Under scrutiny: governance in Canada; U.S. practices are having a significant impact, and other distinctive initiatives are under way to protect investors and rebuild confidence in the country's capital markets.

Author:Beck, Andrew J.

CORPORATE GOVERNANCE in Canada is under intense scrutiny. Like the U.S. Securities and Exchange Commission, Canadian securities regulators have been in an unprecedented regulatory frenzy in the aftermath of the Enron scandal. Corporate governance is a hot topic in Canadian boardrooms, and interested parties--governments, stock exchanges, businesspeople, institutional investors, and governance experts--are weighing in. Given the strong economic ties between the U.S. and Canada, it isn't surprising that U.S. governance practices are having a significant impact in Canada.

Canada is the only country that has a bilateral agreement on securities regulation with the U.S. The Canada-U.S. Multijurisdictional Disclosure System (MJDS), adopted in 1991, gives large public Canadian companies access to U.S. markets without having to follow all the SEC's disclosure rules. Eligible Canadian companies can offer their debt and equity securities without the SEC reviewing the registration statement. The SEC's rationale underlying the MJDS is that Canadian regulation is sufficiently similar to its own that duplicate regulation is considered inefficient and unnecessary. This rationale is one important incentive for the Ontario Securities Commission (OSC) and other Canadian securities regulators to follow the SEC's lead to regulate corporate governance more strictly.

Neighborly best practices

On balance, Canadian companies value MJDS much more highly than U.S. companies do. Because Canadian companies rely on U.S. capital, the regulators of Canada's comparatively small markets must always be aware of new legal requirements and the evolution of best practices south of the Canadian border. Participants in Canada's capital markets fear that preferential access for Canadian companies to the U.S. markets could be threatened if Canadian securities regulators don't keep pace with the SEC.

The Sarbanes-Oxley Act of 2002 (SOX) applies to U.S. and foreign companies alike. MJDS companies, like all other companies reporting with the SEC, must comply in a host of ways, such as CEO/CFO certifications, off-balance-sheet transaction disclosure, internal control reports (including auditor's attestation), independent audit committees, and prohibition on loans to directors and executive officers. This means that the cost of complying with U.S. rules has increased significantly for cross-border Canadian companies. Even if Canadian companies were exempt from compliance with SOX, many MJDS companies would comply voluntarily, because they want investors and analysts to view them as being on a par with their U.S. competitors.

But the desire to preserve MJDS and achieve harmonious cross-border securities regulation doesn't tell the whole story of why Canada cares about corporate governance. Regulators in Canada want to protect investors and rebuild domestic and international confidence in Canada's capital markets in light of Canada's own corporate scandals, including Bre-X Minerals, YBM Magnex, Nortel Networks, and others. Nortel is cited as "Canada's Enron." Its 2003 financials are being restated for the second time. The company fired its CEO, CFO, and controller in April 2004, and shareholders are filing class-action lawsuits. The SEC and the OSC are investigating, and the Royal Canadian Mounted Police are conducting a review. Nortel's stock was worth nearly $100 per share during the tech boom, but is now worth less than $4 (although the decline can't be attributed entirely to governance failures).

Investor confidence measures

Canadian regulators recently finalized several investor confidence measures, many of which are very similar to those of SOX and various U.S. stock exchange listing standards:

* The CEO/CFO certifications of annual and quarterly reports look much like SOX Section 302 certifications. Like U.S. companies, Canadian companies will have to certify that their periodic reports contain no material misstatements or omissions and provide a fair presentation of the company's financial condition. They will have to adopt disclosure controls and procedures.

* Public companies must have fully independent and financially literate audit committees. But instead of the SOX requirement that companies disclose whether their audit committee includes a financial expert, Canadian regulators require disclosure of the education and experience of all committee members (on the theory that investors can judge the committee's expertise for themselves). Audit committees must have a charter, adopt whistleblower procedures, and preapprove nonaudit services.

* Audit committees are not required to hire and fire the independent auditors as they are under SOX...

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