Directors of Crown corporations: an introductory guide to their roles and responsibilities

What is a Crown corporation?

Crown corporations are corporations wholly owned by the Crown and most are agents of the Crown.^{Footnote 3} Each Crown corporation's enabling legislation, whether by a special Act of Parliament or by articles of incorporation under the Canada Business Corporations Act, sets out in broad terms the Crown corporation's mandate, powers and objectives. Part X of the Financial Administration Act (FAA) outlines the control and accountability framework for Crown corporations. In combination, this framework and the enabling legislation form the government's basic management structure for each Crown corporation.

Each Crown corporation is ultimately accountable, through a minister normally referred to as the responsible minister, to Parliament for the conduct of its affairs.^{Footnote 4} The minister, within the collective responsibility of Cabinet, represents the Crown. It is through the responsible minister that the Crown corporation reports to the government and to Parliament on its plans and its performance.

As an integral part of the federal government structure, Crown corporations must be sensitive to the government's broad policy objectives and priorities. These may include such policies as official languages, employment equity and, particularly in times of economic downturn, the priority of fiscal restraint.

How are Crown corporations created?

The majority of parent Crown corporations are created by Parliament through special Acts;^{Footnote 5} others have been incorporated under company legislation such as the Canada Business Corporations Act (CBCA).^{Footnote 6} The rights, privileges and powers of a Crown corporation may be prescribed or limited by its enabling legislation or by provisions of the FAA.

In order to better understand the context for the creation of a particular Crown corporation, its public policy mandate and the framework within which it operates, board members are advised to read the legislation that created it, any legislative Acts applicable to the corporation,^{Footnote 7} the corporation's general by-laws and Part X of the Financial Administration Act.

The different types of Crown corporations

Crown corporations operate in many different sectors of the economy, vary greatly in terms of relative size, often serve different public policy purposes, and place different demands on the Crown for financial support.

The FAA categorizes Crown corporations on the basis of their dependency on appropriations from Parliament for their funding. Corporations operating in commercial and frequently competitive environments are expected to earn profits and provide a return on the public's investment. These corporations are normally not dependent on government appropriations and are listed in Schedule III, Part II of the FAA. Examples include the Canadian National Railway Company and the Canada Post Corporation. Other corporations that depend in part on appropriations for operating purposes, or for equity for lending purposes, are listed in Schedule III, Part I of the FAA. Examples include the Canada Mortgage and Housing Corporation, the National Gallery of Canada, the St. Lawrence Seaway Authority and the Farm Credit Corporation.

In addition, certain other Crown corporations are not scheduled under the Financial Administration Act and are not subject to the control and accountability provisions outlined in Divisions I to IV of Part X. These corporations generally have a public policy mandate of a cultural nature and depend on appropriations from the Crown. These include the Canadian Broadcasting Corporation and the National Arts Centre Corporation. The exempt corporations follow the control and accountability regime outlined in their specific legislation and many of them have chosen to adopt a number of the key accountability provisions of Part X of the FAA.

The role of boards of directors

While many similarities exist among the roles and responsibilities of the boards of directors of all corporations, membership on the board of a federal Crown corporation presents unique challenges. These challenges result from a need for heightened sensitivity to the corporation's public policy objectives and its connection to the Crown.

Effective boards of directors are critical to the good management of corporations. In the public sector, a board of directors helps to separate ownership from day-to-day management by providing a key link between the Crown and the executive officers. A strong board of directors is essential if the corporation is to fulfil the objectives established for it.

Through the power conferred on them, boards of directors oversee the management of the businesses, activities and other affairs of the corporation.^{Footnote 8} Directors exercise their powers and fulfil their obligations by becoming familiar with the corporation and its management, by establishing the corporation's strategic direction, by monitoring performance, and by reporting to the Crown. By entrusting operational decisions to the executive officers of the corporation, directors normally do not involve themselves in day-to-day management.

Boards of directors of Crown corporations must be sensitive to the mandate of the corporation as expressed in the authorities granted to it by Parliament and to the fact that the corporation is part of the federal government. In short, boards of directors of Crown corporations oversee the corporation on the Crown's behalf by holding management accountable for the company's performance, its long-term viability and the achievement of its objectives.

The role of Parliament

Parliament has an important role with respect to Crown corporations. It legislates with respect to the creation, dissolution or privatization of a parent Crown corporation. Parliament also legislates the general governance of Crown corporations and the allocation of public funds to individual Crown corporations.

