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It has been five years since Enron Corp. collapsed, turning a spotlight on the work of boards of directors and the governance practices at public companies. Since then, new laws and regulations have been drafted to improve corporate governance, and companies have also faced a growing tide of shareholder activism. In Canada, a group of large institutional investors banded together to create the Canadian Coalition for Good Governance, which has lobbied boards to voluntarily adopt a variety of governance practices, especially greater disclosure of compensation information.

In 2002, Report on Business launched an annual assessment of the governance practices of large public companies, scoring and ranking them based on various recommended best practices for boards. This year marks the fifth installment of the Board Games project, and the data shows a dramatic shift over five years in many key areas. For example, boards and their key committees are far more independent from management than they were five years ago, and many more boards have adopted practices like annual director evaluations and in-camera meetings without management present. Share ownership by directors has also soared with the spread of ownership requirements for board members, while disclosure of key information -- such as attendance records for directors -- has exploded.

Join Janet McFarland at 1 p.m. Wednesday for an on-line discussion on the changes in corporate governance since the Board Games project was launched five years ago.

Leave a question for Ms. McFarland through the comment feature on this story.

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Sasha Nagy, Business Features Editor, globeandmail.com: Hi Janet: Thanks for answering reader questions about the Globe's annual corporate governance rankings, Board Games. This is your fifth year, and without going over every point of your extensive report here. I would be interested in your personal observations on how the rankings have changed since the first year you embarked on this investiation back in 2002.

Can you answer the question that the headline in Tuesday's Globe asked: " Do better boards make better companies? "

Janet McFarland: Hi Sasha. It's been an interesting five years on this project. We've been carefully looking at all sorts of issues around the ways corporations are governed -- things like the composition of their boards of directors, the various rights they grant to shareholders and the quality of information they disclose around topics like executive compensation. We've really come to believe that better boards do make a difference, even though there are still skeptics out there. Better structures don't guarantee anything, obviously, but they should help boards operate professionally and thoroughly, and that can't hurt in terms of nipping potential problems in the bud or responding appropriately when they emerge. Many investors particularly think that real change stems from greater discipline about executive compensation, and hopefully that will happen as boards feel pressured to disclose more information and justify their decisions to investors. This year, we asked a lot of corporate directors what they think about governance reforms, and they were unanimous in telling us that governance has improved dramatically. They say directors themselves have changed the way they approach their jobs -- they feel pressured to be far more diligent and dedicated to the task. And they say investors have also changed their attitudes and appreciate good governance more than ever. This really has the potential to cause profound changes. There's nothing companies want more than to be attractive to new investors, because there is so much choice out there about where to put your money.

Jim Terrets of Vancouver writes: Ms. McFarland, colour me skeptical on this issue. Based on my experience in corporate Canada, I believe these changes in corporate governance are tantamount to changing the ribbon on a pig -- the ribbon was red and now it's blue, but it's still a ribbon on a pig. I believe the lack of accountability in corporate Canada is rooted in systemic causes such as: a high degree of corporate concentration, legislation insulating key economic sectors such as banking from global competition, and a dearth of enforcement mechanisms stemming from the lack of a national securities regulator. Am I right? Are these changes mere window dressing, or does your experience and knowledge tell you that these changes are leading to more accountable and transparent corporate governance in Canada?

Janet McFarland: Hi Jim: I think there are good reasons to be skeptical, and good reasons to be a believer. I'm a bit of both. I definitely think companies are significantly more transparent now than they were even five years ago. Just to pick one small example, when we started Board Games only a few companies in the entire TSX 300 index disclosed the attendance records of their directors at board meetings. In retrospect, it was really appalling. Today, every company provides this disclosure, both because it has become a piece of expected disclosure, and because it also just became mandatory. There are lots of other areas where huge changes have happened. Boards are undeniably more independent from management than they used to be, for example, and directors today own far more shares in the companies they oversee. That's actually considered a really important development because it means directors have an extra, meaningful motivation to think like other shareholders and not just do whatever the CEO wants. At the same time, none of this is a guarantee of better results. And it certainly doesn't guarantee there won't be scandals in the future -- people will always do bad things. You're also right that Canada definitely does have a poor track record of catching and prosecuting big name crooks in the business realm. So that deterrent is still pretty weak in this country. I'm the last person who would say simple governance changes will fix everything, but I also think the changes of the past five years go far beyond mere window dressing.

Ajit Khare from Canada writes: Hi Janet: It is often said that Canadian corporations differ with American corporations in the following two areas that are relevant in establishing good corporate governance practices:

1. Remuneration of non executive independent directors, and;
2. Representation of minorities in the corporate board rooms

Could you please share your thoughts?

