Let me begin by congratulating the Institute of Corporate Directors.
This is a critical time in the life of corporate Canada.
We are under scrutiny that is unique in its intensity. We are in a new kind of competition, a competition not of numbers but of ideas.
And how we fare in this competition will shape the future of every public company in this country, and the competitiveness of Canada in the world.
Times like these demand leadership. The Institute has provided it, through forums such as this one or, earlier this month, its annual dinner honouring business leaders who are leading the way to improving governance.
A number of my colleagues were at that dinner. They considered it an outstanding success.
I'm sorry I couldn't be there, but I'm sure you'll understand.
The dinner coincided with TSX Group's first annual general meeting and I had to fight the Battle of Verdun - Bob Verdun.
Many of you know the gentleman. He parses every sentence. He scrutinizes every footnote. He questions every metaphor. And he makes some pretty good points, as a matter of fact.
I don't know whether we won or lost.
But we didn't make the front page of the ROB, like some others who encountered Mr. Verdun that day.
In any case, I spoke a moment ago of the governance debate as a competition of ideas that will shape our competitive place in global capital markets.
Let me expand on that.
Competitiveness isn't just about how we compare in terms of this rule or that.
It's about the core ideas that shape corporate integrity, inform corporate cultures and provide the basis for good governance.
It's about knowing our competitors and how they're waging their competition against us for customers in our markets.
And it's about results.
Governance, specifically our approach to governance, has in past represented a competitive advantage for Canada. We have been, and we are, a world leader in governance.
Others have grasped our competitive strength.
The London Stock Exchange is especially noteworthy in how they exploit our approach to governance to try to attract Canadian listings to their senior and junior exchanges.
Why would they be interested in what we do?
They're interested because they are hard, tough competitors and they're interested because we have something they want.
Let me illustrate by talking for a few moments about mining, as an example of the kind of competition we're in, not just in North America but globally.
The mining sector is one of our great strengths as an exchange. We are, far and away, the global leader in serving this industry.
Mining companies last year raised two and a half times more money on the Toronto Stock Exchange as they did on the next closest exchange in the world, the NYSE. They raised five times as much on TSX as they did on the London Stock Exchange.
In fact, TSX companies, combined with TSX Venture companies, raised nearly a third of the mining finance in the world - a third. TSX Venture financings alone were fifth in the world.
The mining companies that list with our two exchanges are overwhelmingly global in their outlook.
So we have to be global in our outlook. We cannot afford to confine our competitive focus to North America, the way some would wish us to do.
We need to keep our eye on our customers and what they do, whether they're in the Peruvian Andes, the Russian Steppes, the highlands of New Guinea, the Horn of Africa, southern China or good old Timmins.
What our customers do is finance some 44 per cent of the mines and mills outside North America on our two exchanges.
They finance more than half, 52 per cent, of the exploration projects outside North America.
That's quite an extraordinary achievement for a market of Canada's size, and an important source of Canadian wealth and growth potential.
And one final, pertinent fact.
Some 35 per cent of the chief executives and 290 directors of TSX listed companies live outside Canada. There are Americans, of course, but also Europeans and Australians, South Africans and Asians.
Because they finance the operations in one country, live in another and run their mines, mills and exploration projects in a third, or fourth, or fifth, they know the choices available to them in global securities markets.
They know the differences between and among markets.
They know where the right combination of factors can be found to meet their needs.
And they come to us by choice.
And they list their companies in Canada for good reasons.
We have an unparalleled concentration of expertise in mining finance in Canada, built up over more than a century of experience. That's one reason.
We have sophisticated investors who know the mining industry, recognize its potential and are comfortable with its risks. That's another.
We have both the reputation and reality of strong corporate governance and a market known for its quality and integrity that reflect well on its global image.
And our exchanges and our regulators respond when there are problems in the industry to protect the integrity and the reputation of our market - as we responded six years ago when Bre-X damaged that reputation.
