The Control and Accountability of Public Enterprise

The Control and Accountability of Public Enterprise Ken Rasmussen Faculty of Administration January 29, 2002

Control and Accountability Defined • Control: capacity to make certain things happen or to prevent certain things from happening • In a democracy control is exercised by government on behalf of citizens, but citizens do not have any one particular interest, they have multiple and conflicting desires. • Accountability an ambiguous term; • -Literally accounting for the resources in your care • -Reporting on your performance • -Explaining what had been done with the authority delegated • -The imposition of sanctions for poor performance

Accountability of Private Corporations • There are two types of accountability 1) the corporation to the market • The market holds a firm accountable by the force of competition. If input and output markets are highly competitive the corporation can not exploit is customers, supplier or employees. • of the managers to the share holders 2) Share holders elect board of directors who then hires manager. • Shareholders have a number of ways of holding managers accountable, sale of shares, capital markets etc, • In general there are more means by which shareholder can constrain the behaviour or mangers, than are available to the ultimate owners of Crowns.

Does Ownership Matter? • It matters when government uses their firms to achieve social/policy objectives. • It also matters when government ownership confers special privileges such as immunity from taxes and competition laws. • Government is a unique owners in that it has law making power over both private and its own firms. • Mangers are given various types of incentives • Managers of a Crown may be rewarded for carrying out directives even if they increase the corporations cost and reduce its profits. • Managers of private firms will be eventually replaced if they do not maximize profits and shareholders interests.

Accountability and Control • Mechanisms of government • Setting objectives and mandate • multiple goals, often conflicting • Trade-offs between goals is never specified • Changing goals make it difficult to measure the Crown’s’ performance over time. • Appointment of Director • Minister recommends to cabinet who should become a director • The autonomy of directors is based on the desires of cabinet • Appointment of president/CEO, prerogative of the Board, but minister and even cabinet will get involved. • Authorisation of major financing, government guaranteed debt has to be approved by cabinet • Review of business plans, Review of capital budgets • Little agency problem between cabinet and managers? Bigger problems between ultimate owner and cabinet ministers

Key Features in Sask • -Each Crown reports to a single minister • -The Cabinet is the regulator of public utility • -CIC holds the shares. Directors of CIC are cabinet ministers. CIC focuses on strategic decisions, capital expenditures, financing dividends policy and inter-crown redistribution • -Appears before the Legislative Committee on Crown corporations • Annual report tabled in the legislature

Accountability in Practice • How do citizens hold Crown’s accountable • They are monopolies so you have little choice. • You can write you MLA, who may be an opposition member or have little clout with government • Citizens can vote against the government, but this does not mean a change in a policy you did not like • What the ultimate owners cannot do is • shell their shares • buy more shares • vote for or against the management at the annual general meeting • organise a hostile tender offer to gain legal control

Citizens and Property Rights • Crown corporations are different from private firms in important ways • taxpayers face significant information, organisation or transaction costs if they want to force improvement in the performance of crowns • Ownership rights cannot be bought or sold, thus you cannot cut your losses • Involuntary take-over of Crowns is impossible • potential profits are used by politicians to reduce prices or extend served to uneconomic areas or cross subsidise favoured customers • Difficult to pay bonuses to managers, thus you get poor quality of managers, or end up providing different kinds of benefits. • Other constituencies might have more power in certain forms like employees, customers, and suppliers of inputs.

Principle Agent Problem • Principle agent problems in Crowns are much worse than in private businesses. • there is a layer called cabinet between the owners and the corporations • performance of crown are judged against multiple and changing objectives • Difficult to structure contracts with top managers of Crown corporations to create strong incentives for them to achieve the owners purposes. Large cash bonus are politically unacceptable

The Principal/Agent Problem • The need to define is important in that it helps us determine what kind of accountability relationship will exist • Legal Definition: The most common definition (legal) is to suggest that the Crown Corporation is an organization that the government owns • Current legislation defining the relationship between government and Crowns, deals with only 100 % wholly owned • Functional Definition: The criteria used by statistics Canada is the following • a majority of its ownership must be vested in government • management of its affairs must be relatively independent from government • its primary role must be to provide goods or services to the private sector, not government • the prices set for these good and services must reflect the cost of producing them

Different Types of Crowns • Crown corporations • vary greatly in terms of relative size, often serve different public policy purposes, and place different demands on government for financial support • The Financial Administrative Act (FAA) categorises Crown corporations on the basis of their dependency on appropriations from Parliament • Corporations operating in commercial and frequently competitive environments are expected to earn profits and provide a return on the public's investment. • These corporations are normally not dependent on government appropriations and are listed in Schedule III, Part II of the FAA. • Examples the Canada Post Corporation.

