Canadian Crown corporations first emerged in the 1870s and are flourishing today, with hundreds such bodies delivering services and they account for billions of dollars of revenue. Most often, the creation of semi-autonomous governmental bodies is a response to pressures that require action on the part of governments. In many of those instances governments have initiated the formalization of public-private partnerships, Crown corporations, are defined as “institution[s] with corporate form brought into existence by action of the Government[s] of Canada to serve a public function.” As such, Crown corporations reflect the values and practices of Canada’s public policies while making use of the relatively more flexible and efficient practices of the business sector. As these bodies operate within, or parallel to, governmental processes, a prescribed legal framework dictates the way governments can set Crown corporations into motion.
The initial impetus for the CBC was to help combat what many perceived as harmful and dominating American cultural incursions into Canadian territory – geographical and abstract. Second, the public broadcasting system was to fill a cultural gap left open by private media companies whose mandates had more to do with immediate financial returns than with the large-scale cultural and nation-building projects.
Government intervened into transportation by establishing the Canadian Pacific Railway (CPR), after private enterprise had assessed this epic project as too risky. Indeed, they intervened after multiple railways failed. The federal government, in establishing the CPR, employed a type of “defensive expansionism” to counteract the impact of the American empire within Canadian territories. A failure to deliver on the promise of a national rail-line would have risked the possibilities of British Columbia becoming a sovereign entity to compete with the confederated Canadian provinces or of B.C. joining with the American federation.
Although construction of the CPR took place between 1881 and 1885, the Crown corporation that oversaw this project did not become established officially until 1922. No fewer than two-hundred railway companies became insolvent prior to its establishment, which was the prompt the national government needed to intervene. Thus, the Canadian National Railway company (CNR) emerged at a time, in the early 1920s, when fear of American intervention was at a comparatively lower ebb. The creation of the CNR responded to the ineptitude and risk-adversity of private corporations as well as the enduring need of an efficient network for the transport of people and goods. In formalizing its relationship to the national government in 1919, the CNR became the first of Canada’s many official Crown corporations.
In the preceding examples, the perception of large-scale public needs justifies the presence of Crown corporations in Canada’s institutional landscape. These needs include essential services (such as a national rail-line), cultural information (reliably provided by the CBC), or, more rarely, emergency services. But defining what is an emergency service should not be abused, as this does have the potential for serious problems.
Crown corporations, and other like entities, offer governments a relatively swift and self-sufficient platform for organizing public activities and enacting public policies. Passionate politicians frustrated by a slow-moving democracy that have to adhere to old public policies are attracted to the easy way to engineer around the failing democratic structure. The imperative means that crown corporations enjoy many of the efficiencies of the private sector while still being required to adhere to modest governmental standards of transparency and fairness. Crown corporations, therefore, undergo forensic accounting procedures, as governments do, and report directly to legislative or executive branches of government. However, on most occasions, a narrow financial audit has simply not been enough to detect unethical behavior. However, this inadequate technique for distancing a company from old policy and of engineering around a slow democratic process is trending.
In essence, the quickly turning world of technology has left Democracy struggling to keep up. The management of aligning our civic duties to the exponential change we see in the world has forced the increase of small pockets of strong leadership. Strong leadership, in some places, is a term that is equivalent to dictatorship. One of the parts of the government where this outsourcing is most concerning is in the legal system. Oversight of court officers is outsourced to a private organisation call the “Law Society”. The Law Society is a group that is directed through strong leadership as opposed to a democratic decision-making organisation. In this case, democracy offers the court offices special trust and responsibility to conduct business on the behalf of the government, but also to approve a dictatorship like system to run a large portion of its governance. Unfortunately, this current system of governance is open to unfortunate abuses.
Representative government is vulnerable because, by definition, it concentrates power into the hands of a few. And unfortunately, those few are still very humanly flawed. Thus, it operates ideally when two conditions are met. First, none of the people in power are corrupt. Second, none of the people in power are incompetent, even accidentally incompetent. If either or both of these conditions prevail, representative government will be proportionally less effective. In the same vein, no citizen would knowingly vote a corrupt or incompetent person into power, unless there was something to personally gain, or they were misled. These are the ideal conditions, which are often not met.
Therefore, actual oversight of institutions is rarely done in the manner to which we aspire. We want significantly more active oversight, in order to prevent the abuses of state. This is one place where new versions of governance can actually improve outcomes.
