PACC Committee Report

Pursuant to Standing Order 108(3)(e), the Standing Committee on Public Accounts has the honour to present its

FIFTEENTH REPORT

The Standing Committee on Public Accounts has considered Chapter 18 of the December 2000 Report of the Auditor General of Canada (Governance of Crown Corporations), and has agreed to table the following report.

INTRODUCTION AND BACKGROUND

Crown corporations are distinct legal entities wholly owned by the federal government. They operate in many sectors of the economy and their activities represent a significant portion of the government’s delivery of programs and services. Possessing greater autonomy than most other forms of governmental organizations, Crown corporations can operate more like commercial entities. At the same time, this greater freedom of action increases the likelihood of financial losses and exposure to other risks.

Corporate governance refers to the process, systems and structure of overseeing the direction and management of an organization so that it effectively carries out its mandate and achieves its objectives. Good governance can increase the effectiveness of a corporation’s performance and thereby help prevent financial losses, reduce the exposure to risk, and improve the organization’s effectiveness and efficiency. However, good governance can be quite challenging because Crown corporations often pursue multiple and occasionally conflicting operational goals such as seeking financial self‑sufficiency and fulfilling certain public policy objectives (such as the provision of essential services which may not be viable on a commercial basis).

Crown corporations are administered under the Financial Administration Act (FAA). The Act was amended in 1984 to impose a more rigorous regulatory regime and ensure a more adequate level of direction, control and accountability. These amendments sought to strike a balance between a Crown corporation’s ability to manage its own affairs and, at the same time, maintain its accountability to Parliament. A board of directors oversees the management of each corporation and holds the management responsible for its performance. Through the Crown’s chair, the board of directors is accountable to a minister who represents the government. The chair acts as the intermediary between the Crown corporation and Parliament.

Under the current legislation, the federal government retains power and influence over Crown corporations through: the appointment and remuneration of directors and chief executive officers (CEOs); directives and regulations; and approval of corporate plans and budgets. In addition to the annual audit of financial statements, the 1984 FAA amendments strengthened the internal audit function for Crown corporations and introduced a new type of value-for-money audit known as “special examinations,” which are carried out every five years. These special examinations provide the board with an independent opinion on how well the corporation is being managed.

In 2000, the Auditor General carried out an examination of the corporate governance processes of a representative group of Crown corporations. The examination revealed weaknesses in key areas of corporate governance and the need for further improvement to ensure the successful implementation of the Financial Administration Act and the quality of Crown governance.

Given its interest in promoting good governance in federal institutions and organizations, the Committee met on 4 October 2001 to consider the findings of the audit report. Mrs. Sheila Fraser (Auditor General of Canada), Mr. John Wiersema (Assistant Auditor General) and Mrs. Rona Shaffran (Director, Audit Operations) represented the Office of the Auditor General of Canada. Mr. Ron Bilodeau (Associate Secretary to the Cabinet and Deputy Clerk of the Privy Council) represented the Privy Council Office. Mr. Ralph Heintzman (Assistant Secretary, Service and Innovation Sector) and Ms. Helen Hardy (Director, Crown Corporation Policy and Information Division) represented the Treasury Board Secretariat.

OBSERVATIONS AND RECOMMENDATIONS

Strengthening the review of corporate plans

The government’s performance in reviewing and challenging corporate plans attracted the Committee’s attention. These plans are considered to be the cornerstone of the control and accountability framework of Crown corporations. Under the FAA, the government, through central agencies and sponsoring departments, is required to review the corporate plan before approving it to ensure that each Crown corporation’s strategy maximizes the achievement of its mandate.

According to the audit report, special examinations revealed that 38% of Crown corporations had significant deficiencies in corporate and strategic planning, while a further 28% of Crown corporations showed less serious problems in the same area. Such persistent weaknesses undermine the corporate plan as a basis for ensuring that performance and accountability are maximized. They also indicate that the government’s process for approving corporate plans is deficient with regard to challenging Crown corporations in achieving optimal performance.

Many Crown corporations indicated that they received little or no response from the government regarding their corporate plans.

The examination also revealed that central agencies sometimes did not fully exploit all opportunities to collect relevant information about the governance of Crown corporations.

