PACC Committee Report

The Government Response

to the

Fifteenth Report of the

Standing Committee on Public Accounts

GOVERNMENT RESPONSE TO THE FIFTEENTH REPORT
 OF THE STANDING COMMITTEE ON PUBLIC ACCOUNTS –
GOVERNANCE OF CROWN CORPORATIONS

Background

On February 19, 2002, the Standing Committee on Public Accounts tabled its Fifteenth Report following its consideration of Chapter 18 (Governance of Crown Corporations) of the December 2000 Report of the Auditor General of Canada.

The Government appreciates the time and effort spent by Committee members in their review of the Auditor General’s December 2000 report on the governance of Crown corporations, and thanks the Committee for its report.

Federal Crown corporations are arm’s length, wholly owned corporate entities established to pursue public policy and commercial objectives.  Most Crown corporations are subject to the accountability regime set out in Part X of the Financial Administration Act. 

Boards of directors of Crown corporations are responsible for overseeing the management of their respective corporations and holding management accountable for the company’s performance.  Each Crown corporation, however, is ultimately accountable to Parliament through its minister for the conduct of its affairs.

The Government of Canada’s overarching approach to the governance of federal Crown corporations is to ensure that the accountability and control mechanisms applicable to these corporations are adequate and appropriate, given the authority and responsibility of boards of directors to manage their corporations in accordance with commercial principles, while taking into account their corporations’ public policy roles.

The Government is committed to continually strengthening its governance of Crown corporations.  Canadians can continue to expect the Government of Canada to monitor recent developments in corporate governance and to update, as appropriate, its governance of Crown corporations as new best practices emerge.

The Government of Canada has considered carefully the Report of the Standing Committee, including its ten recommendations.  It is pleased to provide the Committee with the following response that reports on past, current and planned initiatives to improve the governance of Crown corporations.

Response to the Standing Committee’s Recommendations

RECOMMENDATION 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. 

RESPONSE:

The Financial Administration Act lays out the roles, responsibilities and accountabilities of the various authorities in their relationships with Crown corporations.  Crown corporations are accountable to Parliament through assigned responsible ministers.  The Governor in Council, the Treasury Board, the Minister of Finance and the ministers responsible for Crown corporations have defined responsibilities. 

Each minister responsible for a Crown corporation determines the support that he or she requires from the deputy minister, who is the minister’s principal policy advisor, in carrying out the minister’s strategic oversight role before recommending a corporate plan for Governor-in-Council approval.  The responsible ministers and their respective deputy ministers will continue to work together to ensure that the minister receives the level of departmental support that the minister considers to be appropriate.

Several departments have portfolio groups to assist their ministers in performing the ministerial responsibilities for departments, agencies and Crown corporations in the minister’s portfolio.  The Treasury Board Secretariat works closely with these portfolio groups and has and will continue to help departments support their respective ministers in their responsibilities for Crown corporations by, among other things, providing guidance and interpretation of the Financial Administration Act and regulations.

RECOMMENDATION 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.

RESPONSE:

Under the Crown corporation governance regime, the Financial Administration Act assigns different responsibilities to various authorities.  The board of directors plays a key role in this regime.  To provide the board of directors with independent advice, the Financial Administration Act requires that the corporation be subjected to a special examination at least once every five years. 

The Financial Administration Act specifies that the board of directors must agree to the plan by which the special examiner will conduct the examination.

The special examination reports are a key tool to assist the board of directors in carrying out its fiduciary duties for overseeing the management of the businesses, activities and other affairs of the corporation.

The purpose of the special examination is to provide the board of directors with advice independent from the corporation’s management as to the adequacy of the corporation’s systems and management practices in ensuring that corporate assets are safeguarded and controlled and that the corporation’s financial, human and physical resources are managed economically, efficiently and effectively. 

Theresults of special examinations must be reported to the board of directors of the corporation.  The Financial Administration Act allows the special examiner to also submit the report to the minister responsible for the corporation, if the special examiner believes the information should be brought to the attention of the minister.