Janet McFarland: Hi Ajit: Both are really good issues. On the first point, I think things are changing fast here. All the statistics I've seen suggest that director compensation in Canada is quickly closing the gap with comparable sized U.S. companies. Some people might think that's not a good thing, because it means directors are taking too much money from shareholders' pockets or are going to be so highly paid that they won't want to risk rocking the boat and being asked to leave. But as things stand now with most companies, I don't think we've reached a point of excess. (Executive compensation is a different question, especially at some companies.) But for the most part, I think directors are still a pretty good deal, cost-wise, when you consider the calibre of people who are advising management and representing shareholders. Moreover, a fairly decent pay level sends a signal that directors are doing an key professional job. They aren't sitting on boards as a public service or an act of charity -- it's a valuable job that has to be approached seriously and professionally.

I think your second point is a real concern. Canada is WAY behind the United States on the number of women on boards, and is even further behind when it comes to minorities on boards. They are virtually unrepresented. And neither category has seen any significant improvement over the past decade. I think it's a real problem when most of the people running key institutions in our country are drawn from the same demographic pool. They are almost all wealthy white men between the ages of 50 and 70. Surely in this day and age that doesn't have to be the case? And surely we should be past the need to explain why that's a problem? But apparently not.

David Nitkin, of Toronto asks: Do you accept the findings of Canadian researchers that there is no correlation between a specific element of governance-- such as independent directors, or an independent audit committee-- on the one hand, and either good financial or ethical performance, on the other? If Yes or No, why?

Janet McFarland: Hi David I think there is probably a liklihood of a greater link between good governance overall and good ethical performance. When it comes to financial performance, I'm afraid I don't have a lot of respect for much of this research, at least what I've seen of it in recent years. It seems to me that good governance can't possibly be expected to overcome all of the complex issues that affect financial performance. The quality of the management team is also pretty important, I think, as is the quality of the product or service the company creates, not to mention broader economic conditions like commodity prices. Some researchers now think the impact of governance needs to be measured over a very long term, and that it's probably not useful to focus on a single criteria like the number of indpendent directors on the board. They also believe research might be better focused on things that speak to the risks a company takes -- are there ethical scandals or earnings restatements, for example. Good governance should broadly help to manage and mitigate the most excessive sorts of risks, even if it can't prevent every disaster. I think it's unfair to criticize good governance because a business model ultimately doesn't work in the market place or because a company's products fall out of favour. As corporate director Jim Fisher said in an on-line roundtable discussion on our web site, maybe better governed companies will recognize these problems earlier and put the company out of its misery sooner. But you can't expect it to fix everything.

Alex Todd, of Toronto writes: Ms. McFarland, What is your impression of how directors of Canadian public companies see their roles? In other words, do you think they see themselves as being more like a 'judge' or 'paternal', or some other archetype?

Janet McFarland: That's an interesting question, Alex. I bet the answer ranges on a spectrum, depending on the individuals involved and the situation of the companies they oversee. We did a lot of interviewing of directors this year, and I think most of them see themselves as having two key roles: protecting shareholders and upholding their rights on the one hand, while also working collegially with management to generate better returns. Some directors think their role swung too far toward the "shareholder protection" side of the spectrum after Enron and WorldCom failed. They felt pressured to really scrutinize all financial results and other corporate documents to make sure everything was entirely above-board and fully disclosed. Some directors complained that board meetings -- and especially audit committee meetings -- used up too much time with directors asking questions to protect their own legal rights in case they were hit with a law suit. For example, they could all testify in court that they asked a big list of questions about how thoroughly the financial statements were prepared. But most directors I've talked to say the pendulum is swinging back toward the middle again, and they can focus more on the critical task of making money. They say boards are now devoting much more time to topics such as working with management to develop a long-term strategic plan or put in place a good succession plan for the future. Many directors see this as the area where they can personally provide a real service to the company, because they come from business backgrounds themselves. As a result, they find this element of their jobs really satisfying and valuable.

Fg from Burnaby writes: In all fairness - this board mania has gone a little bit overboard (pardon the pun). Not all companies need a diverse board of outsiders - and many are being forced - either by investors or by virtue of window dressing - to follow suit at a ridiculous cost. No where is this more clear than in the SoX set of rules, where you have to have a financially trained person on your board. This is just legislated wealth generation for partners in accounting firms. They provide no strategic or credible value to any business. Last time I checked, bankers accountants and lawyers don't know how to start, operate, or grow a business - so why are we packing our boards full of them?

Janet McFarland: If I had to name criticisms of the U.S. Sarbanes-Oxley Act, I'm afraid the rule about having someone on the board with financial training wouldn't appear on my list. I think that's one requirement that is pretty justifiable. It's hard for a board to really keep on an eye on complex financial dealings if no one understands the complexities of accounting. I do agree that it's questionable whether it helps a board to pack it with accountants and lawyers who have no business backgrounds. But surely there's a happy medium between a board "packed" with non-business types and a board that has no one with financial expertise? Maybe it's possible to find directors who have financial expertise and valuable business backgrounds? The two aren't always mutually exclusive. I know all of this is obviously harder or more burdensome for a smaller company, but it does seem that shareholders deserve to get the best board possible under the circumstances, whatever the company's size.

