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In the private sector, best management practices have evolved significantly over the past decade. While a number of best management practices have also been introduced for Crown corporations,—guidelines entitled Corporate Governance in Crown Corporations and Other Public Enterprises were released in 1996—the time has come to strengthen the governance of Crown corporations by proposing a series of mandatory measures applicable to Boards of Directors of all Crown corporations. Some Crown corporations have taken note and adopted several of these measures on their own initiative.
As stated in the previous chapter, directors have the responsibility under law to act in the best interests of the corporation and to exercise due care and diligence. Boards of Directors are expected to provide strategic guidance to management and oversee the activities of the corporations. To meet these expectations and maintain sound professional relationships with their respective Ministers and corporation management, they need a clear understanding of their responsibilities and accountabilities, and those of Ministers and management.
To provide effective strategic guidance, Boards need a solid understanding of their respective corporation's mandate, activities, risks, assets, and resources, as well as the government's policy orientations. This is essential for Boards to have the capacity to engage effectively with the government, if necessary, on its specific objectives for each corporation, and to fulfill the oversight role that requires accurate knowledge of their respective corporation's activities, operating environment, potential risks, and long-term viability.
Best practices dictate that, to be effective, directors must approach their work objectively and with decision-making independence. This independence helps to establish a Board's credibility and supports sound governance and effective accountability. For this reason, corporate governance best practices require that boards of directors of Crown corporations function independently from management.
Several corporations have public servants as directors on the Board. In fact, a number of statutes identify public servants as ex-officio directors. These public servants bring knowledge and expertise, help ensure the protection of public interests, and can help the board of directors to understand better the policy and the machinery of government. There is a risk, however, that their presence in some circumstances, could lead to questions about the independence of the Board, and for the individuals concerned, could give rise to situations of divided loyalty.
Although public servants who sit on boards have the same fiduciary responsibility toward the corporation as other directors and are required to act accordingly, situations could arise in which this responsibility conflicts with their duties as public servants, leading to concerns—real or perceived—as to whether the conflict is being properly handled.
Public servants might not be—or might not be perceived to be—in the same position as an independent director to perform a challenge function vis-à-vis the Minister in areas such as policy direction and approval of corporate plans. In addition, other members of the board might incorrectly perceive that directors who are also public servants speak more authoritatively as representatives of the government. The government is committed to the principle of ensuring board independence, and will only continue to have public servants on Boards of Crown corporations in a limited number of cases, when it is essential to the best interests of the government and the Crown corporation.
Measure #5The government will review the appointment of public servants as directors on the Boards of Crown corporations with a view to restricting or eliminating their participation. The government will take administrative action, and where necessary seek legislative changes, to implement this measure. |
Adequate processes, functions, and structures must be put in place to ensure that individual directors and the Board as a whole maintain an independent perspective in the governance and oversight of the corporation. One way to ensure that a Board can function independently from management is to require that different individuals perform the duties of chair of the Board of Directors and CEO of the corporation. Most Crown corporations currently have statutes or practices that respect this distinction.
Measure #6The government will enact the legislative changes required to ensure a split in the positions of CEO and chair of the Board for Crown corporations. |
The composition of boards of directors varies greatly from one Crown corporation to another given the significant differences among these organizations. Ensuring that a majority of board members are independent from management would support the realization of an independent board and thus contribute to sound governance.
Measure #7The government will require that the CEO be the sole representative of management to a Board of Directors. |
Crown corporations are public institutions subject to increasing scrutiny. In the name of greater transparency, citizens and stakeholders have pressured organizations to open the proceedings of board meetings to the public. Notwithstanding the general recognition of the value of disclosure, sensitive information related to human resources, corporate strategies, confidential commercial information, and other operations discussed in the purview of board meetings could cause damage if inappropriately released to the public. Directors could be pressured by community members and would be reluctant to voice their concerns and ask the difficult questions if they were not confident that their intervention would be protected by confidentiality. In such circumstances, the Board would not be seen and could not act as a credible independent actor in the decision-making process.
Measure #8To ensure that the Board may deliberate freely, and exercise the challenge function expected of directors, Board proceedings should remain confidential. The government will require that Boards of Directors of Crown corporations hold annual public meetings at which stakeholders could express their views and seek information about the activities of the corporations. Corporations are also encouraged to develop outreach activities to solicit input and feedback from stakeholders on an ongoing basis. |
Although the law is clear with regard to the obligation of directors, it does not provide much information as to what is expected in practice. Many new directors arrive at their first board meeting unclear as to their primary duties and role. They are uncertain about whom they represent; how far they can go in challenging management's plans and proposals; how to interface with the appropriate Minister and his/her staff; and other issues of governance related to strategic guidance and oversight. To discharge their legal obligations as directors and contribute to the good governance of the corporation, new appointees should know about their responsibilities under the FAA; the specific statutes relevant to their corporation; the expectations of government; and good practices in the organization and management of boards. This would assist new directors in understanding their legal obligations and provide them with the appropriate perspective from which to approach their duties.
