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Report from the May 2018 CDN
Meeting
The Canadian Directors Network (CDN) met on 15 May 2018
in Toronto. We prepared this summary to highlight key
themes that emerged during the meeting on the following
topics:
► Regulatory matters: cybersecurity, climate change
reporting ► Canadian investment climate ► Governance considerations ► Artificial intelligence
This document reflects the Network’s use of a modified
version of the Chatham House Rule whereby comments are
not attributed to individuals or their firms. Participants are
listed at the end of the document.
Regulatory matters
During recent conversations, members cited two recent
regulatory developments that boards are following: the U.S.
Securities and Exchange Commission’s cybersecurity
guidance, and the CSA’s recent report on climate change
reporting.
Cybersecurity
In February 2018, the SEC issued interpretive guidance
instructing companies to include specific disclosures about
cybersecurity risk management, and how the board of
directors engages with management on cybersecurity issues.
The guidance stresses the importance of cybersecurity
policies and procedures and discusses the application of
disclosure controls and procedures, insider trading
prohibitions, and Regulation FD selective disclosure prohibitions.1
Members discussed the following:
1. Regulatory focus on cybersecurity is intensifying. Members agreed that much of the SEC’s recent
cybersecurity focus stemmed from the 2017 Equifax
breach, which exposed sensitive personal
1 U.S. Securities and Exchange Commission, “Commission Statement and
Guidance on Public Company Cybersecurity Disclosures,” 26 February 2018.
information of 143 million Americans. That breach—
and the subsequent response from Equifax’s
management and board—contributed to a “feeling [at
the SEC] that not everyone had proper governance
structures in place.” Moreover, the magnitude of
companies’ cyber-risk appears to be increasing. As
one member said, “A year ago, [it seemed] there
was a breach every six months. Today [there is one]
almost every day.” Some members were concerned
that the SEC felt the need to provide specific
guidance, particularly given the differences in cyber-
risk across sectors. As one said, “We shouldn’t have
to be told what do to. It’s just about good
governance.” Another asked rhetorically, “If you
have to provide guidance on this, where do you
stop?” Still, there may be benefits: “The SEC
guidance gives [boards] a good checklist.”
2. Boards are evolving their cyber oversight
practices. Members noted that many boards are
deciding how best to oversee cybersecurity risks.
One member said management is increasingly
engaging in tabletop exercises (i.e., simulated
breaches), and wondered how many directors
participate in these exercises. After all,
“management [often] looks at a breach differently
[from the board]. … Getting everyone on the same
page is difficult. Reputational risk comes up time and
time again.” Of course, some companies (e.g.,
financial institutions) face greater exposure than
others. Their cyber defence strategy may include
“educating customers, [cyber] insurance, training
your employees, and having policies in place.”
However, some said their companies are reverting to
older processes—including phone calls and faxes—to
mitigate cybersecurity risks. As one member said,
“In some cases it feels like we are stepping back [in
time].”
Climate change reporting
On 5 April 2018 the Canadian Securities Administrators
released the results of a year-long review of climate change
risk reporting by large Canadian publicly traded companies.
The study found that “substantially all of the users we
consulted are dissatisfied with the current state of climate
Canadian Directors Network
Meeting notes
change-related disclosure, and believe that improvements are
needed.”2 The report found significant disparities in practices
across companies and industries, but did not recommend any
immediate action.
Members discussed the following:
1. Boards might encourage greater disclosure of
climate change risks. One member noted that Sarah
Keyes of CPA Canada recently spoke to their board
about climate change disclosure: “The takeaway was
that there was more to do.” Unfortunately, many
companies don’t know where to start. What is an
appropriate risk threshold? According to one member,
“it’s very hard to start with [a] blank sheet and
highlight risk factors. You want to include everything,
but [when you list] everything, [it] almost equates to
nothing.”
2. Most stakeholders value action more than
disclosure. Members generally agree that the broader
consequences of climate change are “very important,”
and that the risks—and opportunities— go well beyond
disclosure. One member said that “investment funds
are forcing companies to focus on climate change.”
However, another said that few investors are willing to
pay a premium for granular climate reporting, and
“buyside analysts are not asking about sustainability
or green policies.” Still, boards recognize that an
emphasis on green practices and transparent
reporting may yield ancillary benefits in time:
“Younger people want to invest [their careers] in
sustainable enterprises.”