Important documents relating to the operations and the performance of each Crown corporation are tabled in both Houses of Parliament. These documents include annual reports and summaries of corporate plans and budgets. As well, the President of the Treasury Board annually tables in Parliament a consolidated report on all Crown corporations entitled Crown Corporations and Other Corporate Interests of Canada. Any report received by Parliament may be referred to the appropriate parliamentary committee.

The role of the Governor in Council

Executive authority in the Canadian government is formally vested in the Queen and delegated to the Governor General acting by and with the advice of the Queen's Privy Council. This formal executive authority is conferred by the statutes on the "Governor in Council". Under accepted constitutional practice, this Council generally functions through an informal, non-statutory committee, composed of members of "the Cabinet". The Cabinet comprises the Prime Minister and the other ministers of the Crown appointed by the Governor General to form the Government or Executive of the day. Cabinet has overall responsibility for the formulation of the government's priorities and policies.

Crown corporation annual corporate plans require Governor-in-Council (GiC) approval prior to implementation. This approval represents the Cabinet's endorsement of the responsible minister's recommendation of the particular Crown corporation's business plan.

Appointments to key positions in Crown corporations require GiC approval. In general, directors are appointed by the minister with the approval of the Governor in Council.^{Footnote 10} Officer-directors are appointed by the Governor in Council.^{Footnote 11} The GiC fixes the rate of remuneration for the directors, the chairperson, and the chief executive officer (CEO) of each parent Crown corporation. Annually, the board of directors evaluates the performance of its CEO and makes a recommendation to the minister on the rate of remuneration for the following year and on any performance compensation. The minister then forwards the recommendation to the GiC for consideration and approval.

The roles of the Prime Minister's Office and the Privy Council Office

The Prime Minister's Office (PMO) and the Privy Council Office (PCO) each have a role in GiC appointments. The PMO is actively involved with the appointment of chairpersons, CEOs and directors of Crown corporations. The PMO provides political advice to the Prime Minister on appointments to be made on his or her recommendation. Ministers consult with the PMO when developing their recommendations on GiC appointments. The PCO provides operational advice to the Prime Minister on these appointments by looking after the technical and administrative requirements. The PCO also provides advice on the classification of positions and the associated salary.

Except as otherwise provided by statute, directors are usually appointed to hold office "during pleasure" for a term specified in the instrument of appointment (normally through Orders in Council). "During pleasure" means at the discretion of the Crown.^{Footnote 12}

The role of the responsible minister

The responsible minister functions as the link between the corporation and both the Governor in Council and Parliament. By statute, or by Order in Council, the minister has the delegated responsibility to act for the Crown. It is through the minister that the Crown communicates its wishes to the corporation and the corporation is accountable to Parliament.

The major powers, duties and functions undertaken by the minister include:

• appointing or making recommendations to the GiC on the appointment of directors and auditors;
• recommending approval to the GiC of corporate plans, budgets, borrowings and payments of corporate surpluses (e.g. dividends);^{Footnote 13}
• tabling in Parliament of Crown corporation annual reports and summaries of corporate plans and budgets;^{Footnote 14}
• recommending that the GiC issue directives where necessary,^{Footnote 15} and tabling such directives in Parliament;^{Footnote 16} and
• answering questions in Parliament on matters relating to the Crown corporation.

The minister may request additional advice from his or her department on some of these matters.

The role of the Treasury Board

The Treasury Board is the statutory committee of Cabinet ministers responsible for the administration of the government's financial, human and material resources. The President of the Treasury Board is its chairperson and the Minister of Finance is a statutory member of the Board.

The Treasury Board's responsibilities vis-à-vis a Crown corporation include:

• reviewing the strategic direction of each Crown corporation as presented in its corporate plan and forwarding it to the GiC with a recommendation for approval, if appropriate;
• reviewing proposed decisions or recommendations of a financial nature made by a minister responsible for a Crown corporation;
• approving each Crown corporation's capital budget, certain transactions, and, in the case of Schedule III, Part I of the FAA corporations, their operating budgets and any amendments thereof;^{Footnote 17}
• approving budgetary appropriations to be put to a vote in Parliament;^{Footnote 18} and
• reviewing the legal framework set out in the FAA and making regulations for the general governance of Crown corporations.^{Footnote 19}

The President of the Treasury Board also tables in Parliament an annual report on all parent Crown corporations and other corporate interests of the Government of Canada, including information on compliance with tabling requirements for summaries and annual reports.^{Footnote 20}

The role of the Minister of Finance

As the government's fiscal manager, the Minister of Finance is interested in Crown corporations, their borrowing plans and their payments to the Receiver General. In carrying out these duties, the Minister of Finance may:

• recommend that the GiC make regulations governing borrowing;^{Footnote 21}
• require his recommendation for the approval of any corporate plan that proposes to borrow money;^{Footnote 22} and
• direct any payment of surplus money (e.g. dividends) held by a corporation to the Accounts of Canada, with the concurrence of the responsible minister and the GiC.^{Footnote 23}

The role of the Crown Corporations Directorate

The Crown Corporations Directorate (CCD), a joint organization of the Treasury Board Secretariat and the Department of Finance, is responsible for the control and accountability framework prescribed for Crown corporations.

