Protecting the Shareholder - Public Policy Forum

ProtectingtheShareholderA Review Of TheGovernance Structure OfCanadian Crown CorporationsSEPTEMBER, 1998PublicPolicyForumForumdes politiquespubliques

PUBLIC POLICY FORUM PROTECTING THE SHAREHOLDER 2ProtectingtheShareholderAbout This ReportIn the spring of 1998, the Forum created an Advisory Committee onGovernance and Accountability, co-chaired by Forum boardmembers Kevin Lynch and Jeff Lipton.The committee identified the governance of Crown agencies at boththe federal and provincial levels as an important issue worthy ofreview.The Forum would like to thank those individuals, from both thepublic and private sector, who were willing to share theirobservations, experiences and perspectives with us.We hope that the report that follows will stimulate debate andencourage continued improvement in the management of Canada'sCrown corporations.A Review Of TheGovernance Structure OfCanadian Crown CorporationsDavid ZussmanPresidentAbout The AuthorsSEPTEMBER, 1998Peter E. Larson, Ph.D. - Public Policy ForumBill Neville - Hession, Neville and AssociatesBill Neville has had a long and distinguished career in publicpolicy in Canada. He is currently Chairman of Hession, Nevilleand Associates. He is also an Executive-in-Residence at the PublicPolicy Forum.Dr. Peter Larson is Executive Vice-President of thePublic Policy Forum.

Table of ContentsExecutive Summary ..........................................................................4I. Introduction ..............................................................................5II.III.IV.Crown Agencies In Canada......................................................7The Governance Of Crown Corporations..............................11Recent Developments in Private Sector Governance.............11The Importance of Good Governancein Crown Corporations............................................................12Key differences between Crown corporationsand private enterprise .............................................................13• Mission...........................................................................14• Legal authority...............................................................14• Ownership .....................................................................15• Governance structure ....................................................16• Board selection ..............................................................18Recent Steps To Improve The GovernanceOf Crown Corporations ..........................................................20V. Analysis Of Key Governance Issues ......................................23• Crowns - Closely-held Corporations.............................23• The Complexity of Basic Relationships........................25• The Appointment Process.............................................28• The Role of the Chair.....................................................33• The Appointment of the President ...............................35• Strengthening Accountability .......................................37VI. Summary Of Recommendations ............................................39Appendix I.Basic Information OnCrown Corporations Studied .................................41Appendix II. Contributors ............................................................48Appendix III. Bibliography ...........................................................51PUBLIC POLICY FORUM PROTECTING THE SHAREHOLDER 4Executive SummaryThe privatization of many Crown corporations ("Crowns") over thelast decade has tended to obscure the fact that federal and provincialCrowns still play a very important role in our society. In total, over800 Canadian Crown corporations - from B.C. Hydro to a fishmarketing board in Newfoundland - employ 120,000 people and areresponsible for managing over $ 100 billion in public assets.But for these organizations, the stable protected monopoly of thepast has been replaced by rapidly changing technology,deregulation, and global competition. Many are being challengedin the marketplace as never before. In this highly competitiveenvironment, the public interest demands that their governancestructure be efficient and effective.In the winter of 1997, while working closely with one Crown agency,the Public Policy Forum became increasingly concerned that thegovernance structure of our major Crowns was due for review. Wefelt that Crown corporations could benefit from a review of theirapproach to governance, particularly in light of recent attentionpaid to this issue by the private sector.As a result, we interviewed a wide range of responsible officials -ministers, the chairs and chief executives of Crowns and boardmembers as well as senior officials from various central agencies.We asked them whether they felt that their organizations had theappropriate governance structures (and people) to defend theinterests of their ultimate shareholder, the people of Canada.It would be an exaggeration to suggest that the governance of Crowncorporations is completely ineffective or has broken down.Generally speaking, Canadian Crowns are properly directed andwell managed. But our study indicates that there are flaws in thecurrent governance structure.Some of these weaknesses can be remedied by more consistent

PUBLIC POLICY FORUM PROTECTING THE SHAREHOLDER 5applications of guidelines already in place. Others will requireclarification of roles and responsibilities.But we also conclude that more attention should be paid to therecruitment of members of Crown corporation boards, and that theseboards should play a fuller and more active role in the stewardshipof their respective organizations, including strategic planning,succession planning, and the selection of the chief executive.

PUBLIC POLICY FORUM PROTECTING THE SHAREHOLDER 6PUBLIC POLICY FORUM PROTECTING THE SHAREHOLDER 7IIntroductionCrown corporations have played a vital role in Canada'sdevelopment as a nation since Confederation. In key sectors liketransportation, power, and communications, public enterprise tookon critical tasks that private enterprise was unwilling, or unable, toassume. The resulting organizations, like the CBC, CN, and HydroQuebec, became symbols of the country's values and aspirations.But over the last two decades, several important changes have takenplace in the environment of Crown corporations (often referred toas simply, "Crowns"):• The original public policy objectives of many Crowns -developing a basic infrastructure in rail or airtransportation, communications or power generation - havebeen met. As a result, several have been privatized, andthere is debate about the future of many more.• Increased public antipathy toward all forms of governmentmeans that there is less public support for the notion ofpublic enterprise.agencies (Ontario Hydro, B.C. Hydro, CBC, Canada Post, and theRoyal Canadian Mint, to name a few) raise serious questions abouthow well our Crowns are governed and whether the huge taxpayerinvestment is well protected. When Crown corporations like OntarioHydro end up with billions of dollars of "stranded" assets, one hasto wonder whether appointments to Hydro's board have been madewith a greater eye to "representational equity" than to commercialacumen.In the winter of 1997 the Public Policy Forum's board identified"Governance and Accountability in the Public Sector" as one of itsmain priorities. Later that year, while working with one Crownagency, the Forum became increasingly concerned that thegovernance structure of our major Crown corporations deservedcloser scrutiny. We felt that Crown corporations could benefit froma review of their approach to governance, particularly in light ofrecent work undertaken in the private sector by the Toronto StockExchange. 1We recognize, of course, that not all of the challenges facing Crownsstem directly from weaknesses in their governance structures. Butas Crown agencies enter into an increasingly difficult andcompetitive environment, it is important that their governancestructures be as effective as possible.• The effective monopoly once enjoyed by certain Crownsand protected by legislation, (e.g. Canada Post, OntarioHydro) is being radically undermined by new technology,global competition, and market deregulation.• Many Crowns have had their levels of public subsidyreduced severely. Government/shareholders, facingsignificant economic constraints, are demanding a betterreturn on their investments. Those that make a profit arebeing asked to provide more.The result is that many Crown agencies are in trouble, and theCanadian public could be at significant financial risk. The recentfinancial and management difficulties of a number of Crown

PUBLIC POLICY FORUM PROTECTING THE SHAREHOLDER 10 PUBLIC POLICY FORUM PROTECTING THE SHAREHOLDER 11Commercial agencies which carry on "business" in a commercialsense. Most of these are constituted as "Crown corporations,"providing products or services which they sell to customers. Theymay or may not get subsidies from government, but a significantpercentage of their revenues come from selling a good or service tocustomers. (Examples: Ontario Hydro, Canada Post, BC FerriesCorporation).Crown corporations are designed to have some "freedom" fromgovernment. One reason is to improve administrative efficiency. Inorder to effectively compete in the market, Crown agencies need tobe able to make a wide range of management decisions (where tolocate a post office, for example) without undue interference fromthe political level. The other reason is to insulate the agency fromeditorial or political interference in the actual work of theorganization. The CBC is at arms length, not only to improveefficiency, but to protect its independence and credibility as a nonpartisan,non-political news and cultural agency.complain that the service is poor and costly, whilecompetitors complain of unfair (i.e., state subsidized)competition.• They live in the same "glass house" environment of publicscrutiny as politicians and public servants, quite differentfrom the private sector environment.• They have a sole shareholder - the government.Notwithstanding this legal simplicity however, theshareholder's views are effectively represented by severaldifferent individuals including the responsible minister, theminister of finance and the prime minister (or provincialpremier). Each of these has his or her own priorities andagenda, not all of which may be entirely compatible.This study looks specifically at governance questions associated onlywith Crown commercial agencies known as Crown corporations.This group includes almost all of the largest agencies, like CanadaPost, CBC, and provincial hydro and liquor retail companies. Theyexist as Crown agencies because they do things that privateenterprise, unincented, would not do - things like deliver letters tothe North West Territories, or lend money to risky small businesses,or insure the mortages of low income families.Although Crown corporations bear many similarities to their privatesector cousins, they share a number of distinguishing characteristics:• They have a mixture of "public policy" and "commercial"objectives. In most cases, the market is not sufficient tosupport the whole of the enterprise. Or, to put it anotherway, the public interest may demand that service beprovided to a broader market than that which would justifyitself commercially.• They usually have a monopoly position enforced bylegislation. This places them in an awkward position withregard to both customers and competitors. Customers always