The Treasury Board Secretariat has a principal responsibility with respect to Crown corporation corporate plans and budgets of assessing, reviewing, challenging and advising on the merits of the proposed corporate business strategies and resource requirements.  The Secretariat ensures that the plans and budgets are consistent with overall government priorities and strategies.

Given that the board of directors has the fiduciary responsibility to ensure the effectiveness of the corporation’s internal management practices, the Treasury Board Secretariat should not request copies of the special examination reports.

RECOMMENDATION 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.

RESPONSE:

The Treasury Board Secretariat is responsible for reviewing and challenging the content of corporate plans submitted to the Treasury Board for recommendation to the Governor in Council for approval.  Where a parent Crown corporation indicates in a corporate plan an intention to borrow money, the Minister of Finance may require that his recommendation also be obtained before the plan is submitted to the Governor in Council for approval.

The Treasury Board Secretariat agrees that it should have the capacity to review and challenge corporate plans submitted by Crown corporations and maintains that it is capable of adequately performing these functions.

To further strengthen this capacity, the Secretariat has taken the following actions:

-         The Secretariat ensures that, at all times, experienced staff and their directors are available to provide support and guidance to any less experienced analyst.

-         Secretariat program analysts are given relevant training to help them in their review and challenge function.

-         A small, professional support group co‑ordinates knowledge management and appropriate training for Secretariat program analysts.

-         The Secretariat has established a network of program analysts responsible for Crown corporations to enable them to be in a better position to share their knowledge and experience.

-         The Secretariat works closely with its Department of Finance colleagues on issues related to Crown corporations’ corporate plans.  The Secretariat's Crown corporation policy staff is available to support and advise program analysts as appropriate.

-         The Secretariat has a Web site devoted solely to providing information, policies and guidelines on Crown corporations to assist program analysts in their work and to provide information to others.

The primary responsibility to review and challenge corporate plans rests with the responsible Minister and the Treasury Board, not with the Minister of Finance.  The Minister of Finance is responsible for the borrowing plans of Crown corporations which are closely related to the corporate plans.  Because of this, Finance officials work closely with the Treasury Board Secretariat, and the Treasury Board approval process, in their review of corporate plans.  The Department of Finance is satisfied with its capacity to adequately review the borrowing plans of Crown corporations.

RECOMMENDATION 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.

RESPONSE:

The Government agrees that it is important that audit committees be made up of members who are financially literate and who possess the necessary knowledge and experience in financial management and accounting.  The Government takes its responsibility for appointments very seriously, and strives to make appointments that meet the needs of boards of directors.  The Government is committed to keeping in mind the needs of audit committees in making appointments to boards of directors.

The Privy Council Office will continue to work with chairs of Crown corporations to ensure that board skills profiles accurately reflect the needs of boards of directors in terms of competencies so as to ensure that boards of directors have sufficient members who are financially literate and who possess the required knowledge and experience in financial management.

The development and use of board skills profiles will address concerns raised by the Auditor General that many audit committees were considered ineffective or only marginally effective and were operating below an effective level, as well as that some audit committees are lacking members who are financially literate or who possess accounting experience.

RECOMMENDATION 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.

RESPONSE:

The Privy Council Office has been providing, and continues to provide, assistance to Crown corporations in developing board skills profiles.  To date, 32 (or 82 percent) of 39 Crown corporations(one of which was established on April 1, 2002 and one of which was listed as a Crown corporation on April 26, 2002) have prepared and submitted board skills profiles.  Profiles were not requested from five Crown corporations, three of which are to be wound up, one of which is transitional in nature, and one whose board consists of only three members.

On behalf of the Government, the Privy Council Office and the Treasury Board Secretariat held a corporate governance information session for chairs of Crown corporations on June 14, 2001, which, among other things, provided chairs with information on the development of profiles and reminded chairs of their importance in assisting with the selection of suitable directors.

The Privy Council Office has also developed a guide entitled “Building a Crown Corporation Director Profile”.  This guide is a tool to assist boards in creating board and director profiles.  It was distributed to all Crown corporation chairs at the June 14, 2001, corporate governance information session, and is available through the Privy Council Office’s Web site. 