Different Types of Crowns Other corporations that depend on appropriations for operating purposes are listed in Schedule III, Part I of the FAA • Examples include the Canada Mortgage and Housing Corporation, the National Gallery of Canada, the St. Lawrence Seaway Authority and the Farm Credit Corporation. • In addition, certain other Crown corporations are not scheduled under the FAA and are not subject to the control and accountability provisions outlined in Divisions I to IV of Part X. • These corporations generally have a public policy mandate of a cultural nature and depend on appropriations from the Crown. These include the Canadian Broadcasting Corporation and the National Arts Centre Corporation. • The exempt corporations follow the control and accountability regime outlined in their specific legislation and many of them have chosen to adopt a number of key accountability provisions of Part X of the FAA

Classification of Federal Crowns • The federal government has four schedules which describe the type of accountability regimes for crown corporations. • Schedule A lists all the operating departments • Schedule B CI and CII list those entities known as Crown corporations • Schedule B lists Crowns that perform administrative, research, supervisory advisory or regulatory functions • For purposes of the FAA, these corporations are treated as regular departments of government • Responsible ministers exercise the same continuous control as they do over government departments • Schedule CII list those that are expected to be financially self-sustaining and that compete directly with the private sector • Schedule CI lists all those that fall neither in Schedule B or in Schedule CII • A single set of controls on corporate decisions making would not reflect the diversity among all three categories and therefore the legislation provides for flexibility in several ways.

Classification of Federal Crowns • The FAA also allows for corporations to move from one part to another part depending on restructuring and new mandates. • Also allows for directive power to be exercised by cabinet • Budget Controls: • Schedule B are financed by annual appropriations through the normal budget process in the same way as departments • Schedule CI corporations must submit both capital and operating budgets for the approval of the appropriate minister and TB • Schedule CII corporations must submit only capital budgets.

Classification of Crowns • Submitting a capital budget serves two purposes for the government • it provides government with the information on the projected capital investments, their planning building and the basic assumptions underlying those projects • approval of the capital budget provides authority to make expenditure commitments for future years. • Once it is approved the summary of the capital budget will be table in Parliament • Operating and capital budgets must cover all the activities of the parent corporation and all of its wholly-owned subsidiaries.

The Role of Board of Directors • Boards represent unique challenges • challenges result from a need for heightened sensitivity to the corporation's public policy objectives and its connection to the Crown • Effective boards of directors are critical to the good management of corporations • a board of directors helps to separate ownership from day-to-day management by providing a key link between the Crown and the executive officers • A strong board of directors is essential if the corporation is to fulfil the objectives established for it • Through the power conferred on them, boards of directors oversee the management of the businesses, activities and other affairs of the corporation.

The Role of Boards of Directors • Must be familiar with the corporation and its management • Must establish the corporation's strategic direction • Must monitor performance, and by reporting to the government • Do not normally involve themselves in day-to-day management • Must be sensitive to the mandate of the corporation as expressed in the authorities granted to it by Parliament and to the fact that the corporation is part of the federal government. • Boards of directors of Crown corporations oversee the corporation on the Crown's behalf by holding management accountable for the company’s performance, its long-term viability and the achievement of its objectives.

Board of DirectorsFederal Guidelines • Assume responsibility for stewardship of corporation • Approving strategic plan • Risk identification and management’ • Succession planning • Ensuring an adequate information management system • Examine periodically the public policy objectives and legislative mandate • Ensure effective communications with government • Develop working relationship with management • Guard the independence of the corporation

Board of DirectorsFederal Guidelines • Periodically assess the performance of CEO • Periodically assesses its own effectiveness • Ensure that directors have the orientation and education to ensure their responsibilities • Review the compensation of board members • Developed a corporate approach to governance

The Role of Parliament • Parliament has an important role • It legislates with respect to the creation, dissolution or privatization of a parent Crown corporation. • Legislates the general governance of Crown corporations and the allocation of public funds to individual Crown corporations. • Important documents relating to the operations and the performance of each Crown corporation are tabled in both Houses of Parliament. • These documents include annual reports and summaries of corporate plans and budgets. • The President of the Treasury Board annually tables in Parliament a consolidated report on all Crown corporations entitled Crown Corporations and Other Corporate Interests of Canada.

The Role of Cabinet • Executive authority is exercized by cabinet • The Cabinet comprises the Prime Minister and the other ministers of the Crown appointed by the Governor General to form the Government • Cabinet has overall responsibility for the formulation of the government's priorities and policies. • Crown corporation annual corporate plans require Cabinet approval prior to implementation. • This approval represents the Cabinet's endorsement of the responsible minister's recommendation of the particular Crown corporation's businessplan

The Role of Cabinet • Appointments to key positions in Crown corporations require cabinet approval. • Directors generally are appointed by the minister with the approval of Cabinet • The Cabinet fixes the rate of remuneration for the directors, the chairperson, and the chief executive officer (CEO) of each parent Crown corporation • Annually, the board of directors evaluates the performance of its CEO and makes a recommendation to the minister on the rate of remuneration for the following year and on any performance compensation. The minister then forwards the recommendation to the Cabinet or consideration and approval