PUBLIC POLICY FORUM PROTECTING THE SHAREHOLDER 12 PUBLIC POLICY FORUM PROTECTING THE SHAREHOLDER 13III. The Governance Of CrownCorporationsRecent Developments in Private Sector GovernanceWhen several significant Canadian companies failed in the early1990s, causing losses for thousands of investors, a wave of concernswept over the Canadian public. Some editorialists called forincreased state regulation, others questioned the quality of corporatemanagement. But much of the criticism focused on whether theboards of directors of these companies had acted appropriately.Many felt that the directors had blindly followed management overthe abyss, rather than actively protecting the interests ofshareholders.In response to these concerns, and no doubt in part to pre-empt anyregulatory move by government, the Toronto Stock Exchange (TSE)asked former Chairman Peter Dey to develop guidelines forimproved corporate governance in Canada. 4Dey's report, aptly entitled Where Were the Directors? 5 , made anumber of recommendations and proposed guidelines for improvedcorporate governance. The general thrust of Dey's recommendationswas to reaffirm the position of the Board of Directors at the top ofthe governance structure of the organization. He reasserted that theboard should explicitly assume responsibility for the stewardshipof the corporation and specifically pointed to:• the adoption of a strategic planning process• the identification of the principal risks to the corporation• the development of a succession plan for seniormanagement• the development of a communications policy• the integrity of the corporation's internal control andmanagement information systems.Many of Dey's specific recommendations were designed to reinforcethe independence of the board from management, including theprinciple that a majority of directors be unrelated to management.Dey also recommended that each board create a committee withresponsibility for developing the corporation's response to"governance" issues.Dey recommended that the TSE demand that companies report ontheir approach to governance, and be encouraged to explain anyvariance between their own approach and that suggested in hisguidelines.Although the Dey report was not universally embraced, in general,the thrust of the report was well accepted, and most major privatecorporations in Canada quickly adjusted their practices to reflectDey's recommendations. For example, most TSE-listed companiesnow have a governance committee, and include a report on theirgovernance structure as part of their annual report to shareholders.The Importance of Good Governance in Crown CorporationsOur society is not as trusting of organizations as it once was.Canadians are looking for better management - more efficiency, moreaccountability, and more transparency. This applies not only tobusiness but to governments as well. In a 1997 article, DavidZussman documented the declining level of public confidence inour public institutions. 6Recently, this general public concern has been augmented by callsfor a closer focus on the management of Crown agencies. The 1996-4Neither the pressures, nor the responses are unique to Canada. Similar causes ledto the 1987 Report on the Financial Aspects of Corporate Governance in the UnitedKingdom (known as the "Cadbury Report" after its principal author Lord Cadbury)and and the Report of the National Commission on Fraudulent Financial Reporting(Known as the Treadway Commission in the United States.5Peter Dey, Where Were the Directors? The Report of the Toronto Stock ExchangeCommittee on Corporate Governance in Canada, (Toronto, 1994)

PUBLIC POLICY FORUM PROTECTING THE SHAREHOLDER 14 PUBLIC POLICY FORUM PROTECTING THE SHAREHOLDER 151997 report of the Auditor General of British Columbiarecommended a complete review of the governance of the province'sCrown corporations. 7 At the same time, at the other end of thecountry, the Auditor General of New Brunswick was expressingsimilar concerns in that province. 8The issue has also received attention at the federal level. In 1996,the Senate Standing Committee on Banking, Trade and Commerceundertook a comprehensive review of the Canada BusinessCorporation Act. It recommended that “a study be undertaken ofthe principles of corporate governance as they relate to CrownCorporations. It is the view of the Committee that the generalprinciples of corporate governance should apply to CrownCorporations.” 9Clearly, the governance of Crown corporations makes a differenceto Canadians and to their governments. Do they have the directors,chief executives, and management to take them forward successfuly?Are roles and responsibilities clearly defined? Or, are accountabilitiesso hopelessly confused that commercial viability is impossible? 10Key Differences betweenCrown Corporations and Private EnterpriseCrown corporations resemble private corporations in many ways.The structure and balance sheet of a Crown corporation like theBusiness Development Bank of Canada, for example, may look verymuch like that of a commercial bank. But Crowns are not exactlylike commercial ventures, and it is important to understand theirdistinctive features before discussing their governance.6Zussman, David, "Do Citizens Trust Their Governments?, vol. 40, no. 2, CanadianPublic Administration, (DATE).7British Columbia, Auditor General , Crown Corporations governance Study(Victoria: 1997).8Report of the Auditor General of New Brunswick, 1996. Chapter 10 , "CrownCorporation Governance," (Fredericton: 1997).9Canada, Senate Standing Committee on Banking, Trade and Commcerce, Report ofthe Committee, (Chairman, the Honourable Michael Kirby) (Ottawa: August 1966).• MissionUnlike commercial enterprises, shareholder value is notdetermined solely by the balance sheet. This is because mostCrowns are driven by a mixture of commercial and publicpolicy objectives. 11The Business Development Bank of Canada, for example,exists to offer a service that purely commercial organizationsdo not provide. Its value to its owner, the government ofCanada, lies both in its balance sheet, and in its ability tofoster small business in Canada. Earning revenues isimportant, but it is not the only, or even the principal,objective of the bank.This mix of commercial and political objectives lies at theheart of every Crown agency, and drives its legal framework,structure, and activities.• Legal authorityPrivate enterprises operate under federal or provincial statutes(or both) which give the board of directors of the organizationbroad latitude to undertake any commercial activities notproscribed by law.Crown corporations are much more closely regulated both asto what business they can be in, and how business must beconducted. This control is exercised through a variety ofstatutes.10Despite these concerns, there is evidence that Crown corporations actually dobetter than private ones in some key areas of governance. Based on Conference Boarddata, crown corporation boards are more likely to play a role in shaping strategy,have fewer "insiders" and reflect more gender and regional diversity than their privatesector counterparts. They are also much more likely to separate the Chair and CEOfunctions as recommended by the Dey committee. See "Current Governance Practicesin Canadian Public Enterprise, 1996), Conference Board of Canada."11By "public policy objectives," we refer to broad objectives that are, in the main,independent of the political party in power. Fostering the development of Canadianculture, for example, is a public policy objective shared by all major political parties.And all agree that this should be one of the objectives of the CBC. Crown corporationsare also influenced, of course, by the narrower "political objectives" of specific partiesand specific ministers.