Canadian investment climate
Before the meeting, several members expressed concern with
the Canadian business climate. And they highlighted the
Trans Mountain Pipeline project as a “litmus test” for many
foreign investors.
The first Trans Mountain Pipeline was built in the early 1950s
to carry crude and refined oil from Alberta to the west coast
of British Columbia. In 2013, the pipeline’s owner, Kinder
2 CSA Staff Notice 51-354, “Report on Climate change-related Disclosure
Project,” 5 April 2018. 3 In a timely postscript to our meeting, the Canadian federal government
announced on May 29 that it would buy the Trans Mountain pipeline from Kinder Morgan for C$4.5 billion. Finance Minister Bill Morneau explained:
Morgan, applied to build another pipeline roughly parallel to
the existing one to transport diluted bitumen. The Canadian
government indicated in late 2016 that it supported the $7.4
billion project, whose construction would create 15,000 jobs.
Despite the approval, the project has been challenged by the
municipalities of Vancouver and Burnaby, as well as several
First Nations.
On 8 April Kinder Morgan suspended “non-essential”
activities, as the company did not want to “put our
shareholders at risk on the remaining project spend.” The
company seeks assurance that the project will not be delayed
by political and legal wrangling and has given the federal
government a 31 May deadline to resolve the impasse.
Members discussed the following:
1. The pipeline will probably be completed; Kinder
Morgan is unlikely to own it. Most members expect
the Trans Mountain pipeline to be completed
eventually. However, there was broad agreement that
Kinder Morgan’s 31 May deadline will be of little
consequence, as the final project will likely require a
change in ownership. Some thought the Province of
Alberta would assume a more direct financial stake,
since “[Alberta Premier] Rachel [Notley] needs to
show she’s resisting forces that oppose [the project].”
Members expressed concern that the project had been
derailed by a “vocal minority,” and some thought the
pipeline would have to be re-positioned as “an
indigenous project” using “Aboriginal investment
funds.”3
2. The consequences of Trans Mountain are a threat
to Canadian business regardless of the final
outcome. Some worried about the precedent set by
Trans Mountain as companies pursue strategically
important infrastructure projects. After all, as one member said, “Ian Anderson, [president] of Kinder
Morgan [Canada], is the poster child for how to do this
with the buy-in of interest groups. The message to and
for Canadian investors is that it sends a signal of
uncertainty as regards the Canadian investment
climate. Everyone should be concerned about [the
“When we are faced with an exceptional situation that puts jobs at risk that puts our international reputation on the line, our government is prepared to take action.” The federal government says it does not intend to own the project for the long term.
government’s] interest [in supporting] foreign
investors [that want] to invest in Canada.”
Others agreed. As one member said, “[Prime Minister
Justin] Trudeau has to pass the pipeline deal. His
reputation with [the] business community is at stake.”
Some wondered whether the federal government had
the courage to assert its legal authority, particularly
on interprovincial trade. Another member lamented
the federal government’s “limp-wristed submission.”
Moreover, “If BC can block this, it puts the federal
government in a position of weakness [going
forward].” Members recognize that political solutions
can be messy; as one quipped, “Those that love laws
and sausages shouldn’t watch either being made!”
3. Regulatory uncertainty is a significant risk to the
Canadian business community. Some members say
Canadian competitiveness is being impacted by the
renegotiation of NAFTA—particularly in the auto
sector—and changes to the US corporate tax system.
However not many members worry too much about
those issues. As one said, “Yes, we lost [a tax rate]
advantage. But for [a tax difference of 2%], why would
I move [the company] to the US? [In Canada], there is
less absenteeism, and better quality.” Still, many are
worried about Canadian “regulatory uncertainty,”
which is a “predominant concern.” For example, one
observed that regulatory approval for projects in
Canada routinely takes 18 months longer than for
projects in the US.
4. Canadian companies can no longer assume their
most attractive growth opportunities are at home. Several members said concerns about the Canadian
business environment were causing their companies to
more aggressively explore growth opportunities
abroad, particularly in the “red-hot US economy.”
Some worried about a flight of Canadian talent to US
companies, and said Canadian companies needed to
“hedge [their] bets” given the more favorable business
climate in the US. Still, even though tax and regulatory
considerations make the US “more attractive,” some
pointed out that investing outside of Canada can
present challenges too. As one said, US executives
4 Alex Morrell, Business Insider, “Larry Fink, CEO of $6.3 trillion manager
BlackRock, just sent a warning letter to CEOs everywhere,” 16 January 2018. 5 Eric Roston, Bloomberg, “Fink's Letter to CEOs Upends a Half-Century of Business Thought,” 17 January 2018.
often command higher compensation than their
Canadian peers, so that “compensation structure
cross-border becomes an issue.”
