Frank Hasenfratz, chairman of auto parts maker Linamar Corp., didn't have to look far when he wanted to borrow close to $10-million last year. The company he founded floated him a short-term loan so he could exercise stock options.
Likewise, Toronto-based Aastra Technologies Ltd. last year approved an interest-free housing loan of up to $800,000 for its chairman and chief executive officer and another for $400,000 to a senior vice-president.
Lending money to insiders has fallen seriously out of favour at Canadian companies since the practice was banned in the United States last summer.
But some major Canadian firms are finding the lending habit hard to break.
Of the 207 companies included in the latest Report on Business study, 71 per cent clearly state in their proxy circulars that they no longer give loans to insiders.
That compares with 57 per cent of firms who were not making loans last year.
Still, 60 companies in this year's sample continue to show some form of loan on their books in their most recent proxy circulars and make no mention of discontinuing the practice. Others such as Linamar gave short-term loans that were repaid in full by the end of the year.
There were also some, such as Shaw Communications Inc., that got in under the wire and made loans to executives before the U.S. ban came into effect. Last year, the indebtedness of CEO Jim Shaw climbed to $6-million from $709,923 the previous year. At the time of the proxy's filing last fall, Mr. Shaw said the funds were borrowed in the summer to finance the purchase of a vacation property in Kelowna, B.C.
Charles Elson, a U.S. academic and prominent advocate of corporate governance, says lending money to insiders is never a good idea. "Large companies should not be in the position of lending money to executives. A company is not in business to be a bank," Mr. Elson said during a visit to Toronto to address corporate directors last week.
"It puts the board in a bad position. You may not need a ban on this, but the board has to exercise some common sense."
Some companies have defended their lending practices, saying loans are necessary to encourage share ownership among executives or for recruitment purposes.
But Paul Haggis, the newly appointed head of the Ontario Municipal Employees Retirement Board, thinks boards should know better than to lend money to insiders -- especially to buy shares.
"Giving a loan to a guy to buy stock in the company, that is a recipe for disaster," he said. "That works great when the stock goes up, but what happens when it goes down?"
While loans to executives on terms other than those available to the general public are forbidden for most firms under the new U.S. Sarbanes-Oxley Act, here in Canada regulators say they have no intention of introducing a similar ban.
Susan Wolburgh Jenah, general council at the Ontario Securities Commission, says companies are already facing numerous new regulatory demands.
For now, at least, the OSC would prefer to let the prospect of public scrutiny deter firms from adopting questionable lending practices.
"Surely in this day and age there is enough pressure to make sure that the loans companies are making to insiders are appropriate," she said.
But Claude Lamoureux, head of the powerful Ontario Teachers Pension Plan Board, sees any loan to an insider as inappropriate.
"Sometimes they buy shares, sometimes they buy a bigger home, sometimes they buy a boat, sometimes they do all kinds of silly things.
"Even if they buy shares -- go to the bank, borrow the money and be done with it," he said.