PUBLIC POLICY FORUM PROTECTING THE SHAREHOLDER 16 PUBLIC POLICY FORUM PROTECTING THE SHAREHOLDER 17The principal piece of legislation for most of the majorCrowns is their own specific act. The Hydro and PowerAuthority Act (1996), for example, sets out the powers andlimitations of BC Hydro. It also specifies the process for thenomination of both board members and senior management.In addition, Crown agencies also fall under the control of arange of other acts which regulate public business. In thefederal government, most Crown corporations fall under theFinancial Administration Act, for example. This requires thesubmission of an annual report and summaries of theapproved corporate plan and budget for tabling inParliament.• OwnershipIn private enterprise, the most common form of ownershipis the joint stock company. Depending on the distribution ofshare ownership, private enterprises can be "privatelyowned," "closely held," or "widely held."Crown corporations, on the other hand, are created bygovernment, and wholly owned by it. This is usuallyspecified in the enabling legislation. Those involved in themanagement of crown corporations often refer to thegovernment as "the shareholder", but in most cases this is afigure of speech - there are no equity shares.Legally, ownership is vested in the Governor General (orLieutenant Governor, in the case of provincial Crowns) asthe representative of the Crown. In practice, however, theGovernor General plays only a de jure role. The effectiveowner is the government of the day, and many majordecisions (e.g., appointments) are made by Cabinet decisioncalled an "Order-in-Council."Different governments have different rules for who bringswhat to Cabinet, and depending on the issue, certainministers might be expected to have more influence thanothers. These might include:• the Prime Minister• the finance minister• the treasury minister• the minister responsible for the agency in Parliament• any other minister who might be particularly impacted bydecisions regarding any Crown agency.• Governance structureThe basic governance structure of a private company is fairlystraightforward. Governance of the corporation is vested ina board of directors, elected by shareholders at an annualmeeting. As the elected representatives of the shareholders,the board has complete powers, within the law, to direct thecompany on behalf of shareholders as it sees fit. Each boardcreates appropriate committees to carry out its work. It isresponsible for the election of its own chairman, and for thestewardship of the organization - including the selection andcompensation of a chief executive.The structure of a Crown corporation bears much similarityto that of a private corporation. There is a board of directors,a chairman of the board, and a CEO. Normally the chairmanand CEO functions are separated. Recently, many Crownshave created "governance" committees. But the relationships,responsibilities, and accountabilities of the board, the chair,and the CEO are very different from those in a privatecorporation. Instead of the usual cascading relationshipbetween board, chair, and CEO, in most Crowns, thechairman, the CEO, and the board members are all namedby the government.Crown agency strategic plans must be approved by centralfinancial agencies. As a result, the board of a Crown agencyalso often has a lot less say in deciding the strategic directionof the organization. The CEO and the management teamspend as much time working with the Treasury Board orManagement Board officials on the strategic plan as they dowith their own board.

PUBLIC POLICY FORUM PROTECTING THE SHAREHOLDER 18 PUBLIC POLICY FORUM PROTECTING THE SHAREHOLDER 19Diagram A: Typical Governance Structure of Widely-Held Public CorporationsSHAREHOLDERSBOARDCHAIRCEOOn paper, the governance structure of a widely held public corporation isstraightforward. Shareholders elect directors according to the number ofshares they hold. In fact, of course, management has a large influence inshaping the board and in formulating strategy. In addition, a number ofother players - from analysts to brokers, are important influencers of policy.Diagram B: Typical Governance Structure of Major Federal CrownsSHAREHOLDERIn other words, the Crown corporation board rarely has thepower (or influence) normally associated with the role of aboard in the private sector. It does not select its ownchairman, nor does it select or dismiss the CEO. Sometimesthe board is asked to "evaluate" the CEO, but final decisionson compensation are not board decisions, but governmentdecisions.It would be a mistake, however, to imply that Diagram Bportrays a structure and relationship that are unworkable ordysfunctional. To the contrary, the lines of communicationbetween the multidimensional shareholder, on one hand,and the Crown board and management, on the other, aregenerally understood by the participants and, in most cases,allow each to exercise their assigned responsibilities. Indeed,it is hard to imagine a simple way to reconcile the variouscompeting interests. It is possible, however, that thefunctioning can be improved with some clarification ofrespective roles and reporting lines.• Board recruitmentIn the private sector, normal practice is for a boardcommittee, usually the nominating or governancecommittee, to propose a list of candidates for boardmembership. This list, after endorsement by the full board,is presented to shareholders for approval.TREASURYCEOFINANCEPCOPRIMEMINISTERPMOCHAIRMINISTERBOARDIn Crown corporations, on the other hand, boardnominations are made by the cabinet through what is knownas an "Order-in-Council." In the Federal government, Orderin-Council(or OIC) appointments 12 are coordinated throughthe Appointments Secretariat of the Prime Minister's Office(PMO). 13 In the Federal government, the AppointmentsSecretary makes final recommendations to Cabinet. Theserecommendations are based on at least four sources ofinformation:On paper, the governancy structure of the Crown looks hopelesslycomplicated, but the practice is not totally different from that of a privatesector corporation. Management has to satisfy many interests, but operateswith a broad autonomy.1. The responsible minister. Because Crown corporationsare instruments of government, there is always a "responsibleminister" who answers to Parliament for the operations of

PUBLIC POLICY FORUM PROTECTING THE SHAREHOLDER 20PUBLIC POLICY FORUM PROTECTING THE SHAREHOLDER 21each Crown. The Minister of Public Works and GovernmentServices, for example, is responsible for a portfolio of Crowncorporations including Canada Post and the Royal CanadianMint. Names inevitably come to the minister's attention froma variety of sources as possible candidates for appointmentto the board. If the minister approves, he or she may forwardsome of the names to the PMO for consideration.are not. Prestige and a desire to "do something for thecountry" are the most common motives for candidates.Financial reward, on the other hand, is not. As a generalrule, OIC appointments pay very little - a subject we willcome back to.2. Representatives of the Crown agency itself. TheAppointments Secretariat invites the chairs and CEOs ofCrown agencies to describe the profiles of the kinds ofpeople they want to have on their boards. Some are moreproactive than others in doing so.3. The Privy Council Office (PCO). The PCO is responsiblefor the management of the whole cadre of senior public executives,including those working in Crown corporationsfrom both a performance and compensation perspective. Asthe central coordinating agency for government, the PCOreflects the views of any other line department or agencywhich might have an interest in the Crown agency. Amongother things, the PCO bears responsibility for ensuring thatpersons suggested for office do not carry any potential liabilities(for example, conflicts of interest).4. The Prime Minister's Office (PMO). The PMO is the"political" adviser to the Prime Minister. This is where thepolitical structure of the party in power gets to have a say inwho gets "rewarded" by appointments. Names come forwardfrom many sources - defeated candidates, former ministers,party friends, and organizers. Many are well qualified, some12OIC appointments are commonly known as "patronage" appointments because theyare, in the final analysis political appointments made by the Prime Minister.Nonetheless, calling them patronage appointments tends to obscure the fact that theappointment process entails a number of different considerations of which politicalloyalty may not be the only, or even the most important, factor.13What is described here is the federal process. Provincial governments each havetheir own structures which do not match exactly to the federal ones. However, thegeneral approach is quite similar.

PUBLIC POLICY FORUM PROTECTING THE SHAREHOLDER 22IV. Recent Steps To ImproveThe Governance Of CrownCorporationsOpposition parties always accuse the government in power of usingpatronage in its appointments. The criticisms themselves are oftenself-serving, but not completely without basis. Following the TSEreview of corporate governance in the private sector, howevercriticism focused on whether excessive patronage was weakeninggovernance of major Crowns.In 1994, Gerard Veilleux, a respected federal public servant on loanto the Canadian Centre for Management Development (CCMD),reviewed the appointment process to boards of directors of Crowncorporations. He observed that "political affiliation has inevitablyplayed a large part in the appointment process, which, in recentyears, has drawn media coverage." He also noted that "in manyinstances there is scepticism about the value-added by some Boardmembers." 14In his report, Veilleux did not attempt to argue that politicalaffiliation should have no role in the selection process. But he didargue that the appointment process should be more objective andtransparent, and recommended the use of "job profiles" outliningkey attributes sought from potential candidates to specific boards.He proposed that these job profiles should be developed inconsultation with various stakeholders - including the responsible14Veilleux, Gerard, "Unfinished Business: A Report on the Appointment Process toBoards of Directors of Crown Corporations" (Ottawa: Canadian Centre forManagement Development, March 1994.)15"Corporate Governance in Crown Corporations and other Public Enterprises:Guidelines," (Ottawa: Crown Corporations and Privatization Sector, Department ofFinance and Treasury Board Secretariat, 1996).

