If there is one lesson we have learned from the governance scandals of the last few years, it is that integrity has no price, in either public- or private-sector organizations. Integrity is the ultimate guarantor of trademark value in corpo- rations, and of honest use of taxpayers’ dollars in government.
In assuring the integrity of our public and private organizations in Canada, the first thing that comes to mind is the independence of senior management and the board of directors from inappropriate pressures and representations by third parties who may have a conflict of interest.
In the United States, the Sarbanes-Oxley Act is a significant step forward in assuring board independence, and similar steps have been taken in Canada.
The new emphasis on corporate governance is apparent from a reading of corporate circulars, brochures and annual reports, which now feature lengthy references to the issue of independence. This is now taken very seriously by manage- ment, directors, shareholders and regulators alike.
Looking at Canadian Crown corporations, their independ- ence needs to be attended to, and on an urgent basis. This has emerged as a significant issue before the Gomery Commission. Crown corpora- tions came under pressure to participate in sponsorships that delivered little or no value in terms of building their brand equity. Crowns have also been suscepti- ble to political manipulation in the choice of communications agencies, as in the case of VIA Rail and its primary supplier. Crowns have even come under pressure to participate in representation- al hospitality for which they have no need, and could never justify to an inde- pendent board. I can attest to this, and have testified to it before the Gomery Commission last January.
Directors of Crown corporations are appointed by the minister to which they de facto report, and ultimately the prime minister himself. Leaving aside the issue of competence and merit in such appointments, there is the basic issue of independence. Being appointed by the minister or the prime minister is not a guarantee of independence.
While past political affiliation or service should not disqualify a prospective nominee from serving on the board of a Crown corporation, we need to ensure the independence on the boards of Crowns.
How can we ensure independ- ence? A Crown corporation deals with a number of stakeholders. In the case of the BDC, the Canadian Federation of Independent Businesses is one. The Canadian Chamber of Commerce is another. The Canadian Association of Manufacturers and Exporters is anoth- er. A number of independent organizations that are stakeholders in a Crown corporation could have a seat, or a couple of seats, on a board. Not the whole board, but for the sake of argu- ment, one-quarter or one-third of the seats could be reserved for organiza- tions that are stakeholders. That would be one way of ensuring more inde- pendence on the boards of Crowns.
In terms of the shareholder’s direct representation on the board the assumption used to be that a represen- tative from the sponsoring department was sufficient to ensure that there was some independence. But my experience with the BDC is that the prevailing political will was too overwhelming for the bureaucratic representative from the public service (in this case Industry Canada) to make a stronger case to oppose what was taking place.
There is another element that may not be applicable to all Crown corpora- tions, but it was certainly applicable in the case of the BDC. When the BDC legislation was changed in 1995 it made provision for private capital com- ing to the bank. The future growth of the BDC might have required private capital injected in the bank. It was a profitable organization, it had a man- date to be profitable, therefore it was not incompatible to have private-sector capital injected into the organization to support its future growth.
Had that occurred, there could have been seats opened on the board for private investors to ensure their interests would have been represented. In instances of Crown corporations that have a mandate to be profitable, there should be room for private sector repre- sentation on the board. So a combina- tion of stakeholder representation and a qualification process that looks at the candidates and their credentials should lead to more independence on the boards of these Crown corporations.
Looking at the integrity of the appointments process in the inde- pendence of Crown corporations, it is potentially compromised by the fact that the chairs and presi- dent-CEOs are appointed by the prime minister and the cabinet, and serve at their pleasure.
The appointment process has the inherent potential for conflict of inter- est and compromising the integrity of Crowns. The reforms that have been announced by Prime Minister Martin are definitely a step in the right direction. He is suggesting the board, not the government, establish the criteria for the candidates, or the position, and that appointment be based on merit. This is how it’s done in the private sector, usually with the help of a head-hunting firm. First, there’s a job description and then the qualifications for the candidates. It goes without saying that they look at internal as well as exter- nal candidates. The conclusion should not be that internal candidates are no longer viable in this process.
The process should come down to a short list of no more than three can- didates, the norm in the private sector, leading to an interview with the board committee.
It has also been suggested that short-listed candidates or the eventual nominee be interviewed by the rele- vant parliamentary committee. This is where we are going to find " if the public process would have candidates interviewed in front of cameras, in front of the whole world " that the result will be talented people declining the opportunity to serve.
While I would not be averse to hav- ing the parliamentary committee involved, it should be a confidential interview, as occurs with the board in a private-sector organization, because the candidate at the end of the day may decide not to accept the job, or may prefer to keep his position with his cur- rent employer, and would not want his employer to know publicly that he was seeking employment elsewhere. While the proposals from Prime Minister Mar- tin are a step in the right direction, there should be a concern for the confi- dentiality of the process, including meetings with any committees of Par- liament that would look into these appointments.
