Impact Podcast | Who's in the boardroom? Examining politics, expertise, and good governance

KANINA BLANCHARD (KB)

Exclusive insights, actionable strategies and ideas that ignite change. You're listening to the Ivey Impact Podcast from Ivey Business School.

JULIAN BIRKINSHAW (JB)

Hello and welcome to Dialogue with the Dean, the flagship series on the Ivey Impact podcast. I'm Julian Birkinshaw, Dean of the Ivey Business School. When we think about corporate governance, we often focus on private sector boardrooms with an emphasis on shareholder value, executive compensation, audit committees and so forth. But what about the thousands of government owned corporations that deliver essential services to millions of Canadians? Who sits on their boards? What expertise do they bring? Does it actually matter? It turns out it matters a lot. From electricity distribution to water utilities, crown corporations control assets worth billions of dollars. Yet recent research reveals challenges around employment transparency and the adoption of good practice. To help us understand what makes governance work or fail in the public sector is Guy Holburn, Professor of Business, Economics and Public Policy here at Ivey and former director of the Ivey Energy Policy and Management Centre. Guy is one of Canada's leading experts on energy policy and corporate governance, with pioneering research on how board composition affects strategy and performance in government owned utilities. He also brings a practitioner's perspective as a director of London Hydro, giving him rare insights into boardroom challenges from the inside. Guy, welcome to Dialogue with the Dean, it's great to have you here.

GUY HOLBURN (GH)

Thanks. It's great to be here.

JB

Good. So, we'll get started. Just give us a quick sort of sense of where what brought you to Ivey, the research and teaching that you've been doing over the years.

GH

So, I've had a long-standing interest in business and public policy issues and, Ivey has always had a real strength in looking at this interaction between business and, public policy. So, I did my, PhD, at a University of California in Berkeley. And, I was very lucky at that time to have, some involvements in the California Public Utilities Commission. I had a part time position there while I was studying. California was going through electricity deregulation at that time, I was doing my, research on business and public policy issues. So, I had that, firsthand view of how California was dealing with a deregulating electricity markets. They were deregulating, wholesale, retail was a big experiment and created quite a lot of challenges for policymakers and for businesses. So, that was an important part of my research and that really strengthened, my interest in how the regulated businesses deal with governments, deal with stakeholders. And so when I, finished up, I had an invitation to, come to Ivey, and, it was a great fit in the Business, Economics and Public Policy group. It's been it's been a it's been a great journey since then.

JB

Perfect. And obviously, your interests, as you say, have stayed very much in the in the energy industry, but with implications, I think, for, for regulations of different types of corporations. So we're going to start big picture in terms of a good practice in boards and regulations. And then we'll kind of dive into what perhaps the differences are between private sector corporations and public sector. So what are the essential ingredients of an effective board.

GH

So, good question. So, let's just step back and think about what are boards meant to do. So, the broad responsibility of a board of a board is to oversee a corporation, make sure it's fulfilling its mandate, it's operating efficiently and that management are doing their job. So how do boards do that? Number one, top of the list, for a board to be effective is it needs to develop that trust. And we can think about trust in different ways. We can think about that trust between the board and the management. So the board overseeing, management. So there needs to be that trust and respect between the senior executive team and the board directors. You need to have the trust, within the board, amongst the directors, that they are fulfilling their responsibilities in a competent way. And then importantly, and I think this is where it's, especially, salient for Crown corporations or government owned utilities, there needs to be that trust between the board and the shareholder. So, for Crown corporations, which are, state owned organizations here in Canada, the government is the owner of these organizations, and oftentimes it's a minister who boards are reporting to you at the local level. It could be the mayor and the council, and there needs to be in that trust, because oftentimes ministers or the bureaucrats, they don't have a deep understanding of how that organization is operating. They don't understand. They don't always have that deep understanding of the industry context. But they've delegated that authority, to the board. And so that's why I think that that trust relationship is particularly crucial.

JB

And obviously in a, in a private sector company, the fiduciary responsibility to the shareholders means that the board understands that they are accountable to the owners, which is the which is the shareholders. And there's often a debate about the extent to which that's that their primary responsibilities just purely profitability or some broader set of stakeholders. But let's focus on the crown corporations for a second, because clearly they are accountable to the ministers, because ultimately, the minister, appoints many of the members, but they're also responsible to society as whole to Canadian citizens. So, how do they think about their responsibilities in terms of their objective function? What are they trying to maximize when you're talking about the board of a Crown corporation.