PUBLIC POLICY FORUM PROTECTING THE SHAREHOLDER 23 PUBLIC POLICY FORUM PROTECTING THE SHAREHOLDER 24minister, the chair and the CEO of the each Crown agency, and thecurrent members of its board.He also recommended that board members receive better training,and urged Treasury Board to undertake a general review of therelative performance of boards and of the means to enhance theiraccountability.In partial response, Treasury Board Secretariat and the Departmentof Finance released new "guidelines" for corporate governance inCrown corporations and other public enterprises in July 1996. Theguidelines present recommendations categorized into three broadareas of responsibility: stewardship, board-management relations,and functioning of the board. 15The ten guidelines stipulate that the board of directors of everyCrown corporation should:1. explicitly assume responsibility for the stewardship of thecorporation. This should include: (i) approving the strategicplan, (ii) risk identification and management, (iii)succession planning, and (iv) ensuring an adequateinformation management system.9. review the adequacy and form of compensation of boardmembers10. develop a corporate approach to governance.Our own research revealed that the guidelines (and therecommendations of the Veilleux report) have been unevenlyapplied. Some Crown corporations have reviewed and modifiedtheir own governance procedures in light of the Treasury Boardguidelines, while others have been less active.One other positive development in the field of Crown corporationgovernance should also be signalled. The Conference Board ofCanada has created a Public Enterprise Governance Forum aimedat furthering the practice of excellence in governance amongCanada's public institutions. This Forum undertakes comparativeresearch on governance practices, and provides a useful andpractical venue where those responsible for Crown corporationmanagement can compare and share best practices.2. periodically examine the public policy objectives and thelegislated mandate to ensure continuing relevance3. ensure effective communication with the Crown, otherstakeholders, and the public4. develop an effective working relationship withmanagement5. guard its ability to function independently6. periodically assess the performance of the CEO7. periodically assess its own effectiveness and initiate itsown renewal8. ensure directors have the orientation and educationnecessary to fulfill their responsibilities

PUBLIC POLICY FORUM PROTECTING THE SHAREHOLDER 25 PUBLIC POLICY FORUM PROTECTING THE SHAREHOLDER 26V. Analysis Of KeyGovernance IssuesIn the winter of 1997, after intensive discussions with themanagement of one major crown agency, the Public Policy Forumbecame concerned that the governance structure of our major Crowncorporations was due for review. We felt that a review of theirapproach to governance was appropriate, particularly in light ofrecent work undertaken in the private sector by the Toronto StockExchange and others.As a result, we interviewed a wide range of responsible officials -ministers, the chairs and chief executives of Crowns, and boardmembers as well as senior officials from various central agencies.Among other things we asked them: Who is the "shareholder"? Howdo you define "shareholder value"? How do the shareholderstransmit their objectives to the Crown corporation? Areaccountabilities and responsibilities aligned optimally? Do we havethe right people on Crown boards? How effective are Crown boards?Their answers form the basis of the analytical section below.Crowns - Closely-held CorporationsIn the jargon of private corporation governance, Crown corporationsare "closely-held" institutions. Governments are the dominant,indeed usually the sole shareholder, and, as such, they exerciseconsiderable control over the direction and even the operation oftheir Crown corporations.Through legislation, governments - and legislatures - providecorporations with their basic mandates and structures. ThroughCabinet or ministerial orders they often provide specific policydirection. By Order-in-Council they appoint the boards of directors,including their chairs, as well as the presidents or chief executiveofficers whose compensation are set by Cabinet as well. Crowncorporation budgets are subject to the overall fiscal policy of thegovernment and annual corporate plans are submitted for reviewby the responsible ministers and/or Treasury Board.Given that shareholder governments retain so much power andinfluence over their Crowns, it is worth asking how independentCrown corporation directors really are (even if they are largely"unrelated" by TSE guideline standards) and how much genuineauthority they exert over the corporation. Or are they, in fact, morein the nature of advisory committees similar to those which havereplaced supposed independent boards of directors in many privateCanadian corporations which have a dominant or controllingshareholder, often a nonCanadian one? This move to the advisorycommittee model appears to acknowledge the hard fact thatcontrolling shareholders call the shots in most matters of importance- as well as respond to concerns of directors about liability. (Thisconcern does not exist in the case of Crowns. Directors are notpersonally liable for actions undertaken by the Crown agency ofwhich they are a director.)One option, then, might be to apply this private sector model tocrown corporations, that is to formally redesignate their boards ofdirectors as advisory committees. It would then be clear that theirrole is not to make decisions, but simply to advise management,and perhaps the shareholder, on relevant issues based on thedirectors "once removed" assessments and experience, includingtheir geographic and demographic perspectives.The problem with this approach is that it would virtually destroyany notion that these corporations are, in fact, arms length fromtheir governments and independent of them in day-to-dayoperations and content. One would end up with an even moredirect-line relationship between Crown management and thegovernment with no one effectively in between to provide somecheck on both sides. It would be better, we suggest, for Crown boardsto be real boards, and for any impediments to that reality to beopenly examined and corrected.Most of the boards examined for this study do perform some of the

PUBLIC POLICY FORUM PROTECTING THE SHAREHOLDER 27 PUBLIC POLICY FORUM PROTECTING THE SHAREHOLDER 28functions described as essential in current governance guidelines.They review and contribute to the corporation's strategic planningprocess and, through independent director audit committees,oversee the financial management and administration of thecorporation. Many of them help guide the corporation'scommunications programs, including its relations with theshareholder itself. Through human resources and/or compensationcommittees, they approve senior management - other than thepresident appointments and compensation.But this was not the case of all the boards we studied. And in anyevent, their role was rarely decisive. If the objective is to have boardsof directors not serving as de facto advisory committees but ratherbeing at the centre of Crown corporation governance, as we thinkshould be the case, and as Crown legislation suggests they are, thena number of issues still need to be resolved.The Complexity of Basic RelationshipsRelations between shareholder-governments and their Crowncorporations are complex and, at times, confusing.On the government side, responsibility for Crowns is spread amonga number of individuals and departments. Each Crown has a"responsible" minister (usually the minister whose portfolioresponsibilities cover the Crown's area of operation) who serves asthe Crown's day-to-day liaison point with government and whoreports to Parliament on its behalf. The duties of these ministersincludes bringing forward policy submissions to Cabinet involvingthe Crown corporation, signing off on its annual corporate plan, andliaising with other ministers on the Crown's behalf.Responsible ministers play some role in the appointment of directors,chairs, and presidents of Crowns, but the effective power concerningthese items rests at the centre - with the Prime Minister, his office,and the Privy Council Office (PCO). They maintain the control fileson Order-in-Council appointments. The PMO, in particular, buildsand maintains the list of potential appointees and the Prime Ministerhimself exercises ultimate authority over significant appointments,especially those of the chairs and presidents of major Crowns.The other principal government player is the Treasury Board, asmall group of senior ministers. Its secretariat, together with thePCO, provides advice on Crown governance and other policyquestions which may have widespread impact on Crowns ingeneral. Crown corporation annual plans and capital budgets arevetted by the Board.The result is a somewhat diffused power structure on theshareholder side of the ledger which often frustrates many of theprincipal players. While they tend to spend surprisingly little timeoverseeing Crowns assigned to them, responsible ministers expressfrustration at what, from their vantage point, seems an unevenapplication of the principle of Crown independence, or the armslengthrelationship. In practice, many ministers interpret therelationship to mean that they are prohibited from exercising anydirect influence over a Crown's day-to-day operations - but they areheld personally and politically accountable whenever thoseoperations derail.Based on our interviews, there seems, in fact, to be little in the wayof agreed standards of engagement between Crowns and theirministers. As a general rule, the relationship flows from a very broadshared sense of purpose and direction through an informal, butpersonalized, working arrangement. In the best situations, ministersare kept well informed of Crowns' activities and given an adequate"heads up" - and at least an unofficial opportunity at influence -when issues arise that could have political consequences. At theother end of the spectrum, one finds ministers with little apparentinterest in their assigned Crowns and corporations who, for theirpart, act as if the less contact and informationsharing with theirminister, the better.One would like to believe there could be a better, more consistent,basis for this relationship between ministers and the Crowncorporations for which they are responsible, based on mutualacceptance of certain principles.The concept of an arms-length Crown corporation is an attempt tobalance the need for a public policy initiative against the need - foreither competitive commercial or sensitive editorial reasons for

