Opening Statement to the Standing Committee on Public Accounts

Governance of Crown Corporations
(Chapter 18 - December 2000 Report of the Auditor General)

Mr. Chair, I wish to thank you for the opportunity to discuss the Governance of Crown Corporations, Chapter 18 in our report of December 2000. Assistant Auditor General John Wiersema and Audit Director Rona Shaffran are here with me today.

Crown corporations form a significant part of the government. They play a key role in achieving federal public policy. There are 41 Crown corporations, employing some 70,000 people. Excluding the Bank of Canada, they manage over $65 billion in assets and over $55 billion in liabilities.

Good governance is essential to fulfilling their mandates. Our audit found that the governance of Crown corporations is weak in key areas:

• First, skills and capabilities of boards. In 1977 the government stated "Crown corporations will operate at peak efficiency only when boards of directors operate at peak efficiency." In this audit we found that boards of directors of Crown corporations need to be strengthened. Boards of directors lack key skills and capabilities they need to function effectively in their responsibilities for the affairs of the corporation. Crown corporations need to better define their requirements for director skills and capabilities and communicate them to the government. The government needs to act on those requirements.

• Second, selection of CEO. The board of directors needs to be more engaged in selecting the corporation's CEO. Without meaningful board involvement in this selection, the CEO's accountability to the board is weakened and corporate governance suffers. The government needs to move toward a model in which the board of directors leads the process of selecting the CEO for approval by the Governor in Council. The government would need to work closely with the corporation at each stage of that process - contributing selection criteria and suggesting potential candidates. This model would reinforce the CEO's accountability to the board while preserving the appointment prerogative of the Governor in Council. A board that does not yet have the capability to carry out this approach may need a transition strategy.

• Third, audit committees. An effective audit committee is crucial to a well-functioning board of directors, but only half the audit committees we examined were operating at an effective or a reasonably effective level.

• Fourth, corporate plans. The corporate plan of a Crown corporation sets out the strategic direction of the corporation and is the basis for holding it accountable. The government is required to review and approve these corporate plans. However, the government has a limited capacity to review and challenge them as a basis for approval and the government has approved many deficient corporate plans. There is also a need for a more systematic and regular review of the relevance of the mandates of Crown corporations.

Previous reports of the Auditor General have raised these issues, as have studies and reports by others, but they remain unresolved. Crown corporations themselves, through their CEOs and chairs, are calling for action, especially as other industrialized countries have moved ahead of Canada in these areas.

Our report has generated much interest from Crown corporations and many have undertaken actions in response to our recommendations. In the government's response to our report, we were very pleased that it stated that measures will be examined to address areas needing improvement. However, some time has now passed since our audit and we are encouraged that the government is taking some steps on our recommendations. It has yet to produce a formal action plan.

A formal action plan is needed to address key questions. Does the government intend to act on the skill and capability requirements of a board when selecting directors to fill upcoming vacancies? Is the government prepared to give boards a greater role in selecting the corporation's CEO? How and when will the government improve its capacity for rigorous review and challenge of corporate plans? What roles will the government play in improving the orientation and training provided to newly appointed directors?

The Public Accounts Committee may wish to ask the government to provide an action plan, including a detailed response to each of the recommendations directed at it, whether or not it agrees with the recommendation, what actions, if any, it is prepared to take, and the time frames.

We very much welcome the Public Accounts Committee's interest in these matters. Your support is key in advancing our recommendations.

Mr. Chair, this concludes my opening statement. We would be pleased to answer any questions.