GH

So, good question. So, Crown corporations or government owned entities, they need to find this mix in terms of achieving commercial objectives. And they're deliberately set up to be operating more along commercial business principles. That's the point of having a Crown corporation as opposed to being a department of government, where you've got the civil servants essentially running the organization. They're meant to be bringing in commercial practices and pursuing commercial objectives. But at the same time, it's also common for them to have public policy mandates and public policy objectives as well. So, this is the challenge for Crown corporations and boards - how to achieve both of those sets of objectives. It's not always straightforward. And so, governments will manage those in different ways. So one of the common and I think one of the best practices is for governments to establish very clear written mandates and to work these out with the organization, with the board, and to spell out, look, these are your objectives and this is how we're going to be overseeing or assessing performance on a series of well-articulated, both commercial and also policy goals.

MUSICAL BREAK

JB

So those would be set out and the, the company, obviously there's a chief executive, but then there's a board overseeing the chief executive, their responsibility, responsibilities to deliver on that mandate. And as you said, you have a range of different types of directors on these boards. And I think you've done quite a lot of academic research trying to figure out essentially, what good practice looks like, what the different sort of ways that that political appointees versus independent appointees work. Can we dig into a couple of your studies on this? I think you did a specific study on the role of elected politicians serving as directors. Do you want to just give us the findings from that?

GH

So, governments being the shareholder, have got a very important decision about whom they appoint to these boards. In the private sector it's typically a skills based approach. You need board directors with the right skills, the right background, experience in the sector who can understand how to effectively discharge their, their, their responsibilities. In the government owned setting or for crown corporations or in Ontario, we've got lots of municipally owned entities, then we've seen the number of situations or it's, sometimes common practice, say, for city councils to appoint elected politicians to boards. And so this is the case in the electricity distribution sector.

JB

And this was the specific study you did. I think you looked at essentially all of the electricity distributors in Ontario. And you I read the paper and you gave a fairly low grade to many of these distribution companies in terms of the qualities of their of the boards, is that right?

GH

So, let me back up. I've done a number of studies here because this is a very interesting context to understand. What is the impact of having political directors, on private corporation boards. So, Ontario's got particular contexts where local electricity distribution companies are established as private corporations, under the Ontario corporate businesses act. And so the shareholders which are the cities, they appoint the directors. And what we wanted to study is in the cases where city councils are appointing mayors and city councilors to the boards of these for profit corporations what is the impact on corporate strategy, corporate performance and so forth? This is a nice way to tease out some of this, political approach to corporate governance. And in Ontario, about a quarter to a third of all the directors of local distribution companies are in fact, city councilors or mayors. Whereas the other two thirds would be professional directors, businesspeople. So what I've wanted to understand is I've done this research with Adam Fremeth is to understand, well, is there a, a measurable outcome, on company strategy when you've got political directors at that board level? What we did was survey all of the directors, in Ontario, this was a number of years ago, and we're asking about views on business strategy, business growth, willingness to take risk, dividends, reinvestment and so forth. Just trying to understand all there's some statistical differences in their views. And it turns out that there are.

JB

Okay, go on. So what are the what are the differences. So for the councilors or mayors, what were their attitudes towards for example, risk taking or you know, strategy.

GH

There are a few things. We found that somethings that I think were probably what we expected. And there were some surprising things in there as well. So, when we ask, directors about the priorities of reinvesting in the business or dividends or taking out some of those profits as dividends, political directors had a very clear preference for taking out more of those profits as dividends, rather than reinvesting in the business.

JB

I guess that makes sense

GH

Of course, because politicians, they would like to have a bigger city budget then will be able to use those for social purposes. so no surprise, there. What was a little bit of surprise was, was the view on risk taking and the willingness to engage in mergers and acquisitions, different types of growth ventures into unregulated businesses. And so electricity distribution companies, of course they have their core regulated business, but a lot of them have expanded into competitive, unregulated businesses. And one of the things that we found from the survey, which was, I think, contrary to our expectations, was that on average, political directors seem to be a bit more risk loving. They were more willing to expand into some of these unregulated businesses than the professional directors with a lot of business experience.

JB

Right. So the business, the professional directors maybe were a bit more cautious, perhaps because they, they had more experience of where things go wrong. I mean, I'm making this up now…

GH

That is one potential interpretation here. In that it's easier to spot an opportunity, when you've got a growing sector, say, look, that this is great. It looks like there's good opportunity here. It's harder to assess risks. And this is where deep, business experience understanding, I think can inform the professional, directors. They say, well, actually, there's a whole set of hidden risks here. And this is why this is why we might want to be a little bit more cautious. Whereas politicians who typically don't have that business background, there are some who do, but typically they don't have that deep business experience. So, they're weighing up of opportunity versus risk is a little bit different.