PUBLIC POLICY FORUM PROTECTING THE SHAREHOLDER 29 PUBLIC POLICY FORUM PROTECTING THE SHAREHOLDER 30operating independently and with freedom from the vagaries ofexcessive political interference. Such freedom and independenceof operation would seem to imply that responsibility for providingbroad policy direction to a Crown corporation rests squarely withthe government which should be held accountable - to Parliamentand ultimately to the Canadian public - for it. This responsibilityshould embrace not only the legislative mandate provided to aCrown, but also the strategies and priorities pursued by the Crownin interpreting that mandate.On the other hand, managerial accountability should rest with theboard of directors and senior management of the Crown agency. Adesignated minister may be the vehicle for reporting to Parliamenton such matters, but the Crown board members and managementshould speak for themselves - and be judged for themselves - beforeParliamentary committees and by interested stakeholders. Thismanagerial responsibility includes financial administration and thespecific programs and activities developed by the Crown pursuantto its legislated mandate and strategies as agreed with thegovernment.Both political and managerial accountability function best whenthere is a frank and open dialogue between the Crown agency andthe government through its responsible minister. Ministers do nothave a right to interfere in the day-to-day operations of a Crown, butthey do have a right not to be politically blindsided by theseoperations.This relationship between the responsible ministers and Crowncorporation(s) reporting to them has taken on an added dimensionwith the current development of the concept of PortfolioManagement. This approach suggests that all of the structures withina minister's assigned area of responsibility - not just the formaldepartment but once-removed Special Operating Agencies (SOAs)and even Crowns - should be coordinated as an integrated wholefor policy planning and priority purposes.If the basic principles of responsibility and accountability as set outabove are clearly understood and respected, there is no reason whyCrowns cannot actively participate in portfolio management. Indeed,it would seem logical that Crowns themselves could benefit from aclear understanding of the broad over-arching policy directionsbeing pursued by their ministers across their portfolios. At the sametime, the process of developing and communicating these directionscould benefit from having the perspective and expertise of a Crownagency. But such participation in portfolio management need notthreaten the ultimate arms length managerial independence ofCrowns.Portfolio management also helps bring into focus the role of theresponsible minister's deputy minister in the relationship withvarious Crowns. The deputy minister is not a gate keeper or a filterin a Crown's relationship with its responsible minister. Crown chairsand senior management have, or should have, direct access to theirrespective ministers. But as the ministers most senior adviser onvirtually all matters within the minister’s portfolio, the deputyshould be informed of and consulted on important issues being putbefore the minister. The result may be differences in the adviceoffered the minister, but these differences will reflect the particularperspectives inherent in each of their roles - and will not necessarilybe the result of unproductive jealousies or simple turf battles.To sum up this complex relationship, Crown corporations are bydefinition closely-held corporations and their dominant shareholder- the government - rightfully should provide strong policy andstrategic direction. What is required are Crown boards of directorswith sufficient competence, authority, and arms-lengthindependence to translate that broad direction into effective andefficiently managed operating plans and programs.The Appointment ProcessOne place to improve Crown corporation governance is the processthrough which directors are appointed to serve on Crown boards.The issue is not whether the government should exercise the rightto appoint individuals to these boards. Appointment of directors isa fundamental shareholder prerogative whether corporations arepublic or private, widely or closely held. (The procedure adoptedin recent years of having appointees to significant federal Crowncorporations examined by the appropriate Parliamentary committee,

PUBLIC POLICY FORUM PROTECTING THE SHAREHOLDER 31 PUBLIC POLICY FORUM PROTECTING THE SHAREHOLDER 32should the committee so desire, is a vetting process, be it after-thefact,that one does not find elsewhere).Nor is the real issue the political affiliation of individuals appointedto Crown boards. The management of most Crowns say they find ituseful to have directors who understand and share the directionsand priorities of the government shareholder and who can, whencalled upon, contact senior decision makers and influencers withinthe political structure. It is the experience of most Crown agenciesthat excessive partisanship is left at the boardroom door.However, we did find general agreement on four changes that shouldbe made to the current appointment process.1. Competence and relevant experience must be the overridingcriteria for appointments to Crown corporationboards.There would seem to be a relatively straightforward processavailable to address this requirement. Crown boards shouldcommunicate to their responsible ministers (and evendirectly to the PMO Appointments Secretariat) the areas ofexpertise lacking on the existing board.In fact, Treasury Board guidelines already stipulate that"the chair, on behalf of the board, should advise theappropriate minister ... on the mix of skills ... that shouldbe sought in filling upcoming vacancies." 16 Some boardscurrently do this, but many do not. The chairs of mostCrown corporations lament the lack of weight given to theirviews (and those of their board) by those responsible formaking appointments.There is no inherent contradiction between competenceand political partisanship. But appointment to a Crownboard requires that, in addition to party affiliation,candidates for these positions have extensive knowledgeof the sector involved and some experience in thegovernance of private institutions of comparable size andcomplexity.2. Governments need to ensure that Crown corporationboards have reasonable continuity in membership.It is generally accepted within private corporations that ittakes at least 12-18 months for a new director to becomesufficiently well briefed to make a significant contributionto board deliberations. There is no reason to believe thatbecoming a fully-contributing director of a Crowncorporation is any less challenging or time-consuming.Unfortunately, this reality too often rubs against twocontrary features of the Crown director appointmentprocess. First, most appointees to a crown board serve forone three year term. Private corporation directors normallyare elected annually, but currently in Canada they serve anaverage of eight years or more. As a result, they have areasonable amount of stability. Second, with governmentsin power, there is an inevitable desire to share the rewardsof office (board appointments even with minimalremuneration being seen as one of those rewards) amongas many as possible supporters and Canadians deemeddeserving. When these two factors take control of theappointments process, the result is a revolving door ofshort-term appointees who, just as they becomeknowledgeable and useful to the corporations, are replacedby a new group of appointees who spend half or more oftheir term trying to become knowledgeable and useful.If shareholder-governments want Crown boards that canguide strategy and provide effective managerialstewardship, some care and planning needs to be exercisedto ensure that Crown boards at any given time have at leasta nucleus of seasoned directors who can provide someinstitutional knowledge and experience.16Corporate Governance in Crown Corporations and Other Public Enterprises:Guidelines, op. Cit. P. 14