Given their oversight responsibilities, central agencies are expected to demonstrate more assiduity in seeking the relevant information about the performance of Crown corporations. Thus the Committee proposes the following recommendations:

Recommendation No.1

That Treasury Board Secretariat assess departmental capacity to review and challenge corporate plans of their respective Crown corporations. Once the assessment is completed, that a report be prepared identifying the areas where departmental review capacity needs strengthening, describing the initiatives required to upgrade departmental systems and practices together with a timetable for implementation. That the report be tabled with the Standing Committee on Public Accounts no later than 31 March 2003.

Recommendation No. 2

That Treasury Board Secretariat, when receiving the corporate plan for review and recommendation, request from the Crown corporation a copy of the most recent Special Examination Report.

The ability of Treasury Board Secretariat and the Department of Finance to review and challenge corporate plans also requires strengthening. Their analysts often pay too little attention to major corporate strategic issues, exhibit a weak understanding of the activities of Crown corporations and the commercial environment in which they operate, and demonstrate limited skills in analyzing and interpreting financial statements. In the interest of strengthening board accountability, the Committee makes the following recommendation:

Recommendation No. 3

That Treasury Board Secretariat and the Department of Finance execute an assessment of their own capacity to review and challenge corporate plans. Once the assessment is completed, that a report be prepared identifying the areas where review capacity needs strengthening, describing the initiatives required to upgrade systems and practices together with a timetable for implementation. That the report be tabled with the Standing Committee on Public Accounts no later than 31 March 2003.

Audit committees

According to the Auditor General’s report, the key gaps in audit committee practices were attributed to the lack of financial literacy and accounting experience among the committee membership, incomplete financial oversight and review of Crown corporations, and insufficient communications between the audit committees and management.

The effectiveness of an audit committee largely depends on the financial and accounting knowledge and the management experience of its membership. Given the critical review and oversight role that audit committees play in the governance of Crown corporations, it is essential that they possess all the required capacity, knowledge and experience to effectively carry out their legislated mandates, and thus the Committee proposes the following recommendation:

Recommendation No. 4

That each Crown corporation review and amend its selection criteria and procedures for establishing the membership of its audit committee in order to ensure that all its members are financially literate and further ensure that at least one member possesses the required knowledge and experience in financial management and accounting. That an action plan together with a timetable for implementation be prepared, and that a report describing these initiatives be tabled with the Standing Committee on Public Accounts no later than 31 March 2003.

Skills and capabilities of boards

Serious weaknesses were noted with regards to the ability of boards of directors to fulfil their supervisory responsibilities over the affairs of Crown corporations. Many boards of directors lack key skills and capabilities in finance, administration and management. Because of these gaps in skills and capacity, Crown corporation boards of directors have difficulty in properly executing their duties and mandates.

Mr. Bilodeau of the Privy Council Office stated that more attention must be given to the identification of the skills and the competencies required for the membership of boards of directors. The Privy Council Office has already requested Crown corporations to update or complete skills profiles required for their boards. Although the final responsibility for appointing board directors rests with the ministers and the governor in council, these profiles are expected to provide useful information on the range of skills and capabilities required by boards of directors.

The Committee was very concerned about this and believes that Crown corporations must communicate to government their skills and capability requirements to ensure the effectiveness of their boards of directors. The Committee also believes that government must take into consideration the board skills profiles when making appointment decisions, and thus proposes the following recommendations:

Recommendation No. 5

That the Privy Council Office provide assistance to Crown corporations in developing board skills profiles and ensure that these profiles are submitted in timely fashion to the responsible minister and the Prime Minister’s Office. That the Privy Council Office prepare a progress report on the completion of board skills profiles and present the progress report to Parliament no later than 31 March 2003.

Recommendation No. 6

That the government and the responsible ministers of Crown corporations take into consideration the skills profiles of candidates when selecting and appointing board chairs and directors.

The audit reported that mandate reviews of Crown corporations tend to be carried out in a generally ad hoc manner. Significant changes in economic conditions, government policy or the responsible ministers may affect the relevance of a Crown corporation. Thus, periodic mandate assessments are needed to provide the government with useful information on whether the activities of each Crown corporation continues to fulfil a useful role in serving the needs of Canadians.

