the electorate. Everyone remembers it was the GST that struck the most savage blow to the future of the federal Conservatives under Brian Mulroney, a man still vilified today partly for his association with that tax. With the mutual fund industry lobbying fiercely for an exemption on their management expense ratios and their connection to another sacred cow in the form of our RR- SPs, it would be short-sighted not to crack the door just a little and leave hope at least for more considerations. Then there's the process. While the Liberals have a majority, the bill tabled last week still has to go to committee, where the opposition parties will be sharpening their knives. Still, let's not forget that the HST does have support and, ironically enough, some of that comes from former Conservative leader John Tory, who waxed on his CFRB afternoon radio show that harmonization wasn't as evil as some people were making out and that it in fact has strong support from the business community. A look at the polls, however, reinforces the notion that the government needs to be a little more conciliatory. With a massive deficit, the dust still settling from the eHealth scan- dal, and doubtlessly a couple of more skeletons yet to come out of the closet, the Liberals are bleeding political capital. A G.P. Murray Research Ltd. survey pointed out last week that the gap between the Conservatives and the Liberals continues to tighten. Nanos Research's poll put the Liberals at 37 per cent of the decided vote with the Conservatives at 35 per cent. The NDP, meanwhile, had 17 per cent and the Greens 10 per cent. That's a 10-point drop for the Liberals. "It makes for a statistical dead heat," says Graham Mur- ray, commenting on the trend. This government has a long rocky road ahead and it will need a lot of lipstick to sell harmonization and repair its repu- tation. I'd be buying shares in cosmetics companies. LT Ian Harvey has been a journalist for 32 years writing about a diverse range of issues including legal and political affairs. His e-mail address is ianharvey@rogers.com. E COMMENT Corporate governance a hot topic worldwide BY RICHARD LEBLANC For Law Times arlier this month, the Canadian Securities Administrators announced that it does not intend to implement proposed changes to the corporate governance regime. The amendments included the proposed repeal and replacement of national policy 58-201, corpo- rate governance guidelines; national instrument 58- 101, disclosure of corporate governance practices; national instrument 52-110, audit committees; and companion policy 52-110CP, audit committees. In taking a pass on the proposals, the CSA stated that feedback it received "pointed out that issuers are currently focused on business sustainability issues in a challenging economic climate and on the transi- tion to international financial reporting standards." There was also resistance to replacing guidelines with a principles-based regime. The move comes at a time of widespread discussion over cor- porate governance. In fact, while Canada has declined to make the proposed changes, regulators and other groups in the United States, Britain, the European Union, South Africa, and other jurisdictions have begun developing and issuing binding and non-binding governance rules, codes, and standards. For example, the High-Level Group on Financial Supervision in the European Union found that board members and executives of certain financial institutions didn't understand the characteristics of the new, highly complex products they were dealing with, nor were they aware of the aggregate exposure of their compa- nies. Further, many board members didn't provide the necessary oversight or control of management. The British government responded by estab- lishing its own review of corporate governance in its banking industry, led by Sir David Walker. He found bonus schemes encouraged excessive risk tak- ing and accordingly proposed significant reforms to strengthen bank governance there. The combined code on corporate governance may take up many of these reforms and, if so, will apply to listed companies beyond banks and other finan- cial institutions. Walker, in a statement in the Wall Street Journal Europe, said the proposals on remu- neration were "as tough, or tougher, than anything to be found anywhere else in the world." Lawyers advising companies listed in Britain or following international corporate governance devel- opments should take heed of these reforms. Some of the highlights of the comprehensive review by Walker include: THE RESPONSIBILITIES OF THE CHAIR AND OTHER NON-EXECUTIVE DIRECTORS: • A greater time commitment is required of direc- tors: a minimum of 30 to 36 days for directors and not less than two-thirds of a chair's total annual working time; • The chair is to possess financial industry experi- ence and board leadership capability. BOARD BALANCE AND COMPOSITION: • The Financial Services Authority is to pay closer attention to directors' experience and access to director education; • An interview process by the regulator is to be required for prospective directors who do not bring recent relevant financial industry experience. BOARD EVALUATION: • A senior independent director is to evaluate the chair and be accessible to shareholders if communication with the chair is difficult or inappropriate; • A formal rigorous board evaluation process and a statement thereon are to be developed, with external facilitation every second or third year; • The statement on board evaluation is to include the process for identifying skills and experience of directors and for evaluating contributions and commitments of individual directors; www.lawtimesnews.com • The statement is also to include communica- tion by the chair with major shareholders. RISK MANAGEMENT AND INTERNAL CONTROL: • A risk committee of the board is to be estab- lished, with a chief risk officer, who is indepen- dent from business units, reporting directly to the risk committee and board chair if necessary; • The independence and tenure of the chief risk officer is subject to board approval and the com- pensation of the chief risk officer is subject to the approval of the board chair or the chair of the remuneration committee; • The risk committee is to draw on external exper- tise and oversee due diligence appraisals of acqui- sitions or disposals prior to board action; Speaker's • A separate risk report is to be submitted to sharehold- ers including disclosure of risk committee members, meetings, and the source of any external advice taken. Corner REMUNERATION: • The remit for the remunera- tion committee is to include firm-wide remuneration with emphasis on the risk dimension; • The remuneration committee is to oversee re- muneration for all executives whose pay exceeds the median of that of executive board members and report satisfaction of performance objec- tives linked to compensation, disclosing total re- muneration in bands, the number of executives within each band, and pay elements; • At least half the variable compensation is to be in a long-term incentive scheme with half the award vesting after not less than three years and the remainder after five years; • Short-term bonus awards are to be paid over a three-year period with not more than one-third in the first year; • Clawbacks are to be used for entitlements when performance is subsequently found to have been overstated or in cases of misconduct; • Executives whose total remuneration exceeds the median of executive directors are to maintain a shareholding or retain a portion of vested awards. Stock vesting for this group should not normally be accelerated on cessation of employment; • The report of the remuneration committee is to state whether any executive director has the right to receive enhanced pension benefits be- yond those already disclosed and whether the committee has exercised positive discretion. When Walker was interviewed the day his rec- ommendations were released, he summarized them according to two areas: "capability"and "personal- ity." He also emphasized the need for better-trained non-executive directors. Boards have been "under- qualified and overly collegial," Walker stated. The importance placed on chair and director in- dependence by regulators over the last decade — ab- sent scholarly validation that such factors contribute to enhanced board effectiveness or corporate finan- cial performance and at the expense of competen- cies, behaviours, and assurances that roles are being fulfilled — has been arguably misguided and dam- aging to corporate governance and, by extension, to economies. The Walker review acknowledges that independence standards should be balanced with the skills, experiences, and qualifications of directors. It's not only Britain that's taking that approach. The U.S. Securities and Exchange Commission is also mov- ing towards emphasizing the capabilities of directors. In Canada, despite the CSA's recent move, our rules have addressed, as of 2005, role-assurance and compe- tency-related issues in addition to rigorous indepen- dence standards, which puts them in good standing in these respects vis-a-vis other jurisdictions. LT Richard Leblanc is a lawyer and an associate professor of corporate governance at York University. He can be reached at (416) 767-6676 or rleblanc@yorku.ca. This article is adapted from the October 2009 edition of Director, published by the Institute of Corporate Directors. PAGE 7

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