ARCHIVED - Review of the Governance Framework for Canada's Crown Corporations - Meeting the Expectations of Canadians

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3. The Role of Crown Corporations – Flexible and Autonomous Instruments for the Delivery of Public Policy

Crown corporations derive their raison d'être from their statutory role as instruments of public policy. A large number of them, however, operate in a business environment where they may sometimes find it challenging to manage both their commercial and public policy objectives. Academics, experts, and practitioners agree that the accountability frameworks provided by the FAA and the specific statutes under which some Crown corporations operate have, until recently, attained the balance necessary to accommodate these tensions. The government is of the view that a more consistent application of authorities provided in the FAA and a clearer accountability regime are required now to strengthen governance.

Crown corporations have been part of the Canadian public sector for close to a century. They have played a vital role in key activities such as transportation, power generation, and communications where private enterprises were unwilling or unable to provide the necessary services. With their mixture of public policy and commercial objectives, Crown corporations, such as the Canadian Broadcasting Corporation and Canada Post Corporation, play critical roles promoting the country's identity and connectedness.

3.1 A Brief History of Crown Corporations as Policy Instruments

The first federal Crown corporation—the Canadian National Railway Company—was created in 1922 out of more than 200 companies, many of them insolvent, after the government became owner of the Canadian Northern Railway Company in 1918. The Bank of Canada was created as a private company through the Bank of Canada Act in 1934 and was subsequently nationalized in 1938.

In 1981, all parties in the House of Commons supported the conversion of the Post Office Department into a Crown corporation, after numerous attempts by federal governments over the previous decade had failed to remedy unsatisfactory postal service and address operational, financial, and labour challenges. The Canadian Air Transport Security Authority became a Crown corporation in 2002 to manage several key aviation security services in Canada previously provided by airlines, airports, and others, but perceived to be inadequate after the terrorist attacks in the United States.

Over the last 20 years, federal governments have created 26 new Crown corporations. Several started as completely new organizations; others were previously subsidiaries of Crown corporations, and in some isolated cases the government acquired ownership of existing corporations. In all instances, the federal government has used, and continues to use Crown corporations to deliver public policy when the private sector, other levels of government, or federal departments and agencies cannot satisfy adequately the needs and interests of Canadians. (For a list of all current Crown corporations and the dates they were established, please see Appendix B.)

3.2 The Diversity of Crown Corporations

The current complement of Crown corporations is a diverse set of organizations.⁽⁵⁾ They range in size from fewer than five employees to more than 45,000. Their asset bases are also diverse. The corporations operate in different social and economic sectors such as transportation, agriculture, heritage and the arts, and international trade. In their respective spheres of influence these corporations advance government policy priorities and objectives. Some corporations are almost completely funded by government appropriations while others, primarily those with a commercial orientation, tend to be self-sufficient or profit-making. A few corporations receive government funding to manage and administer discrete government programs in addition to their other lines of business. Some corporations are agents of the Crown and some pay dividends. The set of corporations includes those with regulatory or quasi-regulatory authorities. Strengthening the governance and accountability regime of Crown corporations requires that we take full account of this diversity.

3.3 The Autonomy of Crown Corporations

Crown corporations are used to pursue certain public policy objectives, especially when autonomy is a key requirement. Their structure and financing allows for autonomy in the following two complementary ways:

1. in terms of independence and credibility as non-partisan, non-political providers of services, such as the promotion and development of cultural industries or the formulation and implementation of Canada's monetary policy; and
2. in terms of day-to-day operations (including the management of financial, human, and physical assets), thereby enabling the organization to respond directly to customer demands in a business environment where private sector companies would not be viable because of market size or the level of risk.

While they operate at arm's length from the government, as public institutions, Crown corporations are ultimately accountable to the government. The government has a range of instruments to influence the conduct of Crown corporations, such as amendments to the constituent Acts of corporations, directive power (see sidebar), approval of corporate plans, appointment of individuals to key positions, and approval and guarantee of the financing of corporations.