MUSICAL BREAK

JB

If we kind of zoom back out a bit. So your research shows that we need to have good governance. And, and in one of your other studies, you do indeed talk about some of the lack of governance that we see in some of these. But let's just focus for a minute on, what where things go wrong because, you know, it's of course, we can agree that good governance matters. And that we should have well-functioning, trusted boards. What does bad look like? In other words, when we see governance failures, what can go wrong? How does the how does that problem manifest itself in terms of what, you know, corporate failures or, lack of supply of electricity, whatever.

GH

So we can think about outcomes in terms of performance of the organization as a whole. Well, sometimes of particular projects that a company undertakes, that's not business as usual. And they haven't necessarily adapted their governance structures to reflect those needs. So the classic example would be on mega projects.

JB

A mega project meaning like, you know, a huge new highway or a huge new oil pipeline or whatever….

GH

Mega projects are typically defined as projects, infrastructure projects costing more than $1 billion. So we can yes, we can think about highways, high speed rail. In the energy sector we can look at a major new power generation projects, as well. And this is where we've seen a number of high-profile, challenges for corporations where plan projects end up being twice as expensive, their years over schedule and so forth. And in many cases, we can trace back, those outcomes to failures in governance. But it's at a project level and so when corporations want to take on a new major project, that's not business as usual they don't always recognize that governance structures need to adapt to manage something that can be very challenging. And so even IT projects can classify this. So, you can have small or medium sized organizations and they will undertake, IT projects. It could be tens of millions of dollars. So clearly not in the mega projects range, but still something that's, different and a bit of a challenge, for corporation, because they don't do this every day of the week. And so that's where boards, need to be sensitive.

JB

And to link it to kind of the, the politics of the day, I mean clearly Canada like many other countries in the world struggle with mega projects in terms of project over uncertainty in the in this who say the developed world, U.S has these problems, Europe has these problems. I think Mark Carney’s government is trying to accelerate the development of these mega projects through the Major Projects Office. I forget exactly what it's called. Is that about speeding up the regulatory approvals? Is that about putting in place better governance? Perhaps it's about all of the above.

GH

Yeah. So, a couple of things here. So I will say that we have learned from experience. And we do have examples of good mega project outcomes.

JB

Give us one because…

GH

For example, OPG's Darlington nuclear power plant refurbishment. So Ontario Power Generation, the initiated a $12 to $13 billion refurbishment of the Darlington nuclear power station, beginning in about 2015. And at the time when they when the board made that decision to go ahead, this is after a lot of extensive study and they got approvals the budget was around 12 to $13 billion. Guess what its come in on budget pretty much on schedule. And we've even had Covid during that case.

JB

I mean that is a surprise because the rule of thumb is every one of these projects overruns.

GH

Maybe not a surprise when you look at the very deliberate governance structures that were put in place to oversee this, they were very clear about this. And Ontario Power Generation had learned from some previous challenges going back several decades, around nuclear construction. And so there was a recognition that we really need to pay attention to the governance oversight of this. And so they put this into practice, and it's actually delivered a great outcome. So we can learn from experience and it can be done well. And I think a lot of utilities now are learning from this. Just coming back to major projects office that's more around trying to coordinate different branches of government to speed up that regulatory approval process and permitting process. That can be very challenging, and also to provide some financing as well.

JB

Which is a slightly separate question than the governance of the actual project itself.

GH

That said I do think there is a role here. If you want to have good outcomes, you've got public money going into these projects. You want to be sure you've got best practice governance. So, there's a recent example I was just looking at the other day, which is the Build Canada Homes Crown Corporation Act. So the government is taking on housing as being very important part of its policy agenda. It's now got a Bill C-20 that's it's going to transform the agency into a new Crown corporation. And I was looking at the governance arrangements for that. So they're going to appoint a board and so forth. This is going to be like a Crown corporation. But I did note that the government in the legislation is proposing that the CEO, will be appointed by the government. CEO compensation will be set by the government. And this is, not in keeping with best corporate governance practice, because the government also wants to have a board there to oversee the corporation. But one of the key ways that the board keeps, the CEO and management accountable is through the hiring decision and also by setting compensation parameters. So if you take away those levers from the board, you weaken some of that accountability of the management to the board. So there's there's still opportunities to improve, these, these governance practices.

