Discussion + Information on Governance in Canada
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Canadian Public Accountability Board’s Inspection Findings Should Be Disclosed to Audit Committees

The critical roles of audit committees in overseeing the external auditor and in contributing to audit quality and integrity of financial reporting have been restrained by the failure of the Canadian Public Accountability Board (CPAB) to permit the disclosure of its inspection findings of external auditors to audit committees. Audit committees should have the legal right to receive CPAB’s inspection findings from their external audit firms in order effectively to oversee their external auditors and to evaluate the quality of the audit of their financial statements.

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The Regulation, Supervision, Accountability And Transparency Of Canada’s Audit Regulator And Audit Firms Require New And Expanded Rules

The Canadian Public Accountability Board (CPAB), Canada’s national audit regulator, and the audit firms the CPAB inspects, enjoy limited supervision by and accountability to the Canadian Securities Administrators. There is an undue lack of transparency of CPAB’s inspection findings of audit firms, which has resulted in a failure to achieve an enhanced degree of public confidence in the integrity of financial reporting in Canada that is fundamental to the effective operation of its capital markets. The supervision, accountability and transparency of the CPAB need to be reviewed by the Canadian Securities Administrators and the Ontario Securities Commission.

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Ethical Leadership and Corrupt Practices

The Chairman of the Board has a duty to lead the board to establish a sound ethical culture. The board is responsible for the governance of the company. With the assistance of the CEO and senior management, the Chairman and the board have the responsibility to see that the ethical culture is infused throughout the organization and becomes operationalized. The Chairman should enhance his/her role to become the “Chairman of the Company”, without assuming a management function. The beacon of ethical leadership in an organization is a pre-condition to the prevention of corruption and bribery.

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LESSONS NOT LEARNED AT SNC-LAVALIN

Gwyn Morgan, Chairman of the Board of SNC-Lavalin from 2007 to 2013, published an article in The Globe and Mail (Report on Business, July 27, 2013) titled “What I learned from SNC-Lavalin’s Woes.” In response to Mr. Morgan’s comments, I wrote a letter published in The Globe and Mail (Letters to the Editor, July 30, 2013). I described Mr. Morgan’s “lessons learned” article as “weak, defensive and unpersuasive” and “unconvincing”. The ‘lesson’ that Mr. Morgan did not learn was that the Chairman of the Board and the board, as the leadership of the company, are responsible for assuring that the company they direct and supervise has established the right corporate culture, and management they appoint practices strong ethical values.

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Michael McCain and Governance at Maple Leaf Foods

On July 28, 2011, the Maple Leaf Foods’ board entered into a related party “material contract” with the Company’s CEO, Michael McCain, who later in December 2011 acquired personally the family’s 32% share ownership in Maple Leaf Foods. The board did not explain why the McCain family’s private and external reorganization of its share ownership in the Company required or justified the board effecting a “material change” in the public company. Under the McCain Governance Agreement, the board granted Michael McCain a most valuable right to corporate assets while a minority shareholder, namely, the right to board representation and access to the Company’s proxy. The board granted Michael McCain the right to cause the board to nominate for election as directors a number of McCain’s selected nominees proportionate to his share ownership from time to time. Reciprocally, Michael McCain agreed to vote his 32% block “for” the election of the board’s other nominees as Company directors in uncontested elections. While not a complete lockup of circular control, together with the board’s concurrent adoption of a ‘poison pill’, the McCain Governance Agreement created significant hurdles for those who may wish to challenge Michael McCain’s controlling influence over the Company’s strategy and business performance. The McCain Governance Agreement terminates only if the Company becomes bankrupt or if Michael McCain dies or acquires more that 50% of the Company’s shares. If he acquires 50% or more of the shares, he can then select and elect all the directors. While the board granted Michael McCain the privileged right to board representation while a minority shareholder, the board did not provide protection to the minority shareholders of Maple Leaf Foods if Michael McCain becomes a majority shareholder.

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