The Control and Accountability
of Public Enterprise
Ken Rasmussen
Faculty of Administration
January 28, 2004
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
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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.
2) the managers to the share holders
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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 owner in that it has law making power
over both private firms and its own
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 the 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.
Accountability and Control
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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
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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 inter-crown
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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Monopolies give you little market power
Talk to MLA, who may be an opposition
Vote against the government
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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Citizens face information or transaction costs
Ownership rights cannot be bought or sold
Involuntary take-over of Crowns is impossible
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 (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
Different Types of Crowns
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Vary greatly in terms of size, public policy
purposes, and demands 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
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Examples include the Canada Mortgage and Housing
Corporation, the National Gallery of Canada, the St. Lawrence
Seaway Authority and the Farm Credit Corporation.
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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.
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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.
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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
Classification of Federal
Crowns
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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.
Also allows for directive power to be
exercised by cabinet
Budget Controls in FAA
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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.
Budget Controls
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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 dayto-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 dayto-day management
The Role of the Board of
Directors
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Must be sensitive to the mandate of the
corporation as expressed to it by Parliament
Sensitive to fact that the corporation is part
of the federal government.
Boards of directors of 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.
Federal Guidelines for Directors
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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
Federal Guidelines for Directors
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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 appointed by the minister(cabinet approval)
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 Role of the PCO
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The PCO provides operational advice to the Prime
Minister on 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;
The role of the Treasury Board
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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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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
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 “nongovernment 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?