- The Committee recommends that individuals appointed to the boards of pension plans should have the necessary knowledge, to enable them to effectively monitor a fund’s managers.
- The Committee recommends that the trustees of each pension plan in Canada above a specific asset threshold to be determined in consultation with plan stakeholders adopt one on the PIAC, ACPM or OSFI guidelines and report annually to pension plan members setting out how they comply with, or exceed, the adopted set of guidelines, and explaining why they do not comply if they choose not to do so. Implementation of this recommendation should proceed ounce the three organisations are prepared to provide assistance to their respective stakeholders who need guidance on how a plan is to perform self-assessment.
- The Committee believes that independent directors have a key role to play in the governance of mutual funds. Their independent status leaves them free to focus on issues or fairness, conflicts of interest, and procedural and monitoring issues. Independent directors would not be there to second-guess the investment decisions of portfolio managers. Every mutual fund should be required to have a majority of independent directors.
- The Committee recommends the enactment of legislation that would recognize a business trust structure that would be similar to a corporate structure and would include provisions of directors and officers of the trust and the extent of their independence, how they may be elected and removed, how fundamental changes in the trust would be made, and unitholders’ rights and remedies.
- Investors are entitled to know the risk management and governance practices of their mutual fund manager. They have a right to know what processes are in place to monitor the decisions taken on the risk exposures of the mutual fund, and that monitoring is taking place.
When the Toronto Stock Exchange Committee on Corporate Governance in Canada (the Dey report) was released four years ago, the Toronto Stock Exchange (TSE) made it a requirement for all TSE listed companies to file public documents showing how they are complying with the guidelines for corporate governance put forward in the report. If a company chooses to not comply with guidelines, it must state why.
With respect to the governance of mutual funds, if the fund manager is a publicity traded TSE company, it is subject to the Dey guidelines. Other fund managers have no such formal responsibility.
The emphasis in the Dey guidelines is on full disclosure. In the view of the Committee that the same degree of disclosure should apply to all mutual funds in Canada. The Dey guidelines should be adhered to by all mutual fund companies in Canada.
- The Committee recommends that the media be invited to listen to, but not participate in, briefings of analysts by management following the release of each quarterly report.
- The Committee recommends that the federal government examine the issue of confidential proxy voting in respect of corporations incorporated under the Canada Business Corporations Act.
- In its August 1996 report, Corporate Governance the Committee supported proposals to promote more open and meaningful shareholder communication. At that time, the Committee recommended that the Canada Business Corporations Act be amended to encourage and facilitate such communication. The Committee reaffirms its recommendation on this issue.
- In its August 1996 report, Corporate Governance, the Committee recommended that the CBCA take-over bid threshold be raised from 10% to 20%. The Committee reaffirms this recommendation.
- In its August 1996 report, Corporate Governance, the Committee recommended that the CBCA be amended to require registrants to furnish corporations with a list of all beneficial shareholders, unless such shareholders specifically request that their names not be given. The Committee reaffirms this recommendation because if believes that this would go some way toward rectifying the present difficulties in identifying the beneficial owners of shares.
- The government should begin the process of phasing out the Foreign Property Rule in the near term by increasing the 20% limit to 30%, through annual increments of 2%.
In February 1996, the Standing Senate Committee on Banking, Trade and Commerce (the "Committee") held hearings on a number of broad policy issues related to modernizing the Canada Business Corporations Act particularly as regards the corporate governance of Canadian public companies. Many witnesses raised questions about the behaviour of institutional investors, in Canada especially as regards their governance . The Committee heard about how institutional investors have the capacity to influence corporations in which they invest and were told of the numerous shortcomings as to how some institutional investors are operated and governed. As a result, the Committee decided to conduct a series of hearings on the role and governance practices of institutional investors beginning on November 16, 1997.
CHARACTERISTICS OF INSTITUTIONAL INVESTORS IN CANADA
Institutional investors are financial institutions that invest savings of individuals and non-financial companies in the financial markets(1). Examples of institutional investors in Canada include:
- banks, caisses populaires and other deposit-taking institutions
- mutual funds
- life insurance companies
- public sector pension plans
- private sector pension plans.