The Role of the PMO and PCO • The PMO and PCO each have a role in cabinet appointments • The PMO is actively involved with the appointment of chairpersons, CEOs and directors of Crown corporations • The PMO provides political advice to the Prime Minister on appointments to be made on his or her recommendation. • Ministers consult with the PMO when developing their recommendations on cabinet appointments. • The PCO provides operational advice to the Prime Minister on these appointments by looking after the technical and administrative requirements. • The PCO also provides advice on the classification of positions and the associated salary. • Except as otherwise provided by statute, directors are usually appointed to hold office "during pleasure"

The Role of the Responsible Minister • The responsible minister is the link between the corporation and both the Cabinet and Parliament. • The major powers, duties and functions undertaken by the minister include: • Appointing or making recommendations to the cabinet on the appointment of directors and auditors; • recommending approval to the cabinets’ corporate plans, budgets, borrowings and payments of corporate surpluses (e.g., dividends); • tabling in Parliament of Crown corporation annual reports and summaries of corporate plans and budgets; • recommending that the cabinet issue directives where necessary, and tabling such directives in Parliament; and • answering questions in Parliament on matters relating to the Crown corporation.

The Role of the Treasury Board • The Treasury Board is a statutory committee of Cabinet ministers • The Treasury Board's responsibilities vis-à-vis a Crown corporation include: • reviewing the strategic direction of each Crown corporation as presented in its corporate plan and forwarding it to the cabinet with a recommendation for approval, if appropriate; • reviewing proposed decisions or recommendations of a financial nature made by a minister responsible for a Crown corporation; • approving each Crown corporation's capital budget, certain transactions, and, in the case of Schedule III, Part I of the Financial Administration Act corporations, their operating budgets and any amendments thereof; • approving budgetary appropriations to be put to a vote in Parliament; and • reviewing the legal framework set out in the Financial Administration Act and making regulations for the general governance of Crown corporations. • The President of the Treasury Board also tables in Parliament an annual report on all parent Crown corporations and other corporate interests of the Government of Canada

The Role of the Minister of Finance • The Minister of Finance is the fiscal manager and as such is interested in Crown corporations, their borrowing plans and their payments to the Receiver General • In carrying out these duties, the Minister of Finance may: • recommended that the cabinet make regulations governing borrowing; • require his recommendation for the approval of any corporate plan that proposes to borrow money; • and direct any payment of surplus money (e.g., dividends) held by a corporation to the Accounts of Canada, with the concurrence of the responsible minister and the cabinet

Political Control of Crown Corporations • Crown corporations are designed to be freer from political control than departments • “conventional wisdom” suggests that the battle between business and autonomy and democratic control is most often won by the public enterprise • only a minimal formal statutory relationship to parliament and through parliament to ministers. • Crown corporations require business autonomy to have the same efficiency criteria of the private sector. • But what if Crowns have autonomy because it serves the interest of the cabinet and government in its competitive struggle with the opposition • A desire to keep Crown corporation business out of parliament rather than politics out of Crown business.

Political Control of Crowns • Governments want to keep Crown affairs out of the political arena. How to they do this. • Limit the formal statutory requirements for formal accountability • Seek to maximise the lines of accountability directly to the cabinet by exercising informal, political influence in crown affairs, though the use of appointments to the head and the appointment of a board of directors • Two types of autonomy • Autonomy from parliament, and then autonomy from government.

Political Control of Crowns • Business efficiency is not always the only reason for the desire for autonomy • Governments can influence corporation affairs outside the scrutiny of parliament and has every incentive to do so given the inherently adversarial nature of responsible government • The informal relationship does not exist for ideological purposes, rather it exists to ensure the public enterprise affairs do not become an added burden to the capacity of government to mange responsible government • Both the management of Crowns and cabinet want to keep crown corporation affairs from becoming controversial in parliament

Control and Accountability • Controlling Crowns • establishing organizational relationships that assure public accountability and consistency with government policy without impairing the flexibility necessary for the effective conduct of a Crown Corporations. • How to assure that Crown’s subject to only loose market and fiscal discipline avoid the waste and not depart from their original goal? • How can managers manage effectively whey they are subject to strict controls? • The general experience with PE around the world show that this challenge is difficult.

Control and Accountability • Lack of consensus on goals is the major reason for confusion for the absence of objectives measures to gauge whether controls are adequate or excessive. • Democratic states may want to have coherent industrial strategy, but often find it difficult to reach consensus on national goals • the very essence of democracy is to recognise the legitimacy of rival points of view. • Control systems are not based on a systematic internally consistent conceptual scheme. • Rather they have evolved, changed because of a change in economic conditions • Controls oscillate between reliance on autonomy to very detailed controls.

When is a Crown Not a Crown? • Is the Canada Wheat Board a Crown Corporation? • The federal governments says no it is a “non-government institution” or a “shared-governance institution” • Four directors appointed by government • President appointed by government • Auditor must be approved by government • Employee Pension plan must be endorsed by government • Must submit corporate plan to minister for approval • Should it be under the regulations of the Federal Access to Information Act?

The Control and Accountability of Public Enterprise