The Ontario Securities Commission will face an array of competing views when it asks Corporate Canada for feedback on how to create a clear definition of an ''independent'' member of a board of directors.
Across Canada, companies routinely declare to shareholders that they have boards made up of a majority of directors who are unrelated to management, suggesting their boards have the objectivity needed to supervise executives.
Board relations is a matter of interpretation (photos)
But an ROB review of corporate governance practices of companies in Canada's benchmark S&P/TSX index found that many companies make this declaration despite having directors who have close ties to management, including directors who are family members of senior management, professional advisers like lawyers and recently departed members of management. Some companies also call board representatives from their parent company "unrelated" directors.
"What definition you use is all over the map," said David Beatty, managing director of the Canadian Coalition for Good Governance. "I just think it's a fuzzy area."
Claude Lamoureux, chief executive officer of the Ontario Teachers Pension Plan Board, said he believes directors with relationships to the company, including family ties to the CEO, are less likely to take a tough stand.
"We've seen people put their relatives on the board, and say that person is independent," he says. "Would I believe it? No, I wouldn't."
OSC chairman David Brown said last week that the commission will take over responsibility for setting corporate governance guidelines for companies, moving the responsibility away from the Toronto Stock Exchange. Among the changes he said the OSC will reveal in the next few weeks is a new definition of what constitutes a "related" or "unrelated" director on a board.
OSC general counsel Susan Wolburgh-Jenah said the commission has already drafted a definition of independence for directors who sit on audit committees. But she said the OSC expects to create a less strict definition of independence for other board committees. This is what has happened in the United States, where the Sarbanes-Oxley act requirement for independence on audit committees is stricter than the New York Stock Exchange or Nasdaq standards for other board committees.
"We may distinguish, but we're going to ask for comment on that," Ms. Wolburgh-Jenah said. "Should they be the same?"
Over all, the OSC expects to declare a general principle of what makes a director independent, and then to offer specific guidance in a few areas. Ms. Wolburgh-Jenah said that by stating a broad principle, companies can make their own interpretations when any variations arise.
Under the existing TSX definition, an unrelated director is someone who "is free from any interest and business or other relationship which could . . . materially interfere with the director's ability to act with the view to the best interests of the corporation."
This open-ended definition allows companies to declare that almost anyone can act in the "best interests of the corporation" and to then call them an unrelated director. The result is a wide diversity of practices across companies.
For example, many companies consider family members of the CEO to be related directors because of their close personal ties. But CanWest Global Communications Corp. calls Izzy Asper an unrelated director even though he is the father of CEO Leonard Asper, as well as the company's founder, former CEO and controlling shareholder.
(The company does not, however, list Mr. Asper as a director who is independent of the controlling shareholder.)
Similarly, Empire Co. calls a number of Sobey family members unrelated directors despite their family ties to CEO Paul Sobey. West Fraser Timber Co. Ltd. calls William H. Ketcham and William P. Ketcham unrelated directors, even though they have family ties to chairman and CEO Henry Ketcham. At Leon's Furniture Ltd., Dr. Joseph Leon is called an unrelated director, even though his family members run the company.
On the other hand, many other family-owned companies call all family members related directors, even when they are not members of management of the company. For example, Jean Coutu Group Inc. calls all Coutu family members on its board related, while Barrick Gold Corp. calls the Munk family members related, Loblaw Cos. Ltd. calls Weston family members related, and Goldcorp Inc. calls a relative of CEO Robert McEwen related.
The OSC is facing a wide variety of different definitions of independence used by institutional investors and regulators.
For example, the California Public Employees Retirement System calls customers and suppliers related directors, as well as directors who are affiliated with a not-for-profit organization that has received significant donations from the company over the past five years.
Following adoption of the new Sarbanes-Oxley Act, the U.S. Securities and Exchange Commission calls an audit committee member related if he or she is a large shareholder, with more than 10-per-cent voting control of the company. But the New York Stock Exchange says companies in which someone has more than 50-per-cent voting control are exempted from its independence standards.
In Britain, the new Combined Code says a director is not independent if he receives stock options, or collects a pension from the company, or has served on the board for more than nine years.
Edward Johnson, vice-president and general counsel of Power Corp. of Canada, said he disagrees strongly with calling directors related if they represent a parent company on the board of a subsidiary.
For example, Power Financial Capital Corp., Investors Group Inc. and Great-West Lifeco Inc. do not call Desmarais family members or employees of Power Corp. related directors on their boards. Mr. Johnson said such a designation would confuse independence from management with independence from a controlling shareholder.
But some public firms call representatives of their major shareholders related directors. For example, Quebecor World Inc. and TVA Group Inc. call representatives of parent Quebecor Inc. related.
Michael MacMillan, chairman and chief executive officer of Alliance Atlantis Communications Inc., said Canadian companies could use a clearer definition in the case of professionals like lawyers, consultants and bankers.
"One thing that might be useful is if the TSX would adopt a more specific, precise test," he said. "Because there is, with a number of these people, a perfectly valid debate about how independent they are."
Alliance Atlantis, for example, calls directors whose firms provide legal, investment banking and consulting services unrelated directors, saying that the amount they earn from the company is not material. The company calls director Allen Karp unrelated, though he is chairman of Cineplex Odeon Corp., which is a principal exhibitor of Alliance Atlantis's theatrical releases.
"I can't remotely imagine that would hurt his independence," Mr. MacMillan said. "In fact, it's helpful because of his long-term industry knowledge."