Mr. Heintzman of the Treasury Board indicated that the enabling legislation of most Crown corporations does not include provisions for statutory reviews. Mrs. Fraser told the Committee that the audit report did examine the question of mandate reviews and made two suggestions: a) set up a more systematic process to evaluate corporate mandates and, b) make this process a more formal part of the accountability framework of Crown corporations. The Committee believes that these ideas merit consideration and proposes the following recommendation:

Recommendation No. 7

That the government consider developing a formal mechanism or process that would permit a systematic review of a Crown corporation’s mandate, executed on a ten-year basis or when significant changes to government policy or to economic environment occur that impact on the relevance of the Crown corporation’s mandate. That a report on this matter be prepared to be tabled with the Standing Committee on Public Accounts no later than 31 March 2003.

Selection and appointment process of chief executive officers

The selection and appointment process of a corporation’s chief executive officer (CEO) is another area of governance requiring further strengthening. Too often, the government’s appointment decisions were based on limited input from the board of directors. The audit report recommends that the government move toward a model in which the board of directors leads the process of searching for CEO candidates for the consideration and approval by the governor in council. Such an approach would increase the Crown corporation’s contribution to the selection criteria, the identification and recommendation of potential candidates. The collaboration between the board and government would strengthen the CEO’s accountability to the board of directors while at the same time preserving the governor in council’s prerogative to appoint CEOs. A transition strategy could also be developed that would allow some Crown corporations to acquire expertise and capacity through participation in the search and selection process of CEOs. The process of selecting Crown corporation CEOs would benefit from more transparency, and efforts should be made to ensure that the appointment process enhances the accountability between the corporation’s CEO and the board of directors. Thus the Committee proposes the following recommendations:

Recommendation No. 8

That the government review and amend the process of appointing directors and chief executive officers (CEOs) to Crown corporations in order to ensure greater involvement of the Crown corporation’s board of directors in recommending potential candidates to the governor in council. That the government prepare an action plan with implementation timeframes to be tabled with the Standing Committee on Public Accounts no later than 31 March 2003.

Recommendation No. 9

That the government prepare a transitional strategy that would allow certain Crown corporation boards the opportunity to build up the required capacity to conduct effective candidate searches for recommendation to the governor in council. That the government prepare an action plan with implementation timeframes to be tabled with the Standing Committee on Public Accounts no later than 31 March 2003.

Some members were intrigued by the practices of other industrialized countries in appointing board of directors and wondered whether these could be applied to a Canadian context. The audit report provided examples of countries with alternative practices of appointing board directors. For example, when selecting directors to its state corporations, the Government of New Zealand has to ensure that the board possesses the necessary skills and ensure that appointments are consistent with the corporation’s strategic direction and requirements. Another example is found in the United Kingdom under the form of a Commissioner for Public Appointments whose objective is to manage an appointment process that will merit the confidence of the candidates and the public. Canada has also developed some alternative means of selecting board members. Two recently created Crown corporations have adopted the practice of appointing a nominating committee to identify director candidates. Such a novel approach could be considered for other Crown corporations. The Committee believes that the government should evaluate the feasibility of alternative approaches to its current appointment process, and thus proposes the following recommendation:

Recommendation No. 10

That the government evaluate the practicality of applying best practices found in other countries or jurisdictions for appointing senior officers to public sector or government-owned corporations. That the government prepare a report containing recommendations based on the best practices. That the report be tabled with the Standing Committee on Public Accounts no later than 31 March 2003.

CONCLUSION

The Committee is very interested in the state of governance of Crown corporations. Effective governance structures ensure that Crown corporations properly execute their mandates and maximize the value for taxpayers’ money. Although the management of Crown corporations has improved over the past 15 years, the Committee is concerned about certain persistent gaps in their control and accountability framework. These persistent gaps are believed to be a reflection of the appointment process. The Committee does not question the government’s prerogative to appoint chief executive officers and the membership of boards; rather, it believes that more emphasis should be put on promoting competence. There is a pressing need to ensure that each Crown corporation has a full complement of skilled and experienced board members and chief executive officers who have the ability to effectively carry out the corporation’s objectives and mandate.

Pursuant to Standing Order 109, the Committee requests that the Government table a comprehensive response to this report.

A copy of the relevant Minutes of Proceedings (Meeting Nos. 25 and 39) is tabled.

Respectfully submitted,

JOHN WILLIAMS, M.P.

Chair