Canada Copyright 2006 BishopPhillips Consulting (Canada) 1 21 June, 2006 Being a Canadian Director – How Risky? A Presentation by Bishop Phillips Consulting Canada

Canada Copyright 2006 BishopPhillips Consulting (Canada) 2 Being a Canadian Director –Risk v Reward Being a director of a Canadian company carries some risk Carries much wider range of risks than US directors Assumed that risk category US directors more likely to be sued and faced larger costs and damages US directors are paid more – perhaps partially to compensate for greater risk The Canadian assumption has been that the chance of being sued or pursued in an expensive regulatory investigation was small Average cash paid to US non-executive director*Cnd $ 80,000 Average cash to Canadian director of the smaller TSX 100 companies* $ 64,000 Average compensation to income trust director**$ 55,000 * Spencer Stuart Index 2006 / ** Mercer HR Consulting, March 2006

Canada Copyright 2006 BishopPhillips Consulting (Canada) 3 Simon Fraser 2006 Survey on D&O Liability Insurance Commissioned by Bishop Phillips Consulting Canada –Provider of risk management consulting services Unable to find purely Canadian data less then 10 years old CIBC Centre for Corporate Governance and Risk Management has a special focus Goal was to survey TSX director’s attitude toward risks faced and practices re risk management and insurance 70 TSX companies responded to survey Nearly 70% were Chair, CEO or both Majority had less than 999 employees and $100m sales

Canada Copyright 2006 BishopPhillips Consulting (Canada) 4 Assessment of Risk of Potential Claims How did they assess current risk of claim – On a five point scale with 5 = “very high risk” – Mean response was 3.9 When assessing potential future risk, response rose to 4.55 Same high perceived risk regardless of: – Company size; or – International exposure

Canada Copyright 2006 BishopPhillips Consulting (Canada) 5 Actual Claims Some 16% reported an actual or threatened claim –Equates to slightly better than 50% chance over 10 years –Need caution over small number in data –However survey of 790 US companies showed 35% (up fm 27% in 04) You may have read of the massive CIBC and TD settlements as part of the Enron settlements or of Nortel’s $ 3 billion settlement However do not assume that this is an issue only for giant companies According to an AIG study (in 2004) only 1 in 18 companies facing a class action law suit was a Fortune 500 Overwhelming majority of D&O claims relate to companies with sales of less than $100 million

Canada Copyright 2006 BishopPhillips Consulting (Canada) 6 Assessment of Sources of Potential Claims When offered twelve potential risk sources, most selected three: –Greatest was risk of inadequate or inaccurate disclosures; –2 nd was ethical risks like conflicts and insider trading; and –3 rd was strategic issues such as HR policies and mergers. From US perspective it is crystal clear that the largest risk area for claims is M&A US statistics consistently show that companies engaging in M&A are more than twice as likely to experience a claim against their directors and officers

Canada Copyright 2006 BishopPhillips Consulting (Canada) 7 Who They See as Potential Claimants When offered ten potential sources of claims against Directors: –Two most widely perceived sources were large shareholders and institutional investors; –Somewhat concerned by regulatory agencies; and –Less concerned by employees, competitors, the company itself and customers. Other surveys of claims and litigation show that half of claims against directors are not from shareholders Tillinghast survey (2006) has just confirmed this for public companies About 25% of claims are by employees (wrongful termination or discrimination) and 20% by customers (alleging dishonesty or fraud) Increasingly, large pension funds are joining with attorneys to try to recover monies lost as a result of alleged corporate misconduct. –Ontario PSE Union and Ontario Teachers pension funds have been the lead plaintiff in several class-action suits.

Canada Copyright 2006 BishopPhillips Consulting (Canada) 8 D&O Insurance Coverage and Policies Most (93%) have insurance but coverage amounts varied considerably –Comparable US statistic is 99% have insurance About half had coverage of less than $20 million One third had coverage in excess of $50 million The coverage size largely correlated to company size Over half pay premiums of less than $150,000 pa and over half have deductibles that are less than $250,000 Positive correlation between amount of cover, amount of premiums and size of basic deductible

Canada Copyright 2006 BishopPhillips Consulting (Canada) 9 D&O Insurance Coverage and Policies Cost of coverage a survey of 150 largest TSX proxies Average coverage was $1 buys $100 coverage so $20m policy for public company averages annual premium of $200,000 Ranged from Nortel 1:7 to ATCO 1:2900 The majority of coverage is provided by four insurers: –Chubb, AIG, Liberty International and Ace INA Many use more than one insurer – typically buying a basic policy from one and an excess cover from another 63% felt that most policies in Canada are similar Will see below that this is incorrect

Canada Copyright 2006 BishopPhillips Consulting (Canada) 10 Process of Arranging Insurance D&O insurance is complex with rapidly changing terms Most directors fail to check the policy size and terms When asked why they give several reasons Some assume that all D&O policies are alike –There are over 30 different forms in the marketplace and they vary greatly from one insurer to next Some directors assume CEO, being covered by same policy, will make certain that policy has 1 st class protection –But CEO rarely involved. They may rely on a non-legal employee or upon corporate counsel who negotiate one D&O policy every year or so

Canada Copyright 2006 BishopPhillips Consulting (Canada) 11 Process of Arranging Insurance Good news is that 68% of companies use a consultant About 62% have internal counsel review the application or policy A minority (42%) has external counsel review one or both What about independent directors – how do they look out for themselves? A surprisingly high 25% engage their own independent consultant to review the insurance Respondents say that 39% of independent directors request changes in the policy

Canada Copyright 2006 BishopPhillips Consulting (Canada) 12 Attitude Toward D&O Insurance One startling result was the contrast between the general satisfaction (“comfort”) with current levels of insurance versus claims Of the 16% of respondents who had claims, 1/3 indicated that insurer disputed whether the policy would cover the claim –Larger US survey has reported only 7% had this problem but even there Canadian participants reported a 14% rate –This happened in Nortel; Livent; and YBM Magtex One Respondent’s comment: - “10 years ago we said ‘if you conduct yourself in a prudent manner you don’t need D&O insurance’. The outside environment has changed. You will not attract good directors without D&O”

Canada Copyright 2006 BishopPhillips Consulting (Canada) 13 Contact Details Keith Old and Paul Reynolds (BPC Canada) Phone 604 – Phone 604 – Paul’s Cell 604 – Paul’s Cell 604 – Keith’s Cell778 – Keith’s Cell778 – 386