The Case for Selling Crown Corporations

Commentary, Crown Corporations, Graham Lane, Ian Madsen

Successful private companies benefit from having effective boards of directors. They protect the interests of shareholders – the company’s owners – by hiring and supervising top management, establishing performance standards, and setting management pay. Boards also appoint auditors to scrutinize the books, ensuring transactions and balance sheets are fairly reported.

Investors nominate directors and change corporate bylaws, improving management accountability and tying executive compensation to results. Weak corporate governance can allow companies to become dominated by managers, who may put their own interests first.

There have been substantial advances in shareholder rights, many led by ‘activist’ investors (aggressive hedge funds, private equity players and motivated institutional investors). They recognize under-performers and purchase ownership stakes to wrest control from lacklustre managers, forcing reallocation of assets to more profitable uses. They keep companies on their toes.

No such remedies exist in the slow-moving government world of Crown Corporations. Directors are political appointees, their interests aligned with the political regime of the day. Some have technical, managerial, directorial, and/or financial expertise, but the main criterion for appointment is loyalty to the political party that put them there.

With Crown corporations’ executives, compensation is not based on share price performance and stock options: there are no shares to trade. Crowns can have weak, conflicted and nebulous goals – its sole shareholder a government with political objectives. Crown executives have little risk of being fired for poor financial performance, but the best executives may look elsewhere for challenges.

Non-taxable and having access to lower-cost government debt funding, the cost of capital for, say Hydro, is lower than for private sector companies. Equity capital is, incorrectly, viewed as ‘cost-free’.  A very low rate of return on assets is the expectation. Like private investors, taxpayers deserve much better.

Crown directors and executives have low personal liability; legislation protects them from being sued by ratepayers. So, dismal returns and errors of judgment can be perpetuated indefinitely. While customers/ratepayers are milked, taxpayers’ money is locked in investments that abysmally underperform those in the stock markets. Even worse, politicians and their bureaucratic underlings actively meddle in Crown corporation strategy, reducing profitability and risking financial boondoggles (Keeyask, BiPole, Wuskwatim).

Crown corporations are inherently backward-looking, seeking to protect their political masters/owners. This is unhealthy because Crown firms (including insurance, gambling and liquor, power utilities) operate in complex industries with technological, legal, regulatory, market change and political risk. Sluggish Crowns hesitate to adapt to market changes. Taxpayers and ratepayers (customers) should not be exposed to such risks, entire ‘investments’ can be lost.

Worse than not-so-benign neglect is the empire-building and social-political goal-seeking that provincial politicians have done with various provincial power companies. Or, Ottawa’s blundering in a number of specialty state-owned firms (especially import-export and business development lending).

Politics inevitably over-rides effective Crown corporate governance, and time and time again fails to stop disastrous, costly, new so-called investments. Real accountability plus better performance for citizens and taxpayers will happen only if the Crowns are sold to private investors with real incentives to reform and re-direct failing fatally-politicized organizations. The public interest is better served through laws and regulation, not political business enterprises.