National Post, February 20, 2006
Trusts work on governance rules
By Carrie Tait
Income trusts and real estate investment trusts are only slightly less compliant with governance guidelines than corporations, a new study shows.
Based on the governance guidelines established by the Canadian Securities Administrators, 88% of income funds reporting are “explicitly compliant” with more than 75% of the guidelines, versus 92% of public companies, says the study, published last week. Further, 67% are “explicitly compliant” with more than 90% of the guidelines, compared with 71% of public companies.
The Canadian Association of Income Funds (CAIF) and Real Property Association of Canada (REALpac) – commissioned the study, which was conducted by SECOR Consulting. It looked at how many trusts and corporations had independent directors, independent chairs, a strategic planning process, job descriptions for chief executives, succession plans, audit committees made up of outside directors, a written code of conduct and ethics, among other guidelines.
“Believe it or not, this stuff matters,” said Chris Rankin, an income trust analyst at Canaccord Adams. “The point of requiring boards to go through these functions that, on the surface, seem quite perfunctory and aren't necessarily recipes for success, is because they tend to prompt thinking about how to develop a better company.”
But critics argue that simply meeting these guidelines doesn't ensure value for shareholders. Distributable cash calculations and disclosure, for example, have been contentious issues for income trusts. Just because income trusts meet these governance guidelines doesn't mean their distributable cash will be calculated in a way that meets critics' standards. (CAIF has struck a committee to explore this issue).
The survey, which included 202 income trusts and 100 corporations, speculated that “much of the disparity [between them] can be attributed to the relative youth of most funds.”
Of the trusts, 74.8% were less than five years old, compared with 7% of the companies.
Ronald Charbon, an analyst at Standard & Poor's, disagrees. He said he expected trusts to have better compliance records because of their youth, arguing they could have adopted the guidelines at their inception.
He said size is the more telling factor. Small-caps tend to be less compliant and that may explain why the trusts lagged the corporations in this study.