PUBLIC POLICY FORUM PROTECTING THE SHAREHOLDER 33 PUBLIC POLICY FORUM PROTECTING THE SHAREHOLDER 34Care and planning is also needed to stage the terms ofappointments to Crown boards to avoid a wholesaleexpiration of appointments within a short period of time.In 1998, for example, the terms of more than half of theCBC's directors expired within a six-month period, leadingto a relatively wholesale change within a short period.Appointments of various terms -two, three, four, even fiveyears - spread over a Crown board would allowappointment makers to avoid such needless disruption ofan institution's governance.Finally, governments often simply take too long - manymonths is not uncommon - to fill Crown board vacancies.The growing practice of allowing directors whose termshave expired to remain on until they are replaced is a lessthan-idealresponse to the problem. The reduction in thesize of Crown boards as part of recent governmentdownsizing is an exacerbating factor in this regard. Expirydates of Crown board directors are known well in advance;there really is no excuse for the almost lackadaisicalapproach to decisions on Crown board re-appointments orreplacements.3. Appointees to Crown boards need to know thegovernment's expectations of them, when they are firstappointed, and at regular intervals after that.One of the stranger features of the current process forappointing Crown directors is the virtually completeabsence of any direction or guidance from the shareholderto the shareholder's appointed representative.Appointments normally come with a polite complimentarynote from the responsible minister or even the PrimeMinister. These notes give no hint as to what thegovernment expects of its new directors or even of theCrown to whose board the individuals have just beenappointed. Directors then serve out their terms withperhaps an occasional board luncheon with the responsibleminister, but they are left largely to rely on the media andthe rumour mill to learn whether the government is pleased- or not so pleased - with what the Crown in question isdoing under the guidance of these directors.The literature of corporate governance generally identifiesthe preservation and enhancement of "shareholder value"as the over-riding mission of private corporations and theirdirectors. With privately-held companies, especially publicly-tradedones, shareholder value can be defined in fairlyfinite terms - through asset size, equity value, dividendyields, etc. Such measurements become somewhat morecomplex, however, for a Crown corporation mandated toachieve both commercial and noncommercial objectives.That being the case, it would seem reasonable for agovernment-shareholder to provide its chosen Crown boardappointees with an appointment letter setting forth thepriorities for the corporation in question and itsexpectations of its directors. Furthermore, it is alsoreasonable to develop a process to provide continuouslyupdated input from the shareholder to its board nominees.4. Compensation paid Crown corporation directors deservesreview in regard to these appointments.There does not seem to be any shortage of candidates forCrown boards - on the contrary, potential candidates arelined up outside every minister's door. However, there is asubstantial problem in attracting high quality candidateswith the appropriate skills and experience.The current compensation structure compounds thedifficulty. Current per diems are too low to attract highquality talent, yet just high enough to be attractive to somewho would like to supplement their incomes.Our interviews indicated that most appointees see theirwork on Crown boards more as a public service than asource of personal compensation. But one has to askwhether current directors' fees that, in most cases, are afraction of those paid to private corporation directors - andless than the government pays middle-ranking consultants

PUBLIC POLICY FORUM PROTECTING THE SHAREHOLDER 35 PUBLIC POLICY FORUM PROTECTING THE SHAREHOLDER 36- are not an encouragement to appoint individuals of alower calibre than their Crown corporations need andshould expect.In resolving this dilemma, two seemingly opposite optionsrecommended themselves. One option would be to positionCrown board membership as a "public service" for whichonly expenses would be remunerated. The other optionwould be to recognize Crown board membership as anonerous and important responsibility and to realign thecompensation much more closely to that offered tomembers of private boards.The Role of the chairOne way in which the dialogue between government and its Crowndirectors could be improved would be to clarify the role of boardchairs. Most Crown corporations now have independentnonexecutive chairs. This is in keeping with current trends (some65 percent of Canadian corporations now have independent chairs)and governance guidelines in the private sector. There are, however,some notable exceptions (the Liquor Control Board of Ontario is onewithin our surveyed group) which currently do not meet thiscriterion.If the trend among Crown corporations is clearly towardsindependent chairs, the role and mandate of that position, especiallyin regard to the shareholder, is anything but clear. Indeed it is onlya mild exaggeration to suggest that current practices in this regardare determined more by personalities and ministerial whim than byany established practice.If we can discern any consistent theme at work here, it is thatresponsible ministers are comfortable dealing with Crown chairswho are former senior politicians or personal appointees; they areless likely to establish a close relationship with chairs not drawnfrom either of those categories. An illustration of this would be amajor Crown corporation where the then minister dealt almostexclusively with the president only to be succeeded by a ministerwhose principal contact became the appointed chair of thecorporation, a former ministerial colleague. In another case, aminister appointed a neighbour and personal supporter as chair, -and worked closely with him. The succeeding minister, lacking anysuch personal ties to the chair, preferred to deal principally withthe corporation president.Personalities matter in these relationships as they do in all othersand one is not going to eliminate that factor from having its inevitableimpact. Nor would it be good governance to attempt to lay downabsolute rules which, for example, would limit unduly the ability ofsenior Crown corporation management, especially the president, fromdealing with government ministers and officials as circumstancesrequire. (These who-deals-with-whom issues, by the way, arecomplicated by the current practice of having Crown presidentsappointed by the government itself, a subject we will turn to shortly).The more realistic question is whether, as a matter of governanceprinciple, the system would benefit from a policy and understandingthat clearly identifies the chair of a Crown board as the principalliaison between the government/shareholder and its appointeddirectors.The analogy to be drawn from the private sector in this respect islimited. While the trend there is toward independent chairs, theirrole in shareholder relations generally is subsidiary to that of thechief executive officer. In this case, however, the emphasis inshareholder relations is to ensure that major institutional investors,sectoral analysts, etc., understand not only the corporation's strategicdirection, but also its operating results and prospects, subject areasgenerally deemed to be better addressed by senior management thanby board chairs.Day-to-day relations between Crowns and their shareholders alsoinvolve numerous exchanges over operating questions andinformation best dealt with by senior management. But, as notedearlier, the more important communications gap in theserelationships tends to be with the shareholder's broader, morestrategic wishes and expectations, a subject which can properly beaddressed by the chair on behalf of the board.It probably would be useful if that role and mandate for Crownchairs were enunciated and observed by government shareholders.

PUBLIC POLICY FORUM PROTECTING THE SHAREHOLDER 37 PUBLIC POLICY FORUM PROTECTING THE SHAREHOLDER 38The Appointment of the presidentGovernance relations and accountability between governments andtheir Crowns is complicated by one practice which is perhaps the mostimportant differentiator between Crown corporations and most privatecorporations with independent boards of directors. That is the insistenceon the part of governments of retaining for themselves the right tohire, fire, and compensate Crown corporation presidents with minimalinput from the corporation's board of directors.Ask the director of a major Canadian corporation what are the criticalroles played by him or her and fellow board members and the answeralmost certainly, besides contributing to the strategic planning process,will be the board's exercise of its responsibilities in the area of seniorhuman resource management, especially the hiring, occasional dismissal,compensation, and succession planning of the chief executive officer.The record of Crown boards in the selection and appointment of theCEO is spotty. Some have been active, others not. None has been consistent.In general, the right to appoint the president or chief executive officeris a jealously guarded prerogative of the government - for all intentsand purposes the Prime Minister or Premier. With few exceptions thecompensation of these individuals is also set by Order-in-Council aspart of a broader policy covering salaries and benefits, including performancebonuses, of the most senior public servants (essentially deputyministers and agency heads).Increasingly, Crown boards are attempting to exercise some influencein this area. When the office of president is vacant or about to be vacated,some boards now volunteer their views as to the skill and experiencemix required for the position and even, on occasion, suggest a listof individuals whom the board believes fit that profile. Annual performancereviews of the president are now becoming standard procedurefor Crown boards and these are fed into the centrally-controlled compensationsystem with the board's recommendations, especially inregard to performance-related pay.Such contributions are a welcome step forward in Crowncorporation governance and should be encouraged. Unfortunately,however, it would be an over-statement to suggest that these boardinitiatives are having a pronounced effect in government decisionmaking in terms of either appointments as president orcompensation.Appointments and compensation decisions by the government withminimal effective input by Crown boards produce a number ofquestionable results.Since these appointments are seen by government as part of itsoverall management of senior public service personnel (i.e., for thesepurposes Crown corporation presidents are like "quasi-deputyministers"), decisions often seem as influenced by the overallmanagement of the executive cadré as they are by the needs of aparticular Crown corporation.• The lack of "hire, fire, and pay" power over the presidentdeprives Crown boards of the most powerful accountabilitylever exercised by private sector boards. Indeed manyCrown presidents, while paying lip service to the "valuableadvice" they receive from their boards, are quite candid inseeing that their essential accountability (and, one mightsay, their future career prospects) lies with the governmentand particularly those at the centre of it.• Crown boards, often through human resources orcompensation committees, play an active role in theappointment and compensation of senior corporate officersother than the president. Lacking any control, however,over the president's compensation package, boards are leftto accept the government's decisions in that respect as akind of glass ceiling not to be broken by salaries paid toother officers, no matter what market reality dictates intrying to recruit the most qualified individuals to thesepositions. With some Crowns, subordinates receive morein total compensation than the president.• Given the non-role of boards in appointing Crownpresidents and the government's tendency to fill thesepositions as part of the deployment of its senior executivecadre, succession planning - a key private sector board pre-