Measure #9To assist the work of Board members, the government will issue to every new director, upon appointment, a guidance letter that would make explicit the expectations of the government with regard to the role and responsibilities of directors under law and in practice. The letter would also include provisions related to the values and ethics of public office holders and disclosure of conflict of interest. |
Board and Board committee charters promote effective accountability. Accountability requires clarity about what one is accountable for and to whom. Charters delineate clearly the boundaries of responsibilities and in so doing sharpen accountabilities.
Boards often establish committees to undertake substantive work in support of their broad responsibilities. The Board as a whole, however, remains accountable for any decisions made by its committees. For this reason, and in support of an effective accountability regime, it is important that each committee have a written charter clearly stating its responsibilities and authorities. A charter applicable to the Board of Directors as a whole would also set out the Board's responsibilities and the authorities that it has delegated to management.
Measure #10To strengthen the corporate governance of Crown corporations, the government will work with Boards to adopt a charter that would define clearly the roles and responsibilities of the Board. |
Governing a Crown corporation is demanding. In a challenging operating environment that straddles private and public sector spheres, the orientation and training of directors is critical to ensure good governance. Ongoing professional development is equally critical to maintain the knowledge and expertise required to understand the corporation, its business conditions, and the stakeholders with which it is dealing. The government recognizes that learning is integral to maintaining the capacity of Boards. The Privy Council Office in collaboration with the Treasury Board of Canada Secretariat currently delivers a two-day training session for new directors on public sector governance in relation to Crown corporations. Despite the success of this program, further effort is required if Boards and Board members are to improve their performance.
Measure #11To further enhance the skills and performance of Boards of Directors and building on current orientation programs, the Canada School of Public Service will establish additional training and professional development programs on public sector management and Crown corporations. |
A well-managed appraisal process would increase the effectiveness of Boards and help identify areas where training may be required or where other remedial actions must be taken. Evaluations provide a mechanism for the Board and the chair to hold each other accountable while peer assessments have an impact on the performance of individual directors and the overall effectiveness of the Board.
Measure #12Consistent with good governance practices, the government will ask Boards of Directors to establish regular assessments of their effectiveness and the contribution of individual directors as a self-development tool. The assessment of the Board as a whole will be communicated by the Chair of the Board to the appropriate Minister. |
The FAA (Part X, section 148) requires Crown corporations that fall under the Act to establish an audit committee. However, six of the nine corporations that are exempt from Part X, Divisions I through IV, do not have this requirement in their statutes. The audit committee is an indispensable element of the modern Board of Directors. On behalf of the Board, the audit committee plays a key oversight function in the areas of internal and external audit and the probity of financial statements, internal controls and risk assessment, management and mitigation. Bolstering audit committees has been a critical feature of the private sector's efforts to improve corporate governance.
Measure #13The government will require that Boards of Directors for all Crown corporations establish an audit committee.
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Given the significance of the role the audit committee plays with regard to the governance of the corporation and the oversight of corporate activities, it is imperative that it be a credible body. Credibility is ultimately established by how effectively the committee meets its responsibilities. The foundation for a credible audit committee consists of the qualifications and competencies of its members. Financial literacy and a solid understanding of the business environment in which the corporation operates should be prime features in the competencies of directors serving on the audit committee.
Measure #14All directors on the audit committee must be independent of management and have financial literacy. An individual with financial expertise must chair the activities of the committee. The government will be mindful of this requirement in the context of the selection and appointment process of directors. |
Audited financial statements are the primary mechanism through which management shares results and performance information with the owners of the corporation and other interested parties. They provide assurance to the readers that the information contained within the statements is accurate and reliable. The integrity of financial statements is critical in both the private and public sectors. To maintain the credibility of financial statements, the auditor must be independent from the management team that produced them.
Internal audit is another important component of the control system for a corporation. Internal audit allows the organization to assess its own processes and systems and identify and correct weaknesses and deficiencies. For internal audit to be credible it must also function independently of management.
Measure #15In order to enhance and protect the independence of the audit function, internal and external auditors will report directly to the audit committee. |