Transcript 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
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Control: capacity to make certain things happen or to
prevent certain things from happening
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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;
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-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
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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.
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Shareholders have a number of ways of holding managers
accountable, sale of shares, capital markets etc,
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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?
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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
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Mechanisms of government
Setting objectives and mandate
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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
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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
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Key Features in Sask
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-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 intercrown redistribution
-Appears before the Legislative Committee on Crown
corporations
Annual report tabled in the legislature
Accountability in Practice
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How do citizens hold Crown’s accountable
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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
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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
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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
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Principle agent problems in Crowns are much
worse than in private businesses.
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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
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The Principal/Agent Problem
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The need to define is important in that it helps us determine what kind
of accountability relationship will exist
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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
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Crown corporations
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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
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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
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The federal government has four schedules which describe the type of
accountability regimes for crown corporations.
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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
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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
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The FAA also allows for corporations to move from one part to
another part depending on restructuring and new mandates.
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Also allows for directive power to be exercised by
cabinet
Budget Controls:
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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
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Submitting a capital budget serves two purposes for the
government
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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
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Boards represent unique challenges
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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
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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 Directors
Federal Guidelines
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Assume responsibility for stewardship of corporation
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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 Directors
Federal Guidelines
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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
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Parliament has an important role
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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
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Executive authority is exercized by cabinet
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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 business plan
The Role of Cabinet
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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
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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
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The responsible minister is the link between the corporation and
both the Cabinet and Parliament.
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The major powers, duties and functions undertaken by the minister
include:
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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
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The Treasury Board is a statutory committee of Cabinet ministers
The Treasury Board's responsibilities vis-à-vis a Crown corporation
include:
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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
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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:
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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
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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
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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
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Governments want to keep Crown affairs out
of the political arena. How to they do this.
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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
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Autonomy from parliament, and then autonomy
from government.
Political Control of Crowns
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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
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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
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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?
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Is the Canada Wheat Board a Crown Corporation?
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The federal governments says no it is a “non-government
institution” or a “shared-governance institution”
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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?