And welcome everyone to the Canadian Foundation for Investor Education's third symposium on capital market issues.
I would like to congratulate the Foundation for bringing together such knowledgeable people from the four corners of the earth - Europe, Australia, North America and - well, three corners, anyway.
Today's speakers reflect the diversity of approaches that are being developed in different markets around the globe for dealing with the issues of corporate governance that have arisen in different markets, largely in the last two years.
My role this morning is to provide a measure of context for today's program - from the perspective of a market operator who must constantly balance the needs of investors, the burdens on our issuers and the competitiveness of our market in the global environment within which we now operate.
We live in one of those unusual times when old approaches break down and new ideas burst the banks of the accustomed channels in which they have long been confined. Usually, when that happens, the first thing washed away in the flood is the consensus around certain core ideas, which made the old approaches acceptable to the broad centre of opinion. That has certainly happened in the areas of corporate governance and securities regulation. For a long period every market progressed within the confines of what has been called "a culture of small steps." That is, change took place at the margin and in the context of capital markets that were primarily local, or at best national, in their focus.
I do not exclude from that U.S. capital markets, which for all the new rhetoric about stock markets for the world, may well be the most inwardly focussed securities cultures in the world. Now, we - and our American cousins included - find ourselves more and more inter-connected - one with the other. That is true not just in terms of our global potential, which was everybody's focus in the go-go years of the tech boom.
But, it is even truer today in terms of our problems - especially the huge problems that threw U.S. capital markets into turmoil after the tech bubble burst, the scandals epitomized by Enron and WorldCom and, especially, the extra-territorial response at the core of the Sarbanes-Oxley Act that became law some 13 months ago.
As a result of all these things, the debate about small steps has been transformed into an intense global debate about big steps.
And there is very little in the way of consensus on which to base future approaches in any one's country, much less the broader problem of reconciling global differences.
This is not unusual in those occasional periods when sudden changes sweep aside the prevailing wisdom.
What we are going through, in fact, is very much akin to what happened in the 1970s to the field of economics and economic policy-making.
That's when the Keynesian consensus that had formed the basis of post-war prosperity for two decades broke down under the weight of economic pressures generated by the Vietnam War, the oil shock of the early 70s and the rampant inflation of the decade.
With the loss of that consensus, the whole post-war system of fixed currencies tied to the price of gold broke down. Whole new schools of economic policy thinking came to the fore.
We are still not through the policy swings set in motion by that breakdown. The focus on aggregate demand and fine-tuning of the 70s gave way to a concentration on monetary policy instruments in the eighties.
Monetarism gave way to fiscal policy in the shape of deficit reduction in the 90s.
Now Canada is one of the few major industrial companies in budgetary surplus, though just three years ago virtually all the major players were in surplus.
Now, however, some $500 billion in red ink is looming for the U.S., at the same time as France is defying the European Commission on deficit reduction.
The lesson, I suppose, is that once a consensus is lost, it's very difficult to find another one.
And now, largely as a result of the events of the last two years, we face the same situation with governance and securities regulation.
I do not think it is yet realized just how the corporate scandals in America, and the subsequent responses to them has destroyed the consensus for the framework of ideas on which our approaches had long been based.
There were differences, largely reflecting problems in specific markets. Europe, of course, has been in a process of solving the unique problems involved in transforming itself into a single market. We've had our own unique problems as the only major country without a national securities framework.
By and large, however, the consensus that dominated the small steps of global adjustment - for the most part since the 1930s -reflected the dominance of U.S. approaches to regulation.
In virtually every market, whatever the differences at the margin, the guiding star was found in American approaches.
What made them acceptable, in a word, was success. They worked. Or they seemed to.
And as long as the success of the U.S. model for capital markets continued to be reflected in unmatched returns, who was to doubt?
Who was to doubt, either, that copying the U.S. model was in the best interest of every market?
And who could dispute, especially in the emerging cyber-world where relations between and among capital markets was becoming ever-more important to the prosperity of national markets, that we should seek to replicate the U.S. model on the global stage?
So we were all caught up in the "culture of small steps" emerging from America as we tried to accommodate our individual national practices - a word, a phrase, a rule at a time - to the U.S. model as we proceeded, or so we thought, on the road toward a more and more harmonized world.