Bre-X, in its way, was our bubble. It was our Enron.
Investors and analysts, brokers and investment banks - including U.S. investment banks - got caught up in the frenzy produced by salted samples in the Indonesian jungle.
Salting a mine is a crime. We have laws against it. There may also have been a murder involved. The last time I looked there were also laws against murder.
And what happened off in the jungle was always considered to be a crime until a few months ago, when the Bre-X fraud began to be routinely pushed forward, not as the crime it was, but as something quite different - an example of bad governance that good old American rules like Sarbanes-Oxley could solve.
In any case, when Bre-X came apart in 1997, TSX and the Ontario Securities Commission moved swiftly and we moved together. We set up a joint task force on mining standards. We went after root causes, not just symptoms.
The task force produced 66 recommendations to prevent another Bre-X. Sixty four were adopted. The remaining two required more time, mainly because they're global in scope, but they're on the way, too.
TSX timely disclosure standards were beefed up. The Investment Dealers Association produced new analyst standards.
The OSC led the way in winning the approval of Canadian Securities Administrators to create a new national regulatory instrument. It ensures that mining regulations can be applied consistently across Canada to companies operating far beyond our borders.
Mining companies were required to improve their corporate governance. They've changed dramatically. Canada's national system for registration of mining engineers and other experts now leads the world and is being copied in other countries.
Among those ways was a requirement that companies have available qualified and accredited mining experts to prepare technical reports and other information for public disclosure - this, years before Sarbanes-Oxley insisted on financial expertise on corporate audit committees.
Even though what happened was a crime, in other words, we moved to correct the weaknesses in governance that Bre-X had laid bare. And because we worked together and went after root causes we succeeded in raising the bar, not just for Canada, but for the industry world-wide.
In light of that, it is a matter of mild curiosity to see Bre-X constantly cited by commentators in the way it is.
Lacking other evidence to demonstrate why Canada now needs to adopt U.S. rules, and ignoring the strong action that was taken, they have taken to citing Bre-X as a reason for Canadian corporate governance reform American-style.
In fact, it's a good example of how well all the relevant Canadian players can act together to solve a Canadian problem. Indeed, it's a good example of how each of the players in our system has contributed to making our market the most trusted in the world on corporate governance.
TSX is one of many partners in governance, in other words. What we do in setting standards and guidelines is complementary to what is done by regulators in laying down rules and regulations. It is complementary to investment dealers, market regulators, to governments and industries.
We did act on Bre-X, in other words. The OSC acted. Every other Canadian regulator acted. The mining industry acted.
As an example, Bre-X is a dead horse. It is gone, kaput, history. It is not pining for the fjords. It is not just resting. It is Dead. D.E.D. Dead.
Yet the flogging goes on.
Meanwhile, our mining industry has recovered. The global industry has survived and adapted. There is no crisis of investor confidence in mining that awaits U.S. style action on governance.
Mining investors are back in droves.
That's why, last year, in the midst of Enron, WorldCom and the rest, trading in mining securities on the Toronto Stock Exchange doubled to 11.5 billion shares in volume and climbed 73 per cent in value to $127 billion.
Canadian mining investors, with their global perspective, understood full well that Enron and the rest were an American failure - their Bre-X, if you will - and they had to act to fix it, just as we did five years before.
Actually, the other criminal cases flogged by the media to make their governance arguments - Livent and YBM Magnex - are equally long in the tooth, and equally amenable to the Monty Python treatment.
But I have digressed…
The point I want to make is that we in Canada have created a place where global industries, like mining, are comfortable and mining investors are confident.
And if gold prices and diamond finds have a great deal to do with it, so does the strong and distinctive approach we have taken to corporate governance not just over the last year but over the last decade.
That is why, in mining financings, we lead the world.
And, as a world leader, of course, we are also a target - for competitors, like London, Johannesburg and Sydney, as well as the American exchanges like NYSE, Nasdaq and their over-the-counter market.