As this is true, one place where the Democratic Quality Vector could find meaningful application is in Crown corporations and other organizations responsible to the Government. In Canada, the federal or provincial government can use an Act of Parliament or Act of a provincial legislature respectively to establish a state-owned enterprise owned by the Sovereign of Canada or the province called a Crown corporation. Such organizations are therefore shielded from constant government intervention and legislative oversight, so enjoy great freedom from direct political control that apply to normal government departments. They are created to provide a public service that the provincial or federal government deems necessary, but which is not being met by the private sector. These may include services that aren’t profitable, such as ferry or air services to remote communities in Canada. They now exist at every level, federal, provincial and municipal. Other countries have similar institutions, often called State-Owned Enterprises (SOE). They are all so omni present, that they do need systems of better oversight.
In fact, a global list of such companies shows just how influential they are in the economy of many countries. The 2018 OECD report State-Owned Enterprises and Corruption states that 22 percent of the world’s largest companies are SOEs. However, like every other institution, these face many challenges, such as poor management and low morale. Therefore, good corporate governance is extremely important to ensure there is a level playing field in the marketplace, and also that it is corruption free and supports quality public service delivery. The report analyzed data from 347 SOEs in 28 OECD countries (including Canada) and 9 non-OECD countries. In the Executive Summary, the main findings were:
- In the face of known corruption risks, SOEs generally appear less risk averse or less about to take action than private companies.
- SOEs report the greatest obstacles are the opportunistic behavior of individuals both inside and outside the SOE, as well as the perceived lack of integrity of SOEs from the public and political sector.
- SOEs with public policy goals report higher risks of corruption than SOEs that have entirely commercial goals.
- The risk of corruption is greatest in the O+G, mining, postal, energy, transportation, and logistics sectors
- Instances of corruption reported most often were at non-management or mid-level management level.
The report goes on to say “Opportunistic behavior leading to corruption may be derived from a “too public to fail” mentality in which SOEs are protected by their state ownership, their market dominant position or their involvement in the delivery of public services, and are insulated from the same threat of bankruptcy and hostile take-over that private companies face. Opportunistic behavior may also arise out of SOEs’ operations in sectors with high value and frequent transactions or within complex regulatory frameworks that, unless well-designed, can provide a smokescreen for non-compliant behavior.” Again, this shows how omni present SOE’s are, and how badly they need some sort of enhanced oversight.
In Canada, chartered companies were the precursor of Crown corporations, and the most famous chartered company was the Hudson’s Bay Company, which was founded in 1670 by royal charter of King Charles II. When the British Parliament created the new country of Canada in 1867 part of the requirement of the constitution was to create a national railway system linking all the various British Colonies. Hence the first state-owned enterprise, the transcontinental Canadian National Railway (CNR). Over the succeeding years, the CNR became a giant conglomerate that also invested in shipping, hotels, and media, spinning off famous Canadian Crown corporations such as Air Canada, the Canadian Broadcasting Corporation (CBC), Via Rail, and Marine Atlantic. Today, there are 49 federal Crown corporations and many subsidiaries, and an even larger number of provincial Crown corporations.
Collectively, they are a massive part of a nation’s economy, and as show above are more prone to corrupt activities. As they are our public property, we are responsible for their actions. Delegative democracy may be the solution to this problem.
These entities have both benefited and created challenges for governments, sometimes to the significant detriment of those governments. And despite public some resistance to Crown corporations, these semi-private institutions have significantly expanded in number, reach, and power since the 1990s.
Another criticism of these enterprises is a 2013 study of state-owned enterprises by Crisan and McKenzie. This study criticized the 50 percent government ownership criteria rule. They stated that many corporations have a government stake that is lower than 50%, so this arbitrary rule leads to incomplete lists. Subsequently, the lists may not represent the actual penetration of the government into the public sector. There may be many more SOE’s than on the typical lists. Another downside is that directors of crown corporations are political appointees. Since shares of Crown corporations cannot be traded publicly (otherwise they lose their non-tax status), executive compensation is not based on corporate norms such as stock options or share price performance. And since crown corporation executives’ pay is not pegged to performance, it is very difficult to terminate an executive based on poor performance. DQV implementation could promote a more ethical system of oversight, leading to improved performance of crown corporations.
