IT’S NOT THE MARKET FIX CANADA NEEDS.
The final report of Ontario’s Capital Markets Modernization Taskforce has landed, a document that proclaims boldness of purpose. “One of our main objectives,” said task force chair, Toronto lawyer Walied Soliman, “is to amplify growth and competitiveness in Ontario’s capital markets. The decline in new issuers and initial public offerings in Ontario is alarming. The real consequences of this trend are fewer head offices, fewer entrepreneurs, and fewer growth investment opportunities, all of which could drive Ontario to become a ‘branch plant’ economy.”
Perhaps not enough Canadians are aware that Canada’s major public market for corporate investments — the backbone of shareholder capitalism — has been in decline for some time. Since 2008, the total number of listed corporate stocks on Toronto’s exchanges has dropped about 25 per cent from 4,000 to 3,000. Annual new listings over the past decade are down from about 600 to 300, a 50 per cent decline.
Canada’s capital markets are being left behind both by the vastly more competitive scale of the united States’ capital markets and its arguably superior regulatory regime — and by the great explosion in economic and investment activity flowing around dynamic emerging markets in Asia and elsewhere. Anyone who spends just a few minutes with the nightly Canadian BNN Bloomberg business, economic and corporate news show — live from, India, Indonesia, Vietnam, the Philippines, Malaysia, Korea, Taiwan and China — quickly senses the existence of another economic world filled with corporate IPOS and exploding investment activity and growth.
With evidence of decline on hand, the Ontario task force said “the time for change is now.” Whether the required change and reforms are in the new report seems doubtful. To fix Canada’s status as a capital markets laggard, the task force packed 70 recommendations into 115 pages, or roughly one recommendation every 1.5 pages, a compact formula that fails to offer the kind of detail and analytical depth needed to support the recommendations.
This turns the task force’s report into a grab bag of ideas of limited value to politicians and bureaucrats drafting reforms. ed Waitzer, former head of the Ontario Securities Commission (OSC), describes the report as “an impressive effort conspicuous for a lack of the kind of analysis you would normally find when policy recommendations are being put forward.”
Public shareholder markets are considered a vital element in economic development, providing corporations with funding options and giving investors access to profitable opportunities. The general theme of the task force report, however, is that public markets are bogged down in regulation, reporting requirements and public scrutiny. “After the initial cost and resourcing pressures, public companies experience ongoing regulatory reporting requirements, with costs varying between venture and senior issuers. Listed companies are subject to greater disclosure requirements and regulatory and public scrutiny regarding their business, operations and financial results, share price movements, management and director performance, executive compensation, corporate governance practices and insider reporting.”
To avoid these and other problems, investors and issuers are turning to private markets where costs are lower and corporate owners and managers have greater control that allow them to “maximize returns” and cash-out when they want.
There is no point in trying to dig into the details of the task force’s recommendations.
despite its observations that the regulatory and reporting burden on public companies discourages public listings and encourages private ventures, the task force proposed two trendy regs that would increase the public listing burden: ESG reporting and diversity targets.
On ESG (environmental, social and governance) factors, the task force claims that “evidence suggests” that ESG criteria in corporate reports “positively correlates to investment performance.” Therefore, and without actually examining the suggestive evidence, the task force recommends “mandating disclosure of material ESG information, specifically climate change-related disclosure that is compliant with the TCFD recommendations for issuers through regulatory filing requirements of the OSC.” The TCFD is the Task Force on Climate-related Financial disclosures promoted by Mark Carney, despite the fact that there are no standards on what should be reported and how.
On diversity, the task force settled on something of a compromise between absolute mandates issued by regulators and a form of self-regulation in which corporations set their own targets, although the task force “recommends that publicly listed issuers set an aggregated target of 50 per cent for women and 30 per cent for BIPOC (Black, Indigenous and people of colour), persons with disabilities and LGBTQ+. Implementation of these targets should be completed within five years to meet the target for women and seven years to meet the target for the other diversity groups, placing specific focus and emphasis on representation of Black and Indigenous groups.”
On diversity, the task force avoids the extreme position advanced by Nasdaq, the u.s. stock exchange that wants to be able to de-list corporations that do not have at least one female director, and at least one other director who is either “an underrepresented minority or LGBTQ+.”
Former SEC chairman Arthur Levitt Jr., criticizing the Nasdaq plan in the Wall Street Journal, said there is no clear link between diversity and performance. He said the SEC should review “rigorous studies of the impact of directors on corporate performance, and if necessary it should commission new ones.” As noted in this space recently, if it turns out having a range of directors increases corporate performance, then corporations should be left to their own profit-maximizing devices.
diversity is a great social objective, as is a clean environment, but it is not clear how imposing more complicated and undefined disclosure burdens on public corporations will arrest the decline in Canada’s public investment market.