How we changed corporate governance is necessarily a part of that competition.
I mentioned earlier that the London Stock Exchange was especially interesting in the way they are competing for our listings, and for other listings in every part of the world.
They are making a competitive virtue of the U.K. having an approach like ours to corporate governance, an approach that is stronger, simpler, more flexible and less costly, but, above all, different from what the U.S. requires.
Because they believe our governance is just as strong as theirs and stronger than the American's, they can't very well attack our approach as a competitive strategy. So they are embracing our quality as a reason for listing in London.
It's a pity our gurus of governance don't see us the way others do. If they did, they would not be so eager to abandon an approach that has worked in favour of one that has produced the colossus of ethical failures.
In the U.K., unlike here, there is no support for anything like the American Sarbanes-Oxley approach.
Indeed, there is stout opposition in the U.K. even to adopting governance approaches that we have had in place for nearly a decade - like separating the jobs of board chair and chief executive or establishing an independent lead director to ensure the independence of boards.
The idea of a strong role for a lead independent director in U.K. companies was advanced earlier this year in the (Derek) Higgs report and endorsed by the government.
But a senior official of the U.K. single regulator, the Financial Services Authority, has sharply criticized that idea as too "prescriptive." In that, they are clearly in the same camp as the Americans who don't require or even recommend the jobs be separated either.
Meanwhile, that separation has been part of our TSX guidelines - our "comply or explain" system - for most of the last decade.
On this point and others, in other words, our approach is not only stronger than the American but the British as well. So it is little wonder they are embracing our quality for their marketing purposes.
And more important, as our results show - Canada has simply had nothing to compare even remotely to what has happened, and continues to happen, in the U.S. We have only some dead horses.
Yet the U.S. approach, a quantum extension of what has produced scandal after scandal since the 1920s, is actually described with straight face as gold standard.
Maybe it's Bre-X gold they're talking about.
London, one of our many global exchange competitors, recognizes the reputation American corporate governance has everywhere else in the world, except, it seems, in Canada.
That's why, while putting the soft sell on Canadian companies, they have been aggressively attacking the U.S. approach in seeking to lure global companies from other countries to London.
It will be interesting to see how they respond to the competitive opportunity they may be handed by changes in our approach to governance that bring us down to the U.S. level.
Will they continue to argue, in attempting to convince Canadian companies to buy secondary listings on their junior and senior exchanges, that Canada is still like the U.K.?
Or will they change their pitch to try to convince Canadian companies, especially global mining companies, to flee our market for a friendlier London listing because we've traded a strong, simple and principled system for the weaker, more complex and far more costly U.S. style approach?
We shall see. In the meantime, Canada, through the OSC, is progressing toward rule changes that responding to the perceived need to go the American route.
These changes, I would note, have some distance to go before they become law at the end of this year, and the stakeholders won't see the precise wording of the rule changes until June 27th.
After that there will be 90-day consultation before the rules are put in final form. I assume we'll be able to put out our changes in our listing standards for review as well - changes we began proposing more than a year ago, well before Sarbanes-Oxley. So final promulgation is many months away.
We will, like our listed companies, abide by whatever is decided. What matters now, however, is to understand how these changes affect the companies that are listed on our exchanges. That's especially true for the small and mid-cap companies that so typify Canadian public markets.
And we'll want to assess how they affect our competitive position in global markets.
At this point, notwithstanding the suggestions that the new rules will accommodate the needs of small companies, what divides small from large in the rules is basically the historic division between the senior exchange and the junior.
That is, all 1,300 companies on Toronto Stock Exchange, regardless of their actual size, are deemed to be large for the purposes of the most complex of the rules.
All 2,600 companies on TSX Venture Exchange, on the other hand, are deemed to be small. The regulator of TSX Venture is not the OSC in any case, but the B.C. and Alberta Securities Commissions who share the responsibility.