As mentioned, Crown corporations are shielded from legislative oversight. They are not required to submit corporate plans and budgets for government approval or to undergo examination. These exemptions are designed to shield them against potential political interference, according to the Treasury Board. But these measures can backfire and shield crown corporations from necessary accountability, making them perfect targets for high level corruption or recklessness. History shows that corruption indeed exists within such organizations. In 2003 auditor general Sheila Fraser investigated the federal sponsorship program, revealing concerns that led to the Gomery Commission to conduct a public inquiry. The Gomery Report concluded that $2 million was awarded in contracts without proper bidding. This led to a number of improvements designed to increase transparency:
- Split the CEO and the chairperson of the board into two distinct positions
- Make the CEO the sole representative of management before the board
- Bar public servants from serving on the boards of Crown corporations
- Appoint the auditor general as the sole or joint internal auditor for all Crown corporations except the Bank of Canada.
- Institute new guidelines for appointing directors and CEOs that allow for greater input from the board of directors and members of Parliament
- Make several Crown corporations subject to the Access to Information Act that previously were not
Meaning that these imperfect institutions have many possible layers of dysfunction, as do private institutions. These layers of dysfunction lead to sub-par performances, and ultimately corruption. The Democratic Quality Vector can prevent that.
Corruption has also been exposed in provincial Crown corporations. In 2006, two vice-presidents of Quebec’s liquor control board were caught in a price-fixing scheme. As a result, provincial governments were forced to introduce new rules to increase transparency. In 2009, Ontario Auditor General Jim McCarter released a scathing report charging that the Ontario eHealth Crown corporation had wasted $1 billion of taxpayer’s money. Sarah Kramer was hired by eHealth chair Alan Hudson to fill the position of CEO, but she ignored normal procurement procedures and hired consultants without going through the normal screening process. The board of directors felt it had little power to critique her, however, since she had been hired by the chair. McCarter found that charges that favouritism was shown towards certain companies “without giving other firms a chance to compete were largely true.” At one point, the eHealth program branch had fewer than 30 full-time employees but an army of 300 favored consultants. Again, a terrible outcome for a public institution. Another problem that Delegative democracy could have avoided.
In 2017, Auditor General Michael Ferguson prepared a report for the Defence Construction Canada Crown corporation, recommending strong fraud prevention systems be installed. While the Auditor General did not find a case of fraud, he found that the nature of its mission means it must be alert to the potential for fraud to easily occur and go undetected under present conditions. Auditor Marise Bedard wrote “This weakness matters because no organization that safeguards public resources is immune to fraud risks,” and “If undetected, fraud can divert public funds to unrelated private interests or allow competitions to favor suppliers who provide less value for money. Moreover, a lack of measures to monitor and mitigate fraud systematically can undermine public trust”. As trust is the essential glue that holds our society together, a system that increases trust should have been installed.
In 2018, corruption in SOEsin two different countries intersected in the case of the South African Gupta brothers, involving a loan from the Canadian Crown corporation Export Development Canada (EDC) for $41 million Cdn to the Gupta brothers in order to purchase a $52 million private bombardier jet. A collections of the Gupta’s emails were leaked in 2017 and exposed years of corruption. Among these emails were ones between EDC and the Gupta brothers going back to 2014. Subsequently, the EDC has come under the spotlight for the embarrassing emails that clearly implicate the EDC. The Gupta brothers are the subject of a massive South African criminal investigation on their central role in “state capture”, the Gupta’s control of South African SOEs. This could have been avoided if there was some sort of delegative democracy in the governance of these institutions.
The Toronto Globe and Mail newspaper reported an article on March 9, 2018 entitled “Export Development Canada is the Death Star in the Canadian Economy”. EDC is a behemoth Crown corporation. They are 2nd or 3rd largest export development bank in the world. In 2016 their loans amounted to more than $100 billion and they account for 5 percent of Canada’s GDP. They are opaque and lack oversight. The Globe and Mail reported that while EDC has been subject to the Access to Information Act since 2007, there is an exemption called the Export Development Act legislation which treats as confidential any information relating to a client, along with any documentation that may have been filed during or after the due diligence process. This allows the EDC year end financials to not provide exact amounts of the loans it extends, nor to disclose the lending rate or the precise terms of the financial transaction. The Globe and Mail story notes that Bombardier was hoping to secure some part of a US $1.2 Billion South African train contract, of which the Guptas were the gatekeepers and raises questions about whether the loan for the airplane was related. At the time that Bombardier approached the EDC for the loan, the Gupta brothers were already so politically toxic that no other bank would loan them the $41 million. How then, could EDC loan the Gupta brothers $41 million when the EDC’s own regulations require due diligence to assess profiles of companies or individuals on official lists such as terrorism, corruption or sanctions. In late 2014, the time the loan was approved, the Guptas were being investigated on at least 3 counts. With a more rigorous governance process these issues could have been avoided. While the Gupta brothers loan is the latest debacle to come to light, the EDC has had numerous scandalous clients.