Because this report focuses on the activities and governance structures of pension plans and, to a lesser extent, mutual funds, a brief description of these institutional investors is given below.
A pension plan is a fund that is established to pay benefits upon its members’ retirement(2). There are currently two basic types of pension plans: "defined contribution" and "defined benefit". In a defined contribution plan, the employer (plan sponsor), and in most cases the employees, contribute a predetermined amount on a periodic basis. The contributions accumulate and at retirement the employee is paid a pension determined by the investment performance of the plan. Under a defined contribution plan, the employee bears the risk of poor investments; the employer neither guarantees a return to the employee nor the amount of the pension.
In a defined benefit plan, on the other hand, the plan sponsor agrees to make a specified payment to qualifying employees upon retirement. It is the plan sponsor that assumes the risk of possibly having insufficient funds in the plan to pay pension benefits(3). Most major public sector and private sector pension funds in Canada are defined benefit pension plans.
Public sector pension funds include publicly managed pension schemes such as the proposed new Canada Pension Plan Board and funds that cover public sector employees, such as the Ontario Municipal Employees Retirement System (OMERS), the Ontario Teachers Pension Plan (OTPP) and the Ontario Public Service Employees Union (OPSEU) Pension Plan. Private sector pension plans are operated for their employees by businesses or other non-government entities .
Investment or mutual fund companies are financial intermediaries that sell units (shares) to the public and invest the money they receive. Each unit sold represents a proportional interest in the portfolio managed by a professional money manager. There are two basic types of investment/mutual funds: "open-end" and "closed-end". Open-end funds, known as mutual funds, sell and redeem units on demand; closed-end funds sell shares, but, unlike mutual finds, do not redeem their shares. Their shares are bought and sold through stock exchanges.
One witness pointed out a number of important distinctions between pension funds and mutual funds:
The liability profiles of pension funds vary from fund to fund based upon the mix of actively employed members and retired members in each. Those with a preponderance of employees can take a more aggressive investment posture while those with more retired members must take a more balanced approach. Mutual funds, on the other hand, invest assets in keeping with a stated investment policy and to maximize performance.
Also, pension funds tend, on average, to hold specific investments because of their very long time horizons. Portfolio turnover ratios are lower in pension funds than among other institutional investors and the size of individual holdings can be very large. These factors lead pension fund managers to encourage investee companies to improve shareholder value rather than simply to dispose of their shares.
Unlike the mutual fund industry, pension funds are not competitive. Their focus on performance is one of ensuring returns adequate to meet anticipated liabilities, not to attract investors.(4)
Another witness advised the Committee of the rapidly changing face of the institutional investor:
It is important to recognize that the lines between the so-called "institutional investor" and the "retail investor" have blurred as "institutional investors" increasingly take on the management of money in a representational capacity for individual investors rather than for their own account. In this representational capacity their authorization to continue to manage such money may be terminated on relatively short notice, or in some cases, no notice.
The individual consumer/investor who invests in a mutual fund or participates in a defined contribution plan has a direct ownership interest in his or her investments that fluctuates according to the market value thereof as opposed simply to having a contractual right to receive an agreed-upon payment or payments at a stipulated time or times. The individual consumer/investor who holds his or her investments either directly or through some sort of collective vehicle is in direct competition with the institutional investor who invests for its own account.
The secular shift in household savings that has occurred in the last ten years from deposit type instruments and life insurance to other types of investments, with mutual funds being the investment vehicle of choice, has resulted in increasing "retailization" of the marketplace. In other words, it is no longer appropriate to think of the marketplace as being divided simply into the "retail market" and the "institutional market". The marketplace has become an "instividual" marketplace.(5)
The issues dealt with in this report fall into two broad classifications: (1) the internal governance activities of institutional investors in Canada, and (2) the activities of these institutional investors in the governance of publicly traded corporations in which they invest. Internal governance issues will be discussed first; external governance issues, next.
