Gaps in Mandatory Disclosure

09 July 2007

Last week, the front page of Canada’s Globe & Mail Report on Business section reported that 23 per cent of TSX Venture Exchange companies surveyed violated new corporate governance standards.  Specifically, the issues were around mandatory disclosure items such as independence of Board members and compensation.

So, what is going on here? Are corporations thumbing their noses at regulators in some sort of act of corporate rebellion? Is it that companies simply don’t care to adhere to corporate governance rules?  My feeling is that those companies that don’t comply simply don’t have a good grasp of the rules.

In the case of the TSX Venture Exchange, many of these firms are small caps and likely don’t have in-house legal council, let alone in-house investor relations people, to appropriately review what is required from a disclosure perspective.  They run their little companies, go public to raise some cash, and carry on as if nothing has really changed.

I believe the root of the problem is the lack of real enforcement by the regulators and the lack of consequences for companies that do not comply.  Everyone talks about Enron, WorldCom, and new corporate governance rules but when was the last time you heard of a Canadian corporate executive being sent to jail, or even severely fined, for their company not being compliant?  If such cases exist, they certainly are not well publicized.

It will be interesting to see if Canadian regulators will be willing to flex some muscle and get serious about enforcing corporate governance rules. Until then, I expect companies (especially small TSX Venture Exchange listed companies) to continue to plead ignorance towards the new rules.

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