From Sarbanes-Oxley to the Accountability Act: What Will it Take to Restore Public Trust?

May 29, 2006

Business leaders understand that good governance matters in the public and private sectors alike. Good corporate governance provides a competitive advantage in attracting investors and talented people and thereby drives stronger and more sustainable growth in shareholder value. Similarly, good public governance provides a competitive advantage to the country in attracting people and investment within a global marketplace. It also helps governments deliver better value to citizens and taxpayers.

This is why Canadian Council of Chief Executives has been deeply engaged on governance issues for more than three decades. We were active participants in the great national discussions of parliamentary and constitutional reform. We were the only business organization to appear before a committee of this House to support reform of the financing of political parties. And we have been champions of both stronger rules and voluntary efforts to improve corporate governance.

Let me begin, therefore, by congratulating the government for moving quickly and decisively to address the current crisis of public confidence.  The act before this Committee includes a wide range of important measures, and I would commend in particular the strengthening of the powers of the Auditor General and of the role of the Ethics Commissioner, as well as the creation of a Parliamentary Budget Officer and an independent body to review the public appointments process.

In 2002, the response to the corporate governance crisis in the United States was the Sarbanes-Oxley Act (SOX). It reassured investors by providing tough new rules and penalties, but also was hastily drafted and highly complex, creating months of headaches for regulators and continuing huge compliance costs for companies.

Canada took a more thoughtful approach and came up with a system that is both fully compatible with American rules for large, cross-listed companies and more flexible and responsive to the needs of the smaller listed companies that make up the bulk of our markets.

Today, we are seeing some important parallels between issues of corporate and public governance. In both cases, there are real failures and fundamental issues of lost trust that have to be addressed. But as with Sarbanes-Oxley, we would ask whether the political desire to move quickly may lead to an excess of new rules that may in time prove counter-productive.

In the corporate sector, governance rules are aimed at protecting investors, but they also impose costs that come right off the bottom line. What’s more, executives who spend too much of their time talking to lawyers and auditors and not enough growing the business will not produce the best possible value for shareholders.

No one questions the need to repair the flaws in public governance exposed by the sponsorship scandal. But as in the corporate sector, new rules and internal controls will add significant new fixed costs even as they reduce opportunities for fraud. 

I also wonder how these new measures as a whole could affect the culture of government. Could they lead to an obsession with obeying rules and avoiding mistakes that would become a serious brake on innovation and efficiency? There is more to delivering the best possible value to citizens than simply preventing fraud.

Let me add one final concern. Public servants, however well qualified and well intentioned, do not have a monopoly on good ideas. Effective government involves a healthy exchange of ideas with people outside government. In my own organization’s experience, this exchange is often initiated by government officials seeking input on the state of an industry or the likely impact of policy changes that are under consideration.

The new act, however, will impose dramatically more intrusive record-keeping and reporting both by anyone who talks to senior officials and de facto by those officials themselves.

I want to make it clear that I am not arguing against the idea of making sure that the process of lobbying government for gain is transparent and above-board. Our only major concern on this front is that the level and speed of reporting to be required could lead to the unfair release of commercially sensitive information.

The new rules, however, also would appear to affect the activities of the vast array of organizations who engage government for the purpose of influencing public policy in ways that they believe would be good for the country as a whole. The vast majority of these organizations already maintain a high level of transparency with respect to their public advocacy, and I am worried that the new compliance burden may prove to be especially daunting for smaller non-governmental organizations.

If the compliance procedures are burdensome enough to discourage dialogue, the result could be a government that is more isolated from citizens and less likely to draw on the country’s collective wisdom to drive innovative policy solutions.

This is an important bill that addresses an urgent need to restore public trust, and Canada’s business leaders fully support its goals. At the same time, our own experience with the crisis of public confidence in corporate governance suggests that it is very important to think through all of the implications of the new rules that this Committee is now considering.