Now, we're confronted with a whole new roadmap of ideas. There is, moreover, recognized and informed resistance to following the U.S. example.
From what I have seen and heard, I do not think I can overstate the intensity of concern that remains in Europe at the insistence of the SEC that European professionals serving European companies must be subject to U.S. accounting rules as well as their own national requirements.
This is an issue on which it does not seem to me that European governments, nor the European Commission, are likely to yield. Paul Arlman, the Secretary General of the Federation of European Securities Exchanges will, I expect, have some things to say on this later in the morning.
In any case, the process of harmonization that was so central to what we had been doing globally up to Sarbanes-Oxley has been set back.
But, I hope, not irrevocable.
In fact, I am cautiously optimistic, recognizing that U.S. regulators and government officials are trying to find new accommodations that will reverse the damage and restore a measure of momentum toward creating global standards.
As well, I find some cheer in the fact that post Enron and WorldCom, the U.S. no longer argues that everyone should follow its example.
This is a new and positive development.
But the corporate scandals and the extra-territoriality of Sarbanes-Oxley didn't just let the cat out of the bag in terms of the weaknesses of the U.S. approach to governance, regulation and accounting.
They let a whole herd of cats out of the bag in the form of new ideas - and old ideas that now appeared in a much more favourable light. For example, International Accounting Standards, which once had a few lonely advocates on this continent, now are viewed as just as attractive as U.S. GAAP to a growing constituency.
And some American commentators - Walter Wriston, once the head of Citibank comes to mind - have suggested that they are superior, if only on the grounds of length.
Wriston, in making this argument, cited James Madison from the Federalist Papers.
"It will be of little avail to the people," Madison wrote, "that laws are made by men of their choice, if the laws be so voluminous that they cannot be read, or so incoherent that they cannot be understood (or) that no man who knows what the law is today can guess what it will be tomorrow."
Staff at the SEC seem to have come to a similar, Madisonian view.
A staff paper published in July by the SEC argues that published financial results are meaningless "if an investor can't understand or is not capable of comprehending the standards upon which they are based."
Standards that are more oriented to objectives and based more on principles, the staff paper argues, are more likely to produce "greater convergence between U.S. GAAP and international standards."
So there is a growing recognition of the need to accommodate to the new and different views held outside the U.S. and at high levels.
Meanwhile, the rest of the world has moved on.
The U.K. has reaffirmed its basic governance model based on the Cadbury Report's belief in guidelines and the doctrine of "comply and explain" - the doctrine that has underpinned our own approach to governance for a decade now.
I am looking forward to what John Pierce of the U.K's Quoted Companies Alliance has to say about the vigorous debate that preceded that choice.
On the other side of the world, Australia has added its own innovative twists. Australia has rejected the idea that small companies must be treated the same as large companies and therefore bear proportionately higher costs. It has also reaffirmed the Australian commitment to its own version of comply and explain.
I am delighted that one of the principal architects of that approach, Karen Hamilton of the ASX governance council, will be speaking later today.
And Europe, of course, is embarked on its own march toward community directives designed to create a single market of 15 - which will become 25 next year.
The heart of Europe's approach within that framework of directives is a system designed, not to eliminate, but to accommodate the national differences that are inevitable on a continent that reveres its rich history of innovation, and rightly so.
The European debate, of course, is hardly over, but ours isn't either.
And the debate in the United States isn't over either.
Apart from the changing thinking in the SEC, that debate proceeds within the markets, the universities and the think tanks, within legal and accounting firms, within the huge governance industry that has grown up around governance and how to profit from it.
So what do we have before us, Beyond Sarbanes-Oxley, as the Foundation has styled the second panel of this symposium?
What we have is a world in which new ideas on governance, regulation and accounting - or old ideas that have been given new prominence - are now in fierce competition with each other, each with its international and intra-national advocates.
We are in a search for a new consensus, in short.
Realistically, I think it is clear that we are some distance away from finding one, and, if our post-Keynesian experience is any guide, we may be decades away from one.
