Report casts doubt on corporate governance cost savings

(September 25, 2003) Proposed new corporate governance rules may not result in the billions of dollars in savings predicted by Ontario’s securities regulator. In fact, the costs of implementing the rules could outweigh the benefits, says the British Columbia Securities Commission (BCSC).

Earlier this year, the Canadian Securities Administrators (CSA) released three new “made in Canada” governance rules in response to the U.S. Sarbanes-Oxley legislation, an attempt to restore investor confidence following a series of corporate scandals.

A cost-benefit analysis released by the Ontario Securities Commission (OSC) concluded that implementing the rules would cost firms as much as $165 million, but would result in savings of between $1 billion and $9.2 billion.

The bulk of cost savings would come from having all TSX companies adopt fully independent audit committees, the OSC maintained.

In a letter released today, BCSC chair Doug Hyndman says an independent assessment commissioned by the B.C. regulator concludes that there are serious flaws in the OSC’s numbers, “which could reduce the demonstrable level of those benefits to zero.”

The BCSC asked professor April Klein of the New York University Stern School of Business to examine the OSC’s conclusions.

Klein says the OSC report “has many flaws and ambiguities which, in my opinion, calls into question the validity of its conclusions.”

The OSC uses dollar “economic value added” (EVA) as its sole measure of shareholder benefits, Klein says, ignoring other measures. “EVA is extremely difficult to measure and I see no evidence that the study made the necessary adjustments to get it right.”

As well, Klein says the study only uses one measure of earnings management, known as earnings smoothing. “This is the least appropriate measure of earnings management that the study could use,” she says.

“I believe that the study needs major refinements and more importantly a larger body of evidence to make its primary claims,” Klein concludes in her 20-page report.

The BCSC has already announced that it will not adopt the CSA’s CEO certification and independent audit committee recommendations, instead favouring proposals included in its own draft legislation for securities reform. Hyndman says that given the questionable benefits, the OSC and other provincial regulators should reconsider their decision to proceed with the governance proposals.

Filed by Doug Watt, Advisor.ca, dwatt@advisor.ca