David Wilson, chairman of the Ontario Securities Commission, focused on governance issues, in a speech to the Canadian Club of Montreal today.

Wilson said a fund governance rule is coming, and that executive compensation disclosure may be have to be beefed up, but he stood behind the Canadian regulators’ weak approach to internal control reporting.

Wilson suggested that corporate governance structures in Canada are “basically sound”. However, he noted a couple of areas with room for improvement.

He pointed out that almost two-thirds of the companies listed on the TSX are closely-controlled (a shareholder has at least 20% control). In the U.S., only about 20% of companies listed on the S&P 500 fall into this category, he added. With that difference in mind, he said that Canadian regulators, led by Quebec, are looking at whether closely-controlled companies deserve a customized governance regime.

“We have to consider whether the CSA’s corporate governance guidelines – minted about one year ago – are appropriate when applied to controlled companies,” he said. “Should controlling shareholders be treated like all other shareholders? Are their interests aligned with the interests of other shareholders?”

“Another corporate governance issue we need to examine is the disclosure of executive compensation,” he said. The US is already looking at this issue, and Wilson suggested that disclosure in Canada needs to improve too.

“Executive compensation is getting tougher for investors to understand,” he noted. “Disclosure can’t just mean providing information. It also has to provide context and clarity. Shareholders who want to know how much a CEO or CFO earns shouldn’t be expected to juggle several financial tables and footnotes.”

“Shareholders have a right to a simple answer to a simple question: How much are they – the shareholders – paying the managers – in total? And shareholders have a right to know whether – and how – directors have rigorously linked rewards for senior executives to overall corporate performance. Does compensation reflect how the company is actually performing?” Wilson said.

He added that regulators are considering to what extent they can move in the direction of a principles-based approach, rather than a strict rules-based approach, to improving disclosure.

Investors have also been waiting a long time for a fund governance rule in Canada. “We expect to publish a rule this year to establish a minimum, consistent standard of governance for all publicly offered investment funds. It would put in place an Independent Review Committee for investment funds – providing increased protection for investors when their interests come into conflict with the interests of the fund managers,” Wilson noted, and he suggested that it will be a national effort. “I look forward to all CSA members re-examining this issue and deciding to join in this policy,” he added.

Finally, he addressed internal control reporting (Section 404 of the Sarbanes-Oxley Act in the US). Canadian regulators decided not to follow the SOX 404 approach of requiring auditor attestation of the quality of internal controls, allowing management to do that themselves.

The US had been considering a softer approach to internal control reporting for its smaller companies too. But the SEC ultimately decided only to give companies more time to prepare for implementation. It rejected the arguments that the cost of implementation is too high.

Nonetheless, Wilson said, “This is a Canadian proposal that meets the needs of the Canadian market… I believe that the proposal we arrived at on internal controls is the right policy for Canada.”

One issue Wilson avoided was the question of a common regulator, noting that this is, “a matter for the politicians to consider”; adding that the Ministers responsible for securities regulation will be meeting in a few weeks, and the Crawford Panel will release its final report on the subject soon too. “While that’s happening, we regulators need to put our heads down and do our best to develop as harmonized a system as we can,” he said.