Governance considerations
Several members wanted to discuss BlackRock CEO Larry
Fink’s 2018 Annual Letter to CEOs, A Sense of Purpose. And
it’s no wonder. One reporter described the letter as a
“warning shot,”4 and Bloomberg said it “upends a half-
century of business thought.”5 In stark contrast with Milton
Friedman’s assertion that “the social responsibility of
business is to increase its profits,” Fink argued for “a new
model of shareholder engagement” in which investors and
managers align their interests with evolving societal needs.
As Fink wrote: “Society is demanding that companies, both
public and private, serve a social purpose. To prosper over
time, every company must not only deliver financial
performance but also show how it makes a positive
contribution to society. Companies must benefit all of their
stakeholders, including shareholders, employees, customers,
and the communities in which they operate.”6
Members discussed the following:
1. Fink’s letter will prompt greater focus on a
company’s purpose. Members appear to generally
support Fink’s vision of a “new model of shareholder
engagement.” One said Fink described “a new social
contract,” and argued that the market would favour
“purpose-driven organizations.” Members said that
boards and executives need clarity on a critical
question: “Why does the company exist?” After all,
“it’s good when there is alignment between purpose
and profitability. It’s difficult when there is a gap.”
Five years from now, members expect “more
reporting with consequences. Sustainability
reporting will be standard.” Moreover, members said
Fink foreshadowed a looming talent risk: “If you
don’t pay attention to these things, you won’t attract
the next generation of employees.”
Some also noted that evolving corporate ownership
structures will also impact governance practices.
Over time, the “massive shift from public to private
6 Larry Fink, BlackRock website, “Larry Fink’s Annual Letter to CEOs: A Sense
of Purpose.”
[equity] markets” will be a “major influencer” in the
management and oversight of leading companies.
We had planned to discuss a number of governance topics at
this meeting (e.g., board composition, onboarding,
committees, board dynamics, self-assessment, succession).
However, there was not enough time cover these issues, so
we will defer them to the next meeting. Members did offer
several observations about effective board governance that
will provide context for our conversation at the next meeting.
These included:
1. Great chairs lead great boards. Members stressed
the chair’s important role in board effectiveness.
Values are critical, and the chair leads the board in
reinforcing these core values. Asked how an
observer would distinguish between a board with a
great chair but average directors, and a board with
great directors but an average chair, one member
said it was a false choice: “A great chair would never
tolerate average members!” Members noted that
while some US companies still have a combined
CEO/board chair, the vast majority of Canadian
companies now split those roles.
2. Management presence can stifle board
discussions. Before the meeting, several members
observed that the most productive board discussions
often took place during dinner. During the meeting,
most agreed that it was actually the presence of
management—rather than the setting—that stifled
discussion. One member said, “There are more
management showing up at board meetings.
Communication is not as open [when they are
present].” Some boards routinely vary dinner and
meeting format—sometimes including management,
and sometimes not. Others leave it to committees to
engage with operating key executives; for example,
the audit committee will meet for breakfast with the
finance team, while the compensation committee
meets with senior HR staff. Members said the chair
and/or CEO will typically poll fellow directors as part
of a “long, drawn-out negotiation” to agree on board
meeting participation and structure.
7 Michael Chui et al, McKinsey Global Institute, “Notes from the AI Frontier: Insights from Hundreds of Use Cases,” April 2018.
3. Management wants the board to dig deeper into
the substance of the business. Some members
have observed that management’s expectations of
the board are changing. As one said, management
wants the board to have “more direct industry
experience. It’s a great benefit [for them]. The ability
to dig into issues with deeper questions.” Others
agreed, though one said, “The challenge is the pace
of change. Industry experience must be kept
current.” Consequently, boards need to focus more
on evaluation and succession processes—topics we
plan to explore in greater depth during our next
meeting.
Artificial intelligence
A recent McKinsey report described artificial intelligence (AI)
as “a transformational technology of our digital age.”7 The
authors noted that “while much of the public discussion of AI
focuses on science fiction-like AI realization such as robots,
the number of less-noticed practical applications for AI
throughout the economy is growing apace and permeating
our lives.”8
To offer some perspective on the opportunities and risks
associated with these emerging technologies, we invited
Elissa Strome to join the network for this part of the meeting.
