Governance Canada

Discussion + Information on Governance in Canada
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Home Capital: Where were the regulators?

In April, 2017, the Ontario Securities Commission revealed allegations (which have been not proven) that Home Capital Group Inc. and three of its executive officers at the time made materially misleading disclosures for 2014 and in 2015. Why did it take two years for the OSC to make public its allegations of failed disclosure while shareholders traded on information that the OSC now alleges was misleading? Home Capital’s financial businesses, Home Trust and Home Bank, are federally supervised by the Office of Superintendent of Financial Institutions and the Canada Deposit Insurance Corporation. Presumably they were on Ottawa’s watchlist, but depositors and investors were not aware. At the start of 2015, Home Capital’s shares traded around $42 per share are are now at $6 (May 8, 2017). So where where the regulators – what did they know and when?

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Executive Compensation and the Right of Shareholders to Vote ‘Against’ the Election of Directors

‘Majority voting policies” and “say on pay” non-binding votes are ineffective means for shareholders to express and voice their concerns on board decisions on executive compensation. To exert their relevant influence as owners, shareholders need the right to vote “Against” the election of directors, not simply to “Withhold” a vote, and to be granted more practical “proxy access” to nominate individuals for election as directors’.

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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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