The CCD advises the President of the Treasury Board and the Minister of Finance regarding broad policy issues affecting Crown corporations, including their resources and activities, their objectives and performance, and approval of Crown corporation corporate plans, budgets, funding requests and borrowing plans.

The CCD assists the corporations to abide by the requirements and the spirit of this prescribed framework by providing advice and by periodically issuing guidelines on topics such as the preparation of corporate plans.^{Footnote 24}

Other sectors of the Program Branch of the Treasury Board Secretariat monitor the activities of the "exempt" corporations in the cultural field and the museum Crown corporations.^{Footnote 25}

Responsibilities and duties

To fulfil their responsibility to manage the affairs of the company, boards of directors exercise judgement in four broad areas:

• establishing the corporation's strategic direction;
• safeguarding the corporation's resources;
• monitoring corporate performance; and
• reporting to the Crown.

The board of directors and its committees

Not all boards are identical. The Crown corporation's enabling legislation normally specifies the number of directors, the conditions governing their appointment, and the powers and duties of the board of directors.

The chairperson provides leadership and presides over the activities of the board. He or she is the formal link between the minister and the board. Normally, the chairperson and the CEO establish a practice of maintaining ongoing contact with the minister and his or her office. The CEO also serves on the board as a member and is the board's primary link with the management of the corporation.

The board may create committees to perform assigned tasks. Results of committee deliberations usually flow through to regular board meetings where they may be ratified. The requirement for and use of committees varies widely among Crown corporations. Committees commonly created by boards are executive committees and audit committees. Executive committees generally handle business that must be dealt with between board meetings.

The FAA requires that most Crown corporations establish an audit committee.^{Footnote 30} Audit is an important aspect of the FAA, Part X legislative framework for Crown corporations. Audit committees oversee the internal audits required by the legislation.^{Footnote 31} Audit committees also review and advise the board of directors on the corporation's financial statements, the annual auditor's report^{Footnote 32} and the plan and reports with respect to special examinations. Special examinations are a form of value-for-money audit on the corporation's management systems and are required at least once every five years.^{Footnote 33} The external auditor is entitled to attend all meetings of the audit committee and may also request that meetings be called. For many of the Crown corporations, the Auditor General of Canada is the annual external auditor and the special examiner.^{Footnote 34}

Other committees are established on the basis of need as perceived by the board. For example, in a number of larger Crown corporations, a compensation committee exists to deal with salary recommendations, the determination of benefits for the officers of the corporation, and to evaluate the performance of the CEO.

Board meetings

Board meetings are the main forum for board members to fulfil their responsibilities. Board members should prepare well for these meetings and actively participate in them. These meetings provide an opportunity for directors to receive information, to develop their understanding of the important issues, and to influence the decisions of the corporation.

Crown corporation board meetings are convened several times a year. For corporations that have offices across the country, board meetings may be held occasionally at these locations. The draft agenda, minutes of previous meetings and the relevant information relating to matters requiring board approval are usually sent to directors in advance. Directors may request that items be added to the agenda either before or at the meeting.

Normally, board meetings begin with a review and consideration of any outstanding matters arising from the previous meeting's minutes. Regular agenda items may include progress reports from the CEO, reports from board committees and reviews of the corporation's financial position and operating results. Other items on the agenda often relate to policy decisions, strategy, budgets, key personnel decisions and major current projects. Senior officers of the corporation are sometimes invited to these meetings to present and explain specific issues.