In addition, the Privy Council Office has made itself available to Crown corporation chairs and corporate secretaries and portfolio departments to provide guidance on developing board and director profiles. 

The Privy Council Office continues to work with Crown corporations to ensure that board skills profiles are developed, and will submit a progress report in this regard to the Standing Committee on Public Accounts on the completion of these profiles in the near future.

RECOMMENDATION 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.

RESPONSE:

The Government agrees that the use of skills profiles are important tools to assist the responsible Minister in appointing directors who can best serve the board to ensure it meets the demands for the overall management of the businesses, activities and other affairs of the corporation.

The government is committed to using the director profiles when filling vacancies on boards of directors.  The Prime Minister’s Director of Appointments has communicated with all ministers who have Crown corporations within their portfolios to seek their cooperation in using board skills profiles when identifying candidates to fill vacancies and in working closely with board chairs to clearly understand the appointment needs of the boards.

The chairs of Crown corporations have been informed that it is important that they maintain an effective dialogue with their responsible minister to ensure the appointment needs of the board, as set out in the board skills profile, are being met.

RECOMMENDATION 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.

RESPONSE:

The Government agrees that significant changes to policy or to the economic environment can impact on the relevance of a Crown corporation’s mandate, as can changes in many facets of our society.  However, mandate reviews carried out on a systematic or obligatory basis may not be sensitive to addressing such changes in a timely fashion. 

Maintaining a flexible approach will allow the Government to ensure that such reviews are undertaken in pace with the evolution of Canadian society and the economy.  These reviews will take into account the specific circumstances of each Crown corporation as well as the Government’s overall priorities and objectives which can be pursued through Crown corporations as instruments of public policy.  They will also be based on results from other review mechanisms which allow the Government to take regular stock of the achievement of a Crown corporation’s objectives. 

In addition, the respective House of Commons Standing Committees that receive the reports tabled in the House by the ministers responsible for individual Crown corporations are free to recommend to the Government that a mandate review be carried out, should the Committee consider it to be appropriate.

RECOMMENDATION 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.

RESPONSE:

The Prime Minister’s Office and the chair of the Crown corporation consult on the selection process to be used and the board of directors is consulted on the appointment of the chief executive officer.

Current work in the field of corporate governance indicates that there is no one ideal process for the selection and appointment of chief executive officers.  However, the government ensures that professional human resources selection techniques are employed in the selection of chief executive officers, and a wide variety of selection processes have been, and will continue to be, used. 

In many cases, the government has advertised positions in the Canada Gazette and in national newspapers, and the identification of the best qualified candidates has been done by selection committees with representation from the board of directors (usually the chair), the Prime Minister’s Office, the Privy Council Office and the responsible minister’s office. 

In other cases, the responsible minister has asked the board of directors to form a search committee, to engage an executive search firm and to bring forward names of the best qualified candidates.

In all cases, a selection process that is in the best interests of the shareholder and the corporation is employed.

With respect to the appointment of directors, chairs of Crown corporations and their boards are encouraged to establish an effective dialogue with their responsible minister with respect to the appointment needs of the board of directors, including the appointment of new directors, and are also encouraged to bring forward to their responsible minister names of potential candidates for appointment. 

The Government is ultimately accountable for the selection of the corporation’s chief executive officer and its directors, and takes very seriously its appointment responsibilities.  The Government strives to appoint qualified and competent persons, and stands behind any appointment it makes.

RECOMMENDATION 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.

RESPONSE:

The Government has taken steps to continue to strengthen the capacity of boards of directors.  Measures include the development and use of board skills profiles and the development of a training program for directors. 

The Government will continue to employ selection processes that are developed in consultation with the chairs of Crown corporations, and that are in the best interests of the shareholder and the corporation.

RECOMMENDATION 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.

RESPONSE:

The Government agrees that it would be of interest to investigate the appointments practices of other countries or jurisdictions to determine what is working well and what is not working well in these jurisdictions. 

The Government will table a report of its findings with the Standing Committee on Public Accounts on or before March 31, 2003.