Reality presents a different picture as to what is large and what is small.
There are 38 companies on TSX Venture Exchange, for example, with a market cap of more than $40 million. They will benefit from being treated as small companies.
On the other hand, there are 503 TSX listed companies, nearly 40 per cent of our listings, that have a market cap of less than 40 million. They will be treated as large companies.
So despite their small size, they will have to bear the costs of being large - costs that must be measured not just in dollars but in the time they divert from operating the business to complying with rules.
It is not clear, I might add, that the U.S. based approach is appropriate to even our largest companies. Sarbanes-Oxley was designed for the Enrons of America. Enron, before its fall, was seventh on the Fortune 500.
This week, the largest company on TSX by market cap would have ranked 107th on the NYSE. The 10th largest would be 231st. We are a different market.
It is the situation of the smaller companies that concerns me, however. The difference in treatment accorded to smaller TSX listed companies, I suggest, will prove difficult.
But, then, I don't think rules designed to deal with the fraudulent activity of the biggest U.S. companies should be the basis for rules dealing the different needs of different-sized Canadian companies.
More important, it seems to me, this approach to small company governance doesn't solve the problem of small issuers on TSX, though it seems to work well enough for the larger issuers on TSX Venture.
We will certainly want to examine the implications of the incentives this creates for our issuers.
From our perspective, for example, it would seem at first blush to represent a disincentive for qualifying TSX Venture issuers who might be planning to graduate to the senior exchange.
I would expect the smaller TSX issuers will want to examine the new rules with considerable care from this perspective.
And I expect they will make their concerns known to the OSC during the course of the 90-day consultation that's ahead. Certainly, we will be doing this.
A critical piece, however, is as yet missing. This is the "rigorous" cost-benefit analysis that is to accompany the release by the OSC of the three new rules on June 27th.
Estimating costs when new rules are proposed is not an exact science, especially with regard to something as complex as corporate governance.
It takes time and experience to work through the real effects to see how closely they match the estimated effects. The national gun registry debacle suggests how much real costs can vary from estimates.
I don't expect that we will see variations of the gun registry variety when the bills finally come in on corporate governance. And I would certainly not fault the OSC for the effort to estimate the costs in advance.
Nonetheless, if the new rules are designed to bring Canadian rules in line with Sarbanes-Oxley, then the experience of U.S. companies with the costs of SOX may provide a hint of what we're in for.
As it happens, the first calculations of the real costs of SOX to American companies are now beginning to come in.
A survey by a leading American law firm, Foley & Lardner, is the most recent. It compared the costs of 328 companies before and after Sarbanes-Oxley, recognizing that SOX was only in place for the final months of last year and isn't fully implemented even as yet.
Nonetheless they found that directors and officers insurance is up an average of 94 per cent, accounting costs 105 per cent, legal 90 per cent, directors' compensation 98 per cent, compliance personnel 267 per cent.
On average, at this point, they found costs were up 90 per cent at these 328 companies.
The most important finding from our perspective was that the "overall increases will fall disproportionately on small-cap and mid-cap public companies who may face crippling financial burdens to remain public in the new environment."
They also found that 12.5 per cent of the companies are considering going private or selling the company directly as a result of new U.S. corporate governance and disclosure requirements.
These are very troubling numbers for U.S. companies, who also have been trying to grapple with a flagging economy for three years.
Because the OSC has responded in various ways to the concerns expressed about the effect on smaller companies in Canada, it is virtually certain our experience will be nowhere near a 90 per cent increase in costs for what is proposed.
But what is acceptable? Fifty per cent? Forty? Twenty? And what is bearable to the small issuers on the TSX who will have to bear the brunt of whatever the eventual real costs prove to be?
So these are the issues that are in play as we begin the final phase of this prolonged governance debate over what Canada should do about an American problem.
How do they bear on Canada's competitive position in global markets and how do they affect our ability to provide an efficient, liquid and low-cost market for Canadian issuers and investors alike?
