Crown Corporation Role in Policy Formulation - PowerPoint by rgq65570


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									The Control and Accountability of
       Public Enterprise
                Ken Rasmussen
                Faculty of
                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
   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
   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
     –   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
   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
    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
 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
             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
    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
   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
Classification of Crowns
   Submitting a capital budget serves two purposes for the
     –   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
     –   Effective boards of directors are critical to the good management of
     –   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 Directors
Federal 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 Directors
Federal 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
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 business plan
    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
   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
             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
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
     –   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
     –   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
   “conventional wisdom” suggests that the battle between business and
    autonomy and democratic control is most often won by the public
            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
     –   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
    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
   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?

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