The Senate of Canada – A Modest Proposal
As a specialist in the regulation of financial institutions it’s challenging to come up with a short blog entry that will be of interest to the average visitor to our web page.
However, the number one news story these days is the Mike Duffy trial. Suppose we take a look at that situation in the context of the standards and best practices required to be followed by Canadian financial institutions.
The cornerstone of the financial regulatory system in Canada is good governance. Many, if not most, financial debacles that have occurred in this country since Confederation, have resulted from self-dealing (i.e. shareholders and other insiders taking advantage of their positions for their own benefit and to the detriment of public stakeholders such as depositors and policyholders) and other examples of poor governance. In the early 1990s, after a particularly egregious series of trust company, insurance company and bank failures, the Canadian government enacted bold new laws that made financial institutions responsible for maintaining systems of internal discipline and control, defining the risk levels they were prepared to accept in the on-going operation of their businesses and for monitoring and mitigating those risk levels as required for the protection of the public stakeholders. The key responsibility centre for this entire process is the institution’s board of directors.
With the new laws and new approaches, the role of the regulator changed from trying to find out what the institution might be doing that would put the public at risk, to ensuring that the board of directors was in fact overseeing an internal system that would provide adequate public protection. This was a ground-breaking approach at the time. And the proof of the pudding? No bail-outs or other significant difficulties during the financial crisis of 2008/2009; the World Economic Forum has ranked Canada’s banking system as the most sound in the world, five years in a row; and no significant financial failures in the past 20 years.
The Senate has a legitimate purpose: to serve as a centre of sober second thought with respect to new laws that are proposed in the House of Commons. The basic concept of having a group of distinguished Canadians reviewing and making suggestions about proposed laws is surely a good one in theory. However, as with financial institutions that run amuck with self-dealing and other types of self-enrichment, the Senate requires a system that parallels the strong governance regime applicable to financial institutions – and which, appropriately, Canada has pioneered.
Like a financial institution, the Senate should have the equivalent of a board of directors, which is responsible for ensuring that the underlying principles and fundamental concepts of the organization are being respected by the members. The “board” would not spew out innumerable pages of rules and red-tape but would instead establish a framework of sound operational principles and practices for the guidance of members. If the principles and practices are clearly described, intelligent individuals of high integrity will have no difficulty in interpreting them in the appropriate manner and in the public interest. However, if from time to time there are situations where the Senate’s administrative functionaries are of the view that the basic principles are not being adhered to, they could refer particular cases to the board for review. The outcome of the review would be transparent and would serve to guide other Senators in future situations. Over time, board reviews would be like court outcomes, with precedents serving to clarify various elements of the overall framework. Most importantly, however, knowledge that dubious expense claims and related matters could be reviewed by a committee of their most senior peers, would, we believe, lead to a level of self-discipline that seems to be lacking at the present time.
Who would serve on the board? Our suggestion is that the board would consist of 7 senior Senators, including the Speaker of the Senate who would serve as Chair of the Board by virtue of his or her position. The other 6 members would be elected by vote of the 105 Senators, but would be selected from among the 50 longest serving members of the Red Chamber, as the Senate is sometimes known.
The Senate is supposed to be a place where distinguished Canadians provide leadership based on their regional affiliations, as a balance to the House of Commons where, on the one hand, they have been democratically elected by their constituents but on the other hand, they may have little experience to lend gravitas to their views.
With the suggested board mechanism in place, advocating and ensuring a regime of sound governance, the forum of sober second thought should function in a manner that is much better aligned with Canadians’ expectations for performance of what should be a vital and integral part of our parliamentary system.