A number of crown corporations have since been privatized including Air Canada, Canadair, Canadian National Railway, Petro-Canada, Telesat, and many others. Governments have sold these for a combination of reasons – to reduce their federal deficit, because market failures that justified government ownership no longer existed, transparency issues, or that the private sector can turn a profit. The opponents of privatization argue that privatizing government responsibilities can be harmful in many respects. What was once a public service designed to assist the most vulnerable in society may be priced beyond the reach of those very citizens in a privately-operated organization. Many such Crown corporations were therefore never intended to turn a profit, but to provide an essential service. How they provide that service is not often measured effectively. A liquid democratic type governance may provide some version of accurate, real time measurement of these services.
Hence, for many such Crown corporations, selling them creates new social service problems. The solution may not be to privatize them, but to address the challenges they face. Where transparency is a factor, Crown corporations can improve by allowing for a greater measure of democratic accountability. Delegative democracy can help to realize much-needed reforms to Crown corporations by making the current systems of governance more participatory, and therefore more transparent, and therefore revolutionary. A Canadian Assembly of proxy voters operating in a delegative democracy system can hold the promise for a renewed relationship between governments and Crown corporations, so that the latter could become more accountable for their actions, something which should be of interest to every Canadian.
Elected representatives regularly scrutinize the actions of arm’s-length public bodies and put hard questions to the government agents responsible for their creation and service delivery. Traditionally, cabinet ministers have held responsibility for Crown corporations and staked reputations on successful performances. The close ties between ministries and Crown corporations bolsters governmental oversight of these hybrid public-private institutions. Recently some governments have not closely adhered to the principle of ministerial responsibility, which may produce negative effects in future reporting by and operations of these organizations. How should we tackle these less than ideal performances?
When seeking reforms specifically for the management of Crown corporations, reformers should ask, how can governance of these entities improve through an increase in democratic control? Delegative models of democracy will resolve the issues caused by the blurring of private and public realms that characterize Crown corporations.
How might the presence of thousands of proxy voters alter the reality and management of Crown corporations? I propose that Canada adopt a proxy voting schema that provides additional oversight of Crown corporations and helps to inform political actors about the myriad issues they must address using the principles of delegative democracy as a guidepost. Specifically, the formation of “a Canadian Assembly” can address these needs by gathering qualified proxy-voters together to question public policy as it relates to Crown corporations and to determine the scope and activities of such entities. Further, using a DQV within the organization itself will provide voting patterns that would highlight potential unethical behavior for continuous feedback.
Executives of Crown corporations may initially see the oversight processes of an internal proxy voting body as an inconvenience. However, boards of directors would still steer their proverbial ships, as long as they manage to stay on course. A Canadian Assembly would add a new layer of oversight to activities of public-private entities, one that encompasses the views of a broader range of people than current, insular, hierarchical systems allow. Essentially, they are there to ensure that ethical rules are followed. This development would strengthen democratic systems by adding more voices to civic discourse and by ensuring that semi-public institutions act in way that honours public trust.
Such a process could also enable participating delegates to speak as to whether structural changes in the management of the Crown Corporation need to be forthcoming. Labelled “structural heretics” by author J.E. Hodgetts for their opaque governance and arm’s-length distance from ministers, Crown corporations could benefit from further direct feedback on their internal structures.
Despite recent declines in voter turnout across North America, Canadians remain passionate about civic issues. Issues surrounding Crown corporations elicit particularly lively debates. Their concerns can be adequately addressed by delegative democracy and proxy voting. This will improve the relationship between government agencies and Crown corporations, thereby improving trust in public systems, and improving effectiveness of these corporations. Specifically, the proposed liquid democracy could benefit democratic institutions by providing rigorous, ongoing, and much-needed oversight.
If transferable voting shows a marked improvement in the Governance of state owned organizations, then the legal system would also seem to benefit from a modified governance structure dramatically improving entire cultures.