PUBLIC POLICY FORUM PROTECTING THE SHAREHOLDER 39 PUBLIC POLICY FORUM PROTECTING THE SHAREHOLDER 40occupation - is virtually nonexistent in Crown corporations.With Crown corporations, it is a self-fulfilling prophecy inthat only rarely are internal candidates seriouslyconsidered, even less appointed, to head Crowns.This is, to be sure, a controversial subject. Not surprisingly, Crownboard members interviewed for this study said they believed theyshould play a more significant role in the appointment of the chiefexecutive. And equally unsurprisingly, Crown presidents arevirtually unanimous in defending the present process andparticularly in stressing the important access and influence withthe shareholder which they believe flows directly from theindividual who appointed them.with them and perhaps where it had different priorities orexpectations. The resulting exchange between the shareholder andthe Crown - in particular its board of directors - would become akind of performance contract against which the Crown corporation,its directors, and its senior management would be held accountable.In the private sector, corporations which continually fail to meetshareholder expectations pay the price - shareholders walk withtheir investment equity or they force changes in corporatedirectorships and management. Under the present system for Crowncorporations, it is less clear what the shareholder actually expectsof a Crown and how these expectations are given expression inaccountability terms.The issue at the least deserves serious debate. There are possiblemiddle grounds. For example, the Governor-in-Council could retainthe power of final approval of a board-selected candidate forpresident - or even the right of choice from a board-developed shortlist of candidates. As for the compensation issue, it seems passingstrange that Crown boards determine and approve every dollar ofcorporation spending - except those dollars allocated to compensatethe president.Strengthening AccountabilityIn addition to the governance questions already referenced, there isat least one other aspect of the relationship between governmentsand Crown corporations where the accountability of the latter mightbe strengthened.Under most existing Crown statutes, the corporation is required tofile, with its responsible minister and Treasury Board, an annualcorporate plan outlining how it intends, financially and otherwise,to apply its declared corporate strategy to its operations during thefiscal year ahead. Under the Financial Administration Act, theminister is required to approve the plan.However, there is little discussion about these corporate plans, andthe plans themselves sometimes become more ritualistic than realin addressing the challenges and choices facing Crown corporations.One wonders if the system would not be improved if thegovernment responded to these plans, indicating where it agreed

PUBLIC POLICY FORUM PROTECTING THE SHAREHOLDER 41 PUBLIC POLICY FORUM PROTECTING THE SHAREHOLDER 42VI. Summary OfRecommendations8. Compensation for board members of Crown corporationsshould be reviewed in line with their enhancedresponsibilities.9. The role of the chair of a Crown corporation as the principalliaison person with the government shareholder, should beclarified and respected by all parties.1. Responsibility for providing POLICY direction to a Crowncorporation should rest squarely with the governmentwhich should be held accountable through the minister toParliament.2. MANAGERIAL responsibility should rest with the boardof directors and the senior management of the agency. TheCrown board and management should be directlyaccountable - to parliamentary committees and otherstakeholders - for the operation of the corporation pursuantto its mandate and policy direction.3. Competence and relevant experience must be the over-ridingcriteria for appointments to Crown corporation boards. Theapplication of current Treasury Board guidelines which callfor each board to develop skill and experience profiles forfilling vacancies should be monitored.4. Governments must pay more attention to the need forcontinuity in making appointments to Crown boards.5. Appointees to Crown boards need to know thegovernment's expectations of them. This should occur onfirst appointment and at regular intervals.6. Boards of directors of Crowns should have increasedinvolvement in the hiring, evaluation, and compensationof the CEO.7. Crown corporations' annual strategic plans, once formallyapproved by the government, should become a "de facto"performance contract against which the Crown board andmanagement will be held accountable.

PUBLIC POLICY FORUM PROTECTING THE SHAREHOLDER 43 PUBLIC POLICY FORUM PROTECTING THE SHAREHOLDER 44Appendix I: Basic InformationOn Crown Corporations StudiedAtomic Energy of Canada Ltd. (AECL)British Columbia HydroMandateTo develop, market, and manage the construction ofCANDU power reactors and MAPLE researchreactorsMissionTo generate and distribute electricity for residentialand commercial customers, largely in BritishColumbiaEmployeesover 3500 in Canada and abroadEmployees5129 regular and 690 temporaryAssets$1.04 billionAssets$9.2 billionRevenues$629.5 millionRevenues$2.4 billionKey Elements of GovernanceLegal AuthorityBoard of DirectorsChairman of the BoardThe Canada Business CorporationsAct12 membersRobert F. NixonPresident and CEO Reid Morden (retired, July 1998)Key Elements of GovernanceLegal AuthorityBoard of DirectorsChairman of the BoardPresident and CEOHydro and Power Authority Act12 members, appointed by theLieutenant-Governor-in CouncilBoard members remain "duringpleasure."One of the Directors is appointed bythe Lieutenant Governor-in-Councilto act as Chairman of the Board.Currently: Brian R.D. Smith.The Lieutenant-Governor-in-Councilappoints an executive managementcommittee composed of not morethan five directors and determinestheir compensation.Currently: Michael Costello

PUBLIC POLICY FORUM PROTECTING THE SHAREHOLDER 45 PUBLIC POLICY FORUM PROTECTING THE SHAREHOLDER 46Canadian Broadcasting Corporation (CBC)Canadian Commercial CorporationMissionTo operate public radio and television serviceTo "safeguard, enrich and strengthen the cultural,political, social and economic fabric of Canada..."MandateEmployees 94To assist in the development of trade betweenCanada and other nationsEmployees8,181 permanentAssets$250.3 millionAssets$1.7 billionRevenues$907.5 millionRevenues$1.1 billionKey Elements of GovernanceKey Elements of GovernanceLegal AuthorityBoard of DirectorsChairman of the BoardPresidentThe Canadian Broadcasting Act"Twelve directors, including theChairperson and the President, to beappointed by the Governor-in-Council"Term not to exceed five yearsAppointments made by GIC onrecommendation of appropriateminister (Canadian Heritage)Part timeAppointed by Cabinet (GIC).Currently: Guylaine SaucierChief Executive of CBCFull timeAppointed by CabinetCurrently: Perrin BeattyLegal AuthorityBoard of DirectorsChairman of the BoardPresidentThe Canadian CommercialCorporation ActMembers are appointed by theMinister with the approval of theGovernor-in-Council, with terms notexceeding three years. Requiredminimum is five members; requiredmaximum is nine members.The President acts as Chairman ofthe board.Currently: Robert G. WrightAppointed by the Governor-in-Council for a term, the length ofwhich is determined by theGovernor-in-Council.Currently: Robert G. Wright.