They bear on our position in this way:
Traditionally, we have operated in a market where our major companies can be vulnerable to mergers or takeovers by foreign companies and, in past years especially, U.S. companies.
In recent years, the number of American companies taken over by Canadian companies has matched or surpassed U.S. takeovers of Canadian companies. Nonetheless, it is one of the rules of financial jungles that the large are food for the larger.
A static market could pretty quickly wither away at that rate, but we have not been static.
Rather, we have developed a unique dynamic where young companies form, grow, merge and gradually gain the critical mass to become national, then global firms - and thus candidates for takeover by foreign companies.
I have heard it argued that some of our small companies probably shouldn't even be public companies.
But the effect of rules and regulations that would knock smaller companies out of the public market would also reduce the number of companies that can begin the long, Darwinian climb from family firm to global giant. I don't think those who espouse this view fully understand our markets and their history.
This is the process that allowed the Bronfmans to build Seagram's before it was swallowed by the French company Vivendi, that let the Demarais' family build Power Corp., the Westons, the Sobeys, Leon's and so on.
It's that growth dynamic that represents the future strength of Canada's public equity markets, with young companies constantly emerging to replace those that are swallowed by others.
Simply put, because we exist beside a country that is unparalleled in its power to consume the enterprises of other countries, we need a constant supply of small companies rising in strength and reach to replace the large companies that periodically leave the exchange.
And we've been very successful at doing that and in aligning our business - and leading the restructuring of markets - to make that happen.
To give you a couple of examples, TSX Venture Exchange has a unique Capital Pool Company program to encourage new public companies.
Boardwalk Equities started as a CPC. It's now inter-listed on TSX and NYSE.
Or consider Triple G Systems Group, a software company. It also started on TSX Venture. It now has 110 licensees in 440 laboratories in 10 countries. This past January it graduated to Toronto Stock Exchange.
This is a process we've been working very hard to improve and expand, by adding a mentoring program to guide companies through the mysteries of governance and rolling out the CPC program in Ontario and Quebec.
And we have spent a great deal of time and effort ensuring that companies can move between the two exchanges with minimum costs and hassle, so that we support their growth rather than impede it.
A significant increase in the costs of going public would, of course, discourage companies from going public in the first place.
That would reduce the pool of companies starting on the growth track.
Excessive costs could, in fact, reduce the number of companies willing to remain public.
These effects are not simply bogey men. Last year, there were almost as many companies that went private in the U.S. as went public. Canada had more IPOs, in fact, than the U.S.
And this year, in the first quarter, there was a grand total of five IPOs in the U.S. in the first quarter, by the count of Renaissance Capital, which tracks these things. At least as many foreign companies cancelled plans to list on U.S. exchanges last year.
Not all of that was because of governance burdens, of course, but looking at a doubling of governance costs surely made it a factor.
Quite apart from shrinking the pool of emerging companies, according companies of the same size different treatment depending on which exchange they are on would certainly change the incentives drawing companies to one exchange or the other.
And it will almost certainly have an effect on the judgment of companies that might be planning to graduate from TSX Venture to the TSX.
What we can't know is the extent of the impact, and how it will affect our markets over time.
We won't know that until we've seen the kind of costs the OSC believes attach to the formal rules it will make public on June 27.
Then we'll know the competitive landscape that an approach to governance more closely aligned with Sarbanes-Oxley will create.
If there are significant problems, we'll work with the OSC to resolve them. If there aren't serious problems, we'll give our full and generous support to what is done.
The OSC, in our experience, is willing to hear and respond to good arguments and real concerns. Certainly that is what happened in correcting the governance flaws that Bre-X demonstrated.
Either way, we'll continue to be a competitor focussed on securing for Canadians a market that can continue to compete with the best in the world, whether you measure it by cost, efficiency or the prevalence of well governed companies.
Thank you for your attention.