Elissa is Executive Director, Pan-Canadian Artificial
Intelligence Strategy at the Canadian Institute for Advanced
Research (CIFAR), where she works with research leaders
across the country to implement Canada’s national research
strategy in AI.
Members discussed the following:
1. Canada is a pioneer in AI. Ms. Stromme said that AI
technologies strive to model the learning and
information processing architecture of the human
brain. While research is being done globally, Canada
has played a “pioneering role in AI research” for
more than 35 years. The country currently has three
centres of excellence, which support and coordinate
university research and industry collaboration. Many
of these efforts have spawned new businesses, and
there was a 28% increase in Canadian AI start-up
activity in the last year.9
8 Ibid. 9 Jean-François Gagné, Canadian AI Ecosystem 2018.
2. Many industries are well-suited for cutting-edge
AI applications. Examples included:
a. Healthcare. The use of AI with endoscopic
imaging offers “a tremendous increase in
the ability to diagnose [patients].” This
leads to lower costs and improved
outcomes.
b. Transportation. Uber is working with the
University of Toronto to develop algorithms
that will support self-driving vehicles. These
solutions aspire to be safer, less expensive,
and more environmentally friendly than
traditional vehicles.
c. Energy. Researchers are using AI to
discover new materials that could be used
in renewable energy applications and the
smart grid uses AI to better manage our
existing energy delivery infrastructure.
d. Retail. Many retailers manage complex
supply chains with “massive amounts of
data.” AI can help retailers better predict
“what you [should] put on shelves.”
e. Auditing. Many internal and independent
audits involve repetitive processes that can
be automated (e.g., optical scanning and
analysis of lease documents). Over time,
advanced modeling will allow auditors to
more accurately predict financial results
based on multiple input factors (e.g.,
weather patterns). Auditors can then
initiate deeper dives when actual results
vary from those predictions.
f. Human resources: One member said that,
“the HR side of organizations is ripe for AI.
How do we evolve talent? And how does
effective collaboration drive results?”
3. Boards need to learn and help management
determine strategic implications. As one member
asserted, “data is the new oil.” As such, “people
expect greater control and compensation for their
data.” This profound observation will likely impact
many strategic decisions. As one member said, “Our
companies are going to be disrupted [by AI and other
technologies]. We may as well disrupt them
ourselves.”
10 Christina Larson, Science, “China’s massive investment in artificial intelligence has an insidious downside,” 8 February, 2018.
One member described how their company had
made significant investments in AI, viewing the
technology as a key strategic enabler. Many
companies will have to decide how best to develop
and deploy AI. Some may decide to outsource these
technologies; however, “if it’s central to future
development, it should be in-house.” Since many AI
start-ups are underfunded, there may be
opportunities for larger companies to invest in—or
acquire—these technologies.
To fully appreciate the opportunities afforded by AI,
many boards will have to seek out education and ask
many more questions of management. After all,
“management is focused on driving the bottom line
today. AI can be pushed from the board down.”
Members agreed AI is a business priority, not a
technology priority; as such, it should be owned by
“senior leaders, business unit leaders, functional
leaders, not the CIO.”
4. China is investing aggressively in AI, and the
West may be unable to keep up. Several members
were surprised to learn about the magnitude of
China’s investment in AI. Many expressed concerns
that Western advances in AI may pale in comparison
over the long term to those of the Chinese
Government. For example, China is building a
US$2.1 billion AI technology park in Beijing's
western suburbs. In contrast, the US Government's
total spending on unclassified AI programs in 2016
was about $1.2 billion.10 As a Stanford University AI
pioneer observed, "China is investing heavily in all
aspects of information technology [from quantum
computing to chip design]. AI stands on top of all
these things."11
The Chinese Government’s motives may not be
entirely benign though. While some AI advances may
provide consumer benefits (e.g., digital payments by
facial scan, confirming identity at airports), others
can easily be used to stifle political dissent.
11 Ibid.
Appendix – Meeting attendees
CDN members
Ray Bromark
Cynthia Devine
Sarah Kavanagh
Alice Laberge
David LeGresley
John Manley
Eileen Mercier
Kathleen O’Neill
Janice Rennie
Barbara Stymiest
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