The chairperson will invite and lead the discussion on most agenda items. Directors are expected to speak their minds. They may seek clarification of information presented to them and may request any other information they consider appropriate to their needs. When a consensus cannot be reached, the chairperson may defer the issue or put it to a vote. A director has the prerogative to request that an item be deferred to another board meeting if additional information is needed.^{Footnote 35} If a director chooses to dissent or to abstain from a vote, he or she should ensure that the minutes record his or her position.^{Footnote 36}

Privileged communications

Thou shalt keep internal discussions confidential: other directors, management and staff expect a high degree of confidentiality about board discussions and other corporate matters. In order to allow full, open discussion, keep this in mind.^{Footnote 37}

Confidentiality is an issue of concern to boards of directors. It is customary to assume that the affairs of the corporation are deliberated in confidence and that their disclosure only follows from authorized decisions and according to agreed procedures (e.g. speeches, press releases and briefings). Sensitive information in many areas such as human resources, corporate strategy and policy could cause damage if inappropriately released to the public. The frankness of the discussions at board meetings requires that both their nature and their content be kept confidential. Colleagues are more likely to risk voicing their concerns and to pose difficult questions if they trust that the confidentiality of these discussions will be respected. Formal communication of any decisions by the board is normally the responsibility of the chairperson or the CEO.

Constraints on directors

Directors of Crown corporations must, at all times, be sensitive to potential conflict-of-interest situations. A conflict of interest could exist when a board member uses corporate property for his or her own purposes or derives a personal benefit from an impending decision of the board. If the possibility of such a situation occurs, the FAA requires that the individual board member explicitly disclose the nature and extent of his or her interest to the chairperson. Time permitting, this would normally be done in advance and in writing. Once this is done, the board member would be expected to refrain from voting on the matter under consideration.^{Footnote 38} A declaration of the disclosure should normally be entered in the minutes of a board meeting.

In addition to concerns about conflict of interest, directors of public sector corporations should ensure that any partisan political activity they may engage in does not impair the conduct of their duties as a director or the public perception of their position.

To avoid possible embarrassment for the minister and the Crown, directors are cautioned about public statements concerning their Crown corporation. Depending on the circumstances, the spokesperson for the corporation is usually the CEO, the chairperson of the board of directors or the minister. Before an individual board member acts as a spokesperson, he or she should first receive clearance from the chairperson or the board of directors.

Directive power

There are cases where the Governor in Council, acting in the national interest, can direct a Crown corporation to do something that its commercially oriented board members would not normally do. Although this prerogative is there, and it is pristine in its concept, it is rarely used.^{Footnote 39}

There are rare occasions where the Crown perceives a need to direct a corporation to perform an action deemed to be in the public interest which the corporation would not normally do in the context of its regular business.^{Footnote 40} The FAA has provided for this eventuality by including a provision allowing the minister to give a directive to the corporation. Before issuing a directive, the minister consults with the board of directors and obtains the approval of the Governor in Council. Directives are expected to be tabled in Parliament shortly after issue. Once the directive has been delivered by the minister to the board of directors, the board is charged with the responsibility of ensuring that the directive is carried out promptly and efficiently.^{Footnote 41} Because a directive is deemed to be in the best interests of the corporation, the board of directors is absolved of any potential consequences regarding compliance with it.

Extent of a director's liability

A Crown corporation operates within a certain framework, that is to say, the FAA. Every major decision that either goes beyond the corporate plan or contemplates the purchase of shares in another company has to go back to the Crown for an Order in Council. With this measure of control, the directors are much less exposed.^{Footnote 42}

Members of boards of directors are exposed to potential liabilities related to their responsibilities and obligations as outlined in their Crown corporation's enabling legislation and in other statutes.^{Footnote 43} A director of a Crown corporation is expected to exercise the care, due diligence and skill that a reasonably prudent person would in comparable circumstances. In carrying out his or her duties, each director is asked to exercise good business judgement based on common sense and his or her personal experience. Various Canadian laws place responsibility on directors of both public and private corporations to ensure that certain public goals are respected by their corporation (e.g. environmental protection, employment standards or tax deductions).

In recognition of this exposure to liability, the accountability framework set out in Part X of the FAA for federal Crown corporations provides the director of a Crown corporation with indemnification protection for the financial costs of any liability that might be realized, provided that the director:

• acted honestly and in good faith, with a view to the best interests of the Crown corporation; and
• in the case of any criminal or administrative action or proceeding enforced by a monetary penalty, believed on reasonable grounds that the conduct was lawful.^{Footnote 44}

For further information

This introductory Guide sets out basic elements of the director's role from the perspective of the Crown Corporations Directorate. Individual directors are encouraged to seek clarification of their role from their particular Crown corporation and through the following documents:

• Part X of the FAA;
• their Crown corporation's enabling legislation, charter and by-laws; and
• the materials cited in the list of references that follows this text.

Users of this Guide are reminded that its purpose is to present information of interest primarily to newly appointed directors of federal Crown corporations and that, as such, it has no official or legal sanction nor does it constitute a legal document.