What is Directive Power? Directive power is the government's authority to intervene in the management of a Crown corporation by directing the Board of Directors to follow a particular course of action when the government believes it is in the public interest to do so. The FAA requires that the appropriate Minister consult the Board of Directors prior to issuing a directive and that once issued, the Minister table the directive with both Houses of Parliament within 15 sitting days. The directors of the corporation are required to implement the directive promptly, efficiently and with the requisite duty of care. Compliance with a directive is deemed to be in the best interests of the corporation.

Crown corporations for their part concentrate on the delivery of services and operational matters. Wholly owned by the government and subject to an annual audit, they are governed by a Board of Directors. The Board assumes responsibility for the stewardship of the organization, providing strategic direction, overseeing management performance, and holding the management to account.

3.4 The FAA and the Governance of Crown Corporations

Prior to 1984, there were 72 parent Crown corporations and 114 subsidiaries out of which 47 were scheduled in the FAA. Corporations that did not fall under the provisions of the Act followed the governance rules set out in their constituent acts, or in the Canada Business Corporations Act under which several were incorporated.

In 1984 the government adopted Part X of the FAA in order to bring a more standardized control and accountability regime to different classifications of Crown corporations. Part X features five divisions: Division I—Corporate Affairs, Division II—Directors and Officers of Crown Corporations, Division III—Financial Management and Control, Division IV—General, and Division V—Implementation of the North American Free Trade Agreement. Today, of 46 federal Crown corporations, 34 are classified under Part X of the FAA as Schedule III: Part I. Three are classified as Schedule III: Part II—the Royal Canadian Mint, Canada Post Corporation, and the Canada Development Investment Corporation. Nine are exempt from Part X, Divisions I through IV of the FAA.⁽⁶⁾

Key Distinctions between Schedule III: Part I and Part II Schedule III, Part I Crown corporations must submit annually for approval a corporate plan, capital budget and operating budget, but Schedule III, Part II Crown corporations must submit annually only a corporate plan and capital budget. Schedule III, Part II Crown corporations must include a dividend proposal in their corporate plan. The Auditor General of Canada has the right, at his/her option, to be appointed auditor of any Schedule III, Part I Crown corporation. The Governor in Council may appoint a private sector auditor for any Schedule III, Part II, unless the constituent act of the corporation names the Auditor General as the external auditor. Crown corporations not exempted from the Part X, Divisions 1 through 4 of the FAA must have a special examination. The special examiner forwards the special examination report to the Board of Directors. The special examiner of Schedule III, Part I corporations can, where he/she believes the report contains information of interest to the responsible Minister or Parliament, report that information to the Minister or Parliament. The special examiner of Schedule III, Part II corporations is limited to reporting only to the Board of Directors.

There are only a few differences between the requirements applicable to Crown corporations that fall under Part X of the FAA, Schedule III, Part I and Part II. Overall, these differences tend to give Part II corporations somewhat greater operational autonomy. The Governor in Council can move a Crown corporation from Schedule III, Part I, to Schedule III, Part II, only if the corporation

• operates in a competitive environment;
• is not ordinarily dependent on appropriations for operating purposes;
• ordinarily earns a return on equity; and
• has a reasonable expectation of paying dividends.

The nine exempt Crown corporations are subject only to their individual constituent acts although these often reflect the governance regime provided in the FAA. The most common variation from the standardized governance, control, and accountability regime in the FAA is to exclude the corporation from the obligation to submit annually a corporate plan for government approval. This measure, which applies mainly to several cultural corporations, was adopted to shield the explicit mandate assigned to the organization by Parliament against potential political interference.

Generally, corporations that enjoy greater independence also receive fewer benefits provided by the government. Crown corporations, other than the cultural organizations that are exempt from the requirements of Part X, Divisions I through IV of the FAA,⁽⁷⁾ particularly those that do not submit a corporate plan or budgets for approval, do not receive government funding or loan guarantees. They do not enjoy agent status with the associated privileges and immunities, and do not have access to centralized government services available to government departments and some Crown corporations.

There are currently 43 parent Crown corporations and three subsidiaries of Crown corporations that must report on their activities as if they were parent organizations. No single governance framework could possibly meet the requirements of all 46 corporations given the diversity of their mandates, structures, and operating environments. Though not explicitly stated in the measures to strengthen the transparency and accountability of Crown corporations in this report, implementing them would have to take into account the nature of each corporation and its status under or outside the FAA.

 

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