The recent sponsorship scandal proves, once and for all, that the government has an enormous amount to learn about account- ability from the private sector. This whole dust-up would never have occurred if the federal government had behaved in a more business-like manner back in 2001, and appointed Charles Guité rather than Sheila Fraser as auditor general.
After all, as the folks at Arthur Andersen ably demonstrated, when managing obfuscatory transactions involving third-party accounts, it is much better to have those who designed the system of accounts do the work of invigilating them. It eliminates an important source of discomfort.
Okay, so I’m joking. But there is a serious point. Every time the govern- ment gets caught up in a scandal, it only serves to accentuate how much stricter the standards of accountability are in the public sector than in the pri- vate. As shareholders we can only dream of having the power and influ- ence that we wield as taxpayers. Most significantly, as taxpayers we have pit- bull auditors working on our side.
Some critics of Sheila Fraser have argued that she has far exceeded her mandate. It is, quite simply, not the auditor general’s job to complain about the number of Canadian passports lost every year, or to criticize the military’s environmental record. If the opposi- tion were not so incompetent, they would be the ones raising these issues.
I am much more sympathetic to Fraser. It seems to me that a genuinely independent auditor should have an antagonistic relationship with her client. I would love to see, for example, my annual shareholder’s report from the Bank of Montreal talk a bit more trash. Perhaps their auditor thought ”œBeemo” sounded dumb as a name for a bank, or that automated tellers which insist on dispensing $50 bills are supremely irritating. As a shareholder, I’d like to hear all these opinions.
Even better, I’d like to see more audi- tor’s reports in the private sector that seethe with contempt. I’d like to see reports that assume all managers are fat- cats looking for a free lunch. Perhaps even reports that are motivated by an ideological dislike of big business. Then we’d be getting into Sheila Fraser territory. Then we’d be talking accountability.
The fact that people don’t get more upset about the lax standards of accountability in the corporate world always surprises me. Part of it seems to stem from a weird sort of complacen- cy, as though marketplace competition could miraculously eliminate the prob- lem of managerial corruption, in the same way it offers food to the hungry and comfort to the afflicted.
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Some of this is based on pure naiveté, either a failure to appreciate the vast quantities of corporate money that gets funneled in boutique hotels, fussy restaurants, first-class airfare, and promotional gift-bags, or else a credu- lous acceptance of the supremely disin- genuous claim that ”œyou have to spend money to make money.” (Presumably the inventor of this slogan was think- ing about money spent on capital goods, not caviar and strippers.)
The fact is that both shareholders and taxpayers confront a very similar problem when it comes to imposing dis- cipline upon managers. It stems from the nature of bureaucratic organization; it has nothing to do with public or pri- vate ownership. On the one hand, there are enormous information asymmetries between managers and their principals (i.e. those whose interests they are sup- posed to be advancing). As a result, managers are often in a position to advance their own individual interests at the expense of the principals’.
On the other hand ”” and this is the significant complication ”” the principals often face a collective action problem when it comes to imposing effective discipline upon managers. This becomes more severe as the number of principals grows. Thus in a large, pub- licly traded corporation, with widely dis- persed ownership, it is simply not in the interest of any individual shareholder to pay too much attention to what man- agers are doing. An outlandish executive compensation package, for instance, may cost the company a lot, but the cost to any individual shareholder will be slight. Often it will not be enough to motivate that shareholder to show up at an annual meeting, much less to cast the ballot needed to throw the bums out.
The situation of taxpayers is quite similar. The sponsorship scandal, despite being a case of egregious malfeasance, cost the average Canadian less than 35 cents over the course of several years. As a result, not many of us would be willing to go beyond grousing and incur any personal costs to correct the situation.
The question, therefore, in the case of both shareholders and taxpay- ers, is how well organized the groups affected by managerial malfeasance are, and whether they have effective representatives who will fight for their interests. In this respect, there can be little doubt that far more effective institutional controls are in place in the public sector than in the private.
Real democracy, in other words, is still far more powerful than sharehold- er democracy. And every new govern- ment scandal that surfaces merely reinforces the point.