As for board diversity, I suspect there are companies where it is more valuable than others, but I don't see why it wouldn't be a plus for any company. That said, there are no rules requiring board diversity, and I don't think it's even a particuarly big lobbying issue for shareholder groups. Certainly our data shows that even the very largest S&P/TSX index companies seem very comfortable about ignoring the idea, so I think they would be hard-pressed to argue it's an unduly burdensome issue for them in Canada. I don't see why the cost of it has to be ridiculous, either. If you are going to have nine directors anyway, it costs the same amount to hire a woman director to fill a vacancy than to add a man.

Sasha Nagy asks: Considering your startling findings in today's Report on Business ( Income trust boards: The new 'Wild West' ), what do you feel is needed to do first to improve governance of income trusts?

Janet McFarland: I think the first thing I'd say is that many income trusts DO seem to have pretty good governance structures and practices. Many of them have worked hard in recent years to look more like the mature companies they are. They have gotten rid of external management contracts and professionalized their boards of directors. But as we wrote today, there is still a sizable minority of trusts that are operating in ways that are almost never seem among major corporations. For example, we found that 22 per cent of trusts in the S&P/TSX index are still managed under contract by an external party, which means the individuals who oversee the operations are not direct employees of the trust and are, therefore, a step removed from oversight by the board of directors. This is an old-fashioned practice that still lingers at too many trusts. To answer your question, I think I'd have to pick two changes that would improve trust governace. One would be really curtailing the practice of doing related-party deals. Not all transactions done with an insider are necessarily bad deals, but we found that 33 per cent of Canada's largest trusts did related-party deals last year. That's a huge proportion, far more than you'd see at similar-sized corporations. And they are fraught with risks about potential conflicts of interest and the potential for unitholders to get a bad deal at the expense of enriching an insider. To me, it suggests that governance isn't extremely mature at some of these organizations -- they are still operating like early start-ups where the CEO or some other insider has a large amount of influence.

The other change I think would be valuable would be creating a law that gives trust investors the same legal rights as corporation investors. Shareholders are covered by bedrock protections in the Canada Business Corporations Act. But trusts aren't corporations and don't fall under it. Many trusts offer similar rights and protections to their unitholders in the documents they create at their inception -- their trust indentures. But the rights vary among trusts, and few indentures include all the same provisions as the CBCA. Most, for example, don't give investors the right to go to court for a remedy when they feel their rights are being oppressed by the trust. A trust law would put investors on a stable legal footing. Problems are inevitably going to happen somewhere. And some day a trust investor will be outraged to discover he or she can't call a special meeting, or replace the board, or file a shareholder proposal, or get a shareholder list, or use the oppression remedy in court. Then there will really be an outcry.

DP from Toronto asks: Interesting to hear you talking about the aspect of risk involved in companies with poorer governance practices, because it raises the issue of how that risk might play into the attractiveness of an investment, and thus affect not so much financial performance as market performance. In my mind this is a key issue surrounding income trusts, which you dealt with for the first time in Board Games this year since they were added to the S&P/TSX composite. It seems to me that these things have been able to operate pretty much as they please because they've been in a hot market, and investors have been feeling pretty risk-tolerant for quite a while now. But with signs that investors are starting to become more risk-averse, do you think trusts with less rigorous practices - or, alternatively, less transparent practices - will fall out of favour with investors, in favour of companies that might have superior oversight? After all, so much of the value of a trust goes to the reliability of its cash distributions, and those must be more reliable in companies with better structural discipline. Or maybe I'm crazy, and that will matter will be commodity prices and their effect on payout ratios. What do you think?

Janet McFarland: I think you're right. I think while investors have been so trust-crazed, there has been little pressure on trusts with irregular practices to make changes. It seems they can raise money no matter what their governance practices, so they can dismiss these sorts of issues and say they aren't important to their investors. But when times are tougher -- and surely they will be eventually, if they aren't already -- everyone knows that you have to try harder to attract attention. It seems likely that many trusts will have to change some of their practices then, although there's no guarantee all of them necessarily will. There are always stubborn hold-outs, in the corporate world or the trust world.

Sasha Nagy: That's about all the time we have. Thanks Janet for your answers. Any final words?

Janet McFarland: Hi Sasha. Thanks for inviting me to participate. We've been really impressed by the changes that companies have made over the years. I think investing is a really hard thing to do well, and there are no guarantees that companies will always perform as you'd like. But I think most boards really are trying harder to get it right. I'm confident the trends are positive.