The Control and Accountability of Public Enterprise

1
The Control and Accountability of Public
Enterprise

• Ken Rasmussen
• Faculty of Administration
• January 29, 2002

2
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

3
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.

4
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.

5
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
  Crowns 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

6
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

7
Accountability in Practice

• How do citizens hold Crowns 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

8
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.

9
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

10
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

11
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.
•  

12
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

13
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. 

14
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.
•  

15
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.

16
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.

17
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 companys
  performance, its long-term viability and the
  achievement of its objectives.

18
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

19
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

20
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.
•  

21
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 business plan
•  

22
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

23
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"  

24
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.

25
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 

26
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

27
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.

28
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.

29
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

30
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 Crowns 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.

31
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.

32
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?