Presentation on theme: "The Control and Accountability of Public Enterprise"— Presentation transcript:
1 The Control and Accountability of Public Enterprise Ken RasmussenFaculty of AdministrationJanuary 28, 2004
2 Control and Accountability Defined Control: capacity to make certain things happen or to prevent certain things from happeningIn 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 accountability1) the corporation to the marketThe 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 holdersShare 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 owner in that it has law making power over both private firms and its ownMangers are given various types of incentivesManagers 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 the governmentSetting objectives and mandatemultiple goals, often conflictingTrade-offs between goals is never specifiedChanging goals make it difficult to measure the Crown’s’ performance over time. Appointment of DirectorMinister recommends to cabinet who should become a directorThe autonomy of directors is based on the desires of cabinetAppointment of president/CEO, prerogative of the Board, but minister and even cabinet will get involved.
6 Accountability and Control Authorisation of major financing, government guaranteed debt has to be approved by cabinetReview of business plans, Review of capital budgets Little agency problem between cabinet and managers? Bigger problems between ultimate owner and cabinet ministers
7 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 corporationsAnnual report tabled in the legislature
8 Accountability in Practice How do citizens hold Crown’s accountableMonopolies give you little market powerTalk to MLA, who may be an oppositionVote against the government What the ultimate owners cannot do isshell their sharesbuy more sharesvote for or against the management at the annual general meetingorganise a hostile tender offer to gain legal control
9 Citizens and Property Rights Citizens face information or transaction costsOwnership rights cannot be bought or soldInvoluntary take-over of Crowns is impossibleProfits are used by politicians to reduce prices or extend served to uneconomic areas or cross subsidise favoured customersDifficult 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.
10 Principle Agent Problem Principle agent problems in Crowns are much worse than in private businesses.there is a layer (cabinet) between the owners and the corporationsperformance of crown are judged against multiple and changing objectivesDifficult 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
11 Different Types of Crowns Vary greatly in terms of size, public policy purposes, and demands for financial supportThe Financial Administrative Act (FAA) categorises Crown corporations on the basis of their dependency on appropriations from ParliamentCorporations 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 FAAExamples 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 departmentsSchedule B CI and CII list those entities known as Crown corporationsSchedule B lists Crowns that perform administrative, research, supervisory advisory or regulatory functionsFor purposes of the FAA, these corporations are treated as regular departments of governmentResponsible ministers exercise the same continuous control as they do over government departments
14 Classification of Federal Crowns Schedule CII list those that are expected to be financially self-sustaining and that compete directly with the private sectorSchedule 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.
15 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
16 Budget Controls in FAA Budget Controls: Schedule B are financed by annual appropriations through the normal budget process in the same way as departmentsSchedule CI corporations must submit both capital and operating budgets for the approval of the appropriate minister and TBSchedule CII corporations must submit only capital budgets.
17 Budget ControlsSubmitting a capital budget serves two purposes for the governmentit provides government with the information on the projected capital investments, their planning building and the basic assumptions underlying those projectsapproval 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.
18 The Role of Board of Directors Boards represent unique challengeschallenges result from a need for heightened sensitivity to the corporation's public policy objectives and its connection to the CrownEffective boards of directors are critical to the good management of corporationsA board of directors helps to separate ownership from day-to-day management by providing a key link between the Crown and the executive officersA strong board of directors is essential if the corporation is to fulfil the objectives established for itThrough the power conferred on them, boards of directors oversee the management of the businesses, activities and other affairs of the corporation.
19 The Role of Boards of Directors Must be familiar with the corporation and its managementMust establish the corporation's strategic directionMust monitor performance, and by reporting to the government Do not normally involve themselves in day-to-day management
20 The Role of the Board of Directors Must be sensitive to the mandate of the corporation as expressed to it by ParliamentSensitive 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.
21 Federal Guidelines for Directors Approving strategic planRisk identification and management’Succession planningEnsuring an adequate information management systemExamine periodically the public policy objectives and legislative mandateEnsure effective communications with governmentDevelop working relationship with managementGuard the independence of the corporation
22 Federal Guidelines for Directors Periodically assess the performance of CEOPeriodically assesses its own effectivenessEnsure that directors have the orientation and education to ensure their responsibilitiesReview the compensation of board membersDeveloped a corporate approach to governance
23 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.
24 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 GovernmentCabinet 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
25 The Role of CabinetAppointments 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
26 The Role of the PMO and PCO The PMO and PCO each have a role in cabinet appointmentsThe PMO is actively involved with the appointment of chairpersons, CEOs and directors of Crown corporationsThe 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.
27 The Role of the PCOThe 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"
28 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; andanswering questions in Parliament on matters relating to the Crown corporation.
29 The Role of the Treasury Board The Treasury Board is a statutory committee of Cabinet ministersThe 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;
30 The role of the Treasury Board 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; andreviewing 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
31 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 GeneralIn 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
32 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 enterpriseonly 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 oppositionA desire to keep Crown corporation business out of parliament rather than politics out of Crown business.
33 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 accountabilitySeek 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 directorsTwo types of autonomyAutonomy from parliament, and then autonomy from government.
34 Political Control of Crowns Business efficiency is not always the only reason for the desire for autonomyGovernments 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
35 Control and Accountability 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.
36 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 goalsthe 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 conditionsControls oscillate between reliance on autonomy to very detailed controls.
37 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 governmentPresident appointed by governmentAuditor must be approved by governmentEmployee Pension plan must be endorsed by governmentMust submit corporate plan to minister for approvalShould it be under the regulations of the Federal Access to Information Act?