So while we work over the longer term toward the establishment of global principles that can apply to everyone, we also need to find new ways to accommodate and respect the immediate differences that mark our un-reconciled national approaches to governance, regulation, accounting and all the other things that define our markets.
Indeed, if the large steps that now seem both necessary and in prospect actually materialize, finding a way to accommodate differences may well be the only way for global markets to advance.
I say that because a global approach that respects difference and is based on each market adopting international best practices voluntarily and at its own pace seems more likely to converge toward common standards than the process that was derailed over the past two years.
But I think you would agree it is a big step to turn from an approach based on eliminating differences to one based on accommodating them.
But certainly the idea of taking such a big step is one that is in play.
One of the principal ideas that has come to prominence post Sarbanes-Oxley is the idea of mutual recognition - the idea of each country accepting the different approaches taken in different markets to achieve the same broad, regulatory objectives.
I am looking forward to the luncheon presentation by Benn Steil of the U.S. Council on Foreign Relations who has developed one of the most elegant descriptions of how mutual recognition might produce freer trans-Atlantic trade in securities.
As many of you know, TSX Group has proposed that we take that idea a step further by transforming it into a business venture that might provide a working model of mutual recognition in action.
Official Washington has been relatively negative on the idea, I must say, but they might see it differently if a working model was there to show the advantages for investors on both sides of the Atlantic.
Certainly, Australia is attuned to this approach with its trans-border links to Singapore and its initiatives involving Hong Kong and Tokyo.
Mutual recognition is not the only idea in play.
Some high level work - like the SEC study I cited earlier - has been going on in the SEC, in the courts, and among state regulators.
And Europe has been a fertile source of ideas for Canadian regulators seeking to grapple with our own fragmented regulatory system.
Which way will the U.S. go next on governance?
I frankly do not know. Arthur Levitt, the former SEC Chair, thinks the U.S. is going back to the middle after an "over-reaction" - his word - to last summer's scandals, in which case further changes may be in store.
Another former SEC Chair, Richard Breeden, has produced - in my words - some cutting edge ideas on how to improve governance at what was WorldCom and is now MCI. A U.S. federal court has ordered their implementation.
For example, to provide a greater role for shareholders in the company, Breeden designed a process that involves creating an opening for one new director on the MCI board each year and ensuring that a shareholder committee nominee is among the candidates for the vacancy.
The company's board will decide who goes on the basis of a peer review process with the board's governance committee recommending which sitting director is out and, if it can't decide on how to do that, drawing lots.
I can't escape the feeling that I've seen this before. It's akin to voting somebody off the island.
In any case, there is plenty in play and as the Breeden Report suggests, the securities industry in the United States is in as much intellectual ferment as the global industry.
In the midst of all this ferment, however, harmonization seems a more distant prospect than ever. Apart from the divergent directions being taken in response to Sarbanes-Oxley, there's no apparent official inclination to take up the idea of free trade in securities.
Financial services, for example, have yet to make it onto the new trade agenda of the big players on the World Trade Organization.
Mutual recognition involving securities may show up, however, in the trade and investment enhancement agreement that Canadian and European negotiators hope to conclude before a trade summit in Ottawa in December.
TSX Group, in fact, will co-host a meeting of the Canada-Europe Round Table on November 21 during which Canadian and European Chief Executives will thrash out these issues in advance of the Ottawa summit.
We'd like the eventual agreement to adopt the principle of mutual recognition as a basis for increased securities trading between Canada and Europe.
But when you are in a period like this, it is not always predictable which approaches will ultimately dominate.
So the big question we have to deal with in terms of immediate needs is how to get to the different kind of future that's rushing up on us, and how to deal with it once it's upon us.
I suggest that what we need more than anything else is to find a framework within which one major market, like the U.S. or Europe, can change direction without causing massive disruption in everybody else's markets.
That is the kind of disruption that Sarbanes-Oxley produced, and another sharp turn on any of a range of U.S. approaches could do the same, especially if they embody the extra-territorial approach used in Sarbanes-Oxley.
That is what this symposium is about.
Its purpose is to explore a different kind of future for investors, for the securities industry that serves them and for global markets.
I look forward to a fascinating day.
Thanks to all of you for attending and to the Foundation for bringing together such a front-rank group of speakers.