For the chairman of the board, and the directors being appointed politically, as they are now in Crown corporations, a similar process has been recommended by Prime Minister Martin, and I support that. The qualifi- cations of directors to a board have got to be looked at more closely.
In overall terms for Crown corpora- tions, and for the protection of all con- cerned, there is an issue of the appropriate separation between the shareholder, as represented by the government, and the board and management.
In the particular case of the BDC, the prime minister who appointed me, and to whom I was ultimately answer- able, spoke to me on three different occasions about a loan to the Auberge Grand-Mere in his riding, to a hotel in which he previously had an interest, adjoining a golf course he was still trying to dispose of, as it turned out.
There has since been new legisla- tion introduced putting boundaries on ministers, or the prime minister, calling heads of Crowns, and in their dealings with Crown corporations, and I suspect that it was directly relat- ed to the incidents that took place with the prime minister in the Auberge Grand-Mère file. Similar calls made by a prime minister in the future would be clearly outside the boundaries of the new legislation.
As Mr. Justice André Denis con- cluded in his judgement in the Beaudoin-v-BDC case, the executive who ultimately approved the loan without my knowledge was affected by the fact that it was the prime minister, through his constituency office, who was lobbying for this loan.
I have called for the creation of an ombudsman to look into situations such as the one I experienced. There are some initiatives being introduced now, and the latest one is the establishment of the Integrity Commission, which resembles in many respects the descrip- tion I was making of an ombudsman, someone who could hear situations sim- ilar to what I have experienced, some- one who would have the financial resources to provide support to some- one experiencing such a situation.
But where the legislation doesn’t go far enough is in not creating an inde- pendent official; rather, it creates a posi- tion that will report to a minister. Once again there is no independence from the government, so the obvious way to go would be to name an ombudsman who would be an officer of Parliament.
When you examine decisions from the ethics counsellor relative to my situation, as well as other cases, Howard Wilson’s office was quite candid in saying that the PM was ultimately the one who reviewed his recommenda- tions in situations that involved the prime minister. The ethics counsellor, as an employee of the prime minister, was in a conflict of interest himself by pro- nouncing on a potential conflict of interest involving his employer.
The ethical lapses, conflicts of interest and abuses of power under the former Chrétien government all come down to integrity in government. These public scandals have overlapped with the corporate governance scandals that followed the bursting of the tech bub- ble on the stock market in 2000. Enron and WorldCom didn’t take place in a vacuum, they occurred in an environ- ment of greed driven by the tech boom that eventually went bust.
Sarbanes-Oxley is an important improvement and it is filtering through in Canada. There are boundaries neces- sary in a relationship with the board of directors, and one of them is the inde- pendence of auditors. In the private sec- tor, it is a requirement of Sarbanes-Oxley to have the audit com- mittee establish a procedure dealing with complaints from whistleblowers.
This can be discharged with the cre- ation of an independent ombudsman. In a recent press release Tyco announced: ”œWe have…created the Office of Ombudsman, reporting direct- ly to the Audit Committee of the Board of Directors. The Ombudsman’s office is independent of functional manage- ment and it seeks the fair, timely, and impartial resolution of all compliance issues.” Now this should be food for thought for our government.
Another challenge for Crown corpo- rations is to reconcile the public- sector mandates of some Crown corpo- rations with private-sector rules, the rules of the marketplace. Take the Wheat Board, for example. It doesn’t really operate by private sector rules, it operates as a supply management monopoly. The Canadian Broadcasting Corporation has a cultural mandate, not a profit mandate, and operates with a significant billion-dollar-a-year govern- ment subsidy. But Canada Post operates in a competitive marketplace, especially in the world of couriers and deliveries. So how do we reconcile private-sector rules with public-sector mandates?
Certain Crowns have social or social/cultural mandates and they are not expected to operate at a profit, and should be subsidized for doing so. That is one set of decisions that has to be made in terms of affordability, from a governance perspective, and from a public policy point of view. Decisions have to be made on how we allocate our resources. Then there are those commercial Crown corpora- tions that in some cases compete with the private sector. Via Rail, for example, receives a subsidy, but competes with private air- lines and bus companies in the travel segment of the economy. Other Crowns, such as the BDC, operate under a public policy man- date but under market rules, and are expected to return dividends to the shareholder. And for those we need different guidelines, clearly defined in the first place.
The public policy role can include fostering competition in some cases, and the BDC example is a good one, and is still relevant in the context of future discussions with regard to bank mergers. The BDC could play an expanded role for the small business sector. If it received a clear mandate to support small business, as it does now, but with expanded powers to serve small businesses (not only for the term lending that they need, but for full-fledged banking requirements), there would be an additional financial institution available to that sector, competing with the existing players and off-setting the diminishing num- ber of banks in the event of mergers. So there are public policy issues, as well as competitive ones, around that.