PUBLIC POLICY FORUM PROTECTING THE SHAREHOLDER 47 PUBLIC POLICY FORUM PROTECTING THE SHAREHOLDER 48Canada Post CorporationLiquor Control Board of Ontario (LCBO)MandateTo operate Canada's postal service on a selfsustainingbasis with a standard of service thatmeets the needs of CanadiansMandateTo regulate the production, importation,distribution, and sale of alcoholic beverages inOntarioEmployees63,000 full and part timeEmployees2,828 permanentAssets$2.73 billionAssets$2.5 billionRevenues$5.10 billionRevenues $2.01 billionKey Elements of GovernanceKey Elements of GovernanceLegal AuthorityBoard of DirectorsChairman of the BoardCanada Post Corporation Act"There shall be a board of Directors ofthe Corporation consisting of theChairman, the President and nine otherdirectors."Directors are appointed by the Minister"with the approval of the Governor-in-Council."Terms are not to exceed three years.Appointed by the Governor-in-Council.The length of the term is determinedby the Governor-in-Council.Currently: the Hon. André Ouellet, P.C.Legal AuthorityBoard of DirectorsChairman of the Boardand CEOExecutive Vice-PresidentLiquor Control Act and the LiquorLicense[?] ActCurrently nine members, appointedby the Minister through Order-in-Council for three- year terms.Andrew S. BrandtLarry C. GeePresidentAppointed by the Governor-in-Council.The length of term is determined by theGovernor-in-Council.Currently: Georges C. Clermont.

PUBLIC POLICY FORUM PROTECTING THE SHAREHOLDER 49 PUBLIC POLICY FORUM PROTECTING THE SHAREHOLDER 50Appendix II: AcknowledgementsRoyal Canadian MintMandateEmployees 500AssetsRevenuesTo mint the nation's circulation coins while offeringa wide range of specialized, high-quality coinageproducts and related services on an internationalscale$85.5 million$317.3 millionKey Elements of GovernanceLegal AuthorityBoard of DirectorsChairman of the BoardPresident and Masterof the MintThe Royal Canadian Mint ActMembers appointed by the Ministerof Public Works and GovernmentServices, with the approval of theGovernor-in-Council for three-yearterms, usually renewed for a secondterm.Appointed by the Governor-in-CouncilCurrently: Dr. José BlancoAppointed by Governor-in-CouncilCurrently: Danielle V. WetherupIn the course of the research for this study, the authors spent manyhours interviewing over 25 experts and practitioners. In addition,many others provided comments on various drafts prepared overthe course of several months. The Public Policy Forum would liketo thank the following people for their generous contribution of timeand thought.Hon. Harvie AndréFormer Cabinet ministerDiana BeattieVice-President, CorporateAffairsRoyal Canadian MintPerrin BeattyPresident, CanadianBroadcasting CorporationDebra BrownManager, Member ServicesConference Board of CanadaDavid BrownSenior Research AssociateConference Board of CanadaDr. José BlancoChairman, Royal CanadianMintAndrew S. BrandtChairman, Liquor ControlBoard of OntarioDebra L. BrownManager, Member ServicesFinancial and BusinessResearch GroupConference Board of CanadaGeorges C. ClermontPresident, Canada PostCorporationPercy DownesAppointments SecretaryPrime Minister's OfficeGeorge FleischmannPresident, Food andConsumer ProductsManufacturers of CanadaJohn FryerAssistant Deputy Minister,Crown CorporationsSecretariatProvince of British ColumbiaHon. Alfonso GaglianoMinister, Public Works andGovernment Services CanadaPeter HarderSecretary, Treasury BoardCanadaHelen HardyDirector, Crown CorporationPolicy and Information DivisionDepartment of Finance andTreasury Board of CanadaNorine HeseltonVice-President, PolicyInformation TechnologyAssociation of CanadaSen. Michael KirbySenate of CanadaKevin LynchDeputy Minister, IndustryCanadaHon. Marcel MasséPresident, Treasury Board ofCanadaPaul MigusDirector General, Portfolio andStrategic ManagementPublic Works and GovernmentServices CanadaJim MillarDirector, PersonnelAppointmentsPrivy Council OfficeReid MordenPresident, Atomic Energy ofCanada Limited(retired July '98)Michael MurphyVice-President, Stentor PolicyInc.Robert NixonChairman, Atomic Energy ofCanada LimitedFarzin NooraiDirector, BusinessDevelopmentGiffels Associates LimitedHon. André OuelletChairman, Canada PostCorporationMarnie PaikinDirector, Atomic Energy ofCanada LimitedGuylaine SaucierChairperson, CanadianBroadcasting CorporationBrian R.D. SmithChairman, British ColumbiaHydroLaura Talbot-AllanSecretary General andChief Operating OfficerCanadian Radio-televisionand TelecommunicationsCommissionGerard VeilleuxPresident, PowerCommunications Inc.Danielle V. WetherupPresident, and Master of theMintRoyal Canadian MintJohn WiersemaAssistant Auditor GeneralOffice of the Auditor Generalof Canada

PUBLIC POLICY FORUM PROTECTING THE SHAREHOLDER 51 PUBLIC POLICY FORUM PROTECTING THE SHAREHOLDER 52Appendix III: Bibliography1. Canada, Treasury Board. Corporate Governance in CrownCorporations and Other Public Enterprises: Guidelines. (Ottawa:July 1996). Treasury Board guidelines for chairs and boardmembers of Crown corporations.2. Brown, David A.H., and Debra L. Brown. Next Practices inGlobal Governance: Implications for Canadian Corporations.(Ottawa: Conference Board of Canada, 1997).3. Toronto Stock Exchange, Committee on Corporate Governancein Canada. Chair: Peter Dey. Where Were the Directors?Guidelines for Improved Corporate Governance in Canada.(Toronto: 1994).4. Canada, Treasury Board. Crown Corporations and OtherCorporate Interests of Canada, Annual Report to Parliament,President of the Treasury Board of Canada, 1996. (Ottawa: 1997)5. Thain, Donald H. and David S.R. Leighton. Making Boards Work:What Directors Must Do to Make Canadian Boards Effective.(Toronto: McGrawHill Ryerson, 1997).6. Osbaldeston, Gordon. Keeping Deputy Ministers Accountable.(Ottawa and London, Ont.: Canadian Centre for ManagementDevelopment and School of Business Administration, Universityof Western Ontario, 1988).7. Corporate Governance: Improving the Effectiveness of CrownCorporations' Boards. Conference Proceedings. (Ottawa:Department of Finance and Treasury Board Canada, October1994).Conference Board of Canada,1997)10. Brown, David, Debra Brown, and Kimberley Birbeck. CurrentAssessment and Evaluation Practices in Canadian PublicEnterprises, (Ottawa: Conference Board of Canada, July 1997).11. Brown, David, Debra Brown, and Kimberley Birbeck. A PracticalGuide to Compensating Directors and the CEO: TowardCorporate Accountability and Competitiveness, (DRAFT)(Ottawa: Conference Board of Canada, October 1997).12. Brown, David, Debra Brown, and Kimberley Birbeck. CurrentCompensation Practices in Canadian Public Enterprises,(DRAFT) (Ottawa: Conference Board of Canada, October 1997).Good survey data to compare public and private boards.13. Veilleux, Gerard. Unfinished Business: A Report on theAppointment Process to Boards of Directors of CrownCorporations, (Ottawa: Canadian Centre for ManagementDevelopment, March 1994).14. Canada, Auditor General, Crown Corporations: FulfillingResponsibilities for Governance. Report of the Auditor Generalof Canada to the House of Commons (Ottawa: 1995). Chapter 10.15. Canada, Auditor General. Crown Corporations: Accountabilityfor Performance. Report of the Auditor General of Canada to theHouse of Commons. (Ottawa: 1993). Chapter 4.16. Birbeck, Kimberley, David Brown & Michael Andrew, CurrentGovernance Practices in Canadian Public Enterprise, ( Ottawa:Conference Board of Canada, September 1996).8. Birbeck, Kimberley, David Brown, and Michael Andrews.Current Governance Practices in Canadian Public Enterprises.(Ottawa: Conference Board of Canada, 1996).9. Brown, David, Debra Brown, and Kimberley Birbeck. A PracticalGuide to Assessing and Evaluating the Board and CEO. (Ottawa:

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