MUSICAL BREAK

JB

So, can I actually segue from that to your own experience, because you're on the board of London Hydro, I believe. Give us a sense of how this stuff plays out in practice, in terms of the actual board conversations that you have. And, you know, what are the manifestations of these sort of tensions, actually, in the boardroom.

GH

Right. So I feel very fortunate to be on the board of London Hydro as I get to experience corporate governance, which I study in practice. So it has been a great learning, venue for me. I think one of the things that I've learned on that is the importance of corporate governance. And you see these things, you see these pressures play out in the in the boardroom. The relationship with a shareholder is really key, here as well. And I just want to come back to that point about developing trust with the shareholder. Because when you've got a, a well-functioning, board, well-functioning organization, you've got good relationships, with the shareholder which, which London Hydro does. It's a very positive environment, that allows the corporation to flourish and to grow

JB

But, you know, you're obviously an independent director, on this board. And without getting into specifics, I mean, do you find yourself having to kind of challenge some of the decisions that are being proposed in order to essentially maintain the integrity of the, an independence of that of that board?

GH

So, I'll just say that I feel that we've got a very well-functioning board. We do have one, appointee of the council. So we do have a very good, councilor. Corrinne Rahman, who is on the, on the board of London Hydro. So she is one of seven directors. So every board needs that full set of skills to be effective. And so for government owned enterprises, one of the important, sets of skills is to have that policy awareness and have that political awareness in order to be able to navigate these relationships and to be clear about policy objectives. So having that on the board is incredibly valuable. What I think is different for some other boards in the sector is where you've got a majority of councilors or a majority of mayors, and I think that would lead to a different type of, conversation or a different type of oversight where you've got a majority compared to the independent directors.

JB

Got it. So, thanks for that deep dive into, you know, board behavior particularly obviously in the electricity industry, which is your, your, your favorite, your preferred industry. I want to just zoom out a little bit to, to energy, policy more, more broadly. Because, you know, Canada is a slightly unusual country at least compared to the US or the UK in terms of the extent to which the country still controls and indeed owns most of the electricity generation, distribution and retail. Coming from the UK, you obviously have a background in the UK as well. I mean, they went through a huge privatization process whereby both generation and selling of electricity, are competitive industries. Canada has for the most part avoided that. What are the what are the pros and cons of the state continuing to control the electricity industry?

GH

Yeah. It is quite a contrast. And I grew up in the 1990s and Margaret Thatcher's a bit like you Julian and I, in fact I was very lucky. I worked for one of the consulting companies, Bain and Company, in London, and one of the big projects I worked on was for one of the electricity companies that was going through this privatization transformation period. And so I got to see some of what is it like to be operating as a private sector organization, and then, transforming from a previously state-owned one. So the comparison here in Canada is, informative. And Canada, like the UK and other countries, has gone through this institutional development of creating independent regulatory agencies. So professional regulatory agencies, which is somewhat autonomous from government to oversee operations of these, utilities, whether they're either publicly owned or privately owned. If you've got good regulation, I actually think that ownership matters less when you've got good regulatory oversight, when you've got good corporate governance practices. I actually think private ownership or state owned ownership has a lower impact in terms of outcomes.

MUSICAL BREAK

JB

So we're going to wrap up in a second. But a couple of final questions. So, you know, you like all the faculty at Ivey you teach us students. And obviously we teach them about macroeconomics, we teach them about all of the kind of principles. But do you ever get into some of this stuff with them? Because there's a case to be made that this next generation of business leaders should actually understand better how government works and perhaps we could even encourage a few of them to take jobs in government rather than all going into private sector jobs.

GH

So, I've taught a corporations and society, course, in the past. And one of the goals of this course is to help students understand this interaction between businesses and governments and policymakers, because pretty much every business and every sector here is regulated to some extent. And all governments are exposed to those broader macroeconomic conditions. What's happening with an industry regarding regulation and so forth. So we do try and encourage students to broaden that lens. It's not just about competition strategy within your immediate markets. It's also about having that broader policy awareness and understanding of those, interrelationships. Some of our students do go into government, and I'm always very happy when they do, do that, because that's the other part. We need government to understand what business needs as well.

JB

That's right. And of course, one of the interesting things that Mark Carney has been doing is he's been bringing a lot of private sector expertise into his government and alumni like, Tim Hodgson, like Doug Guzman. Ivey alumni are now working in his inner circle to help, I'm going to say professionalize government. We need to make business more aware of what's happening in government. We also need to make government more, commercially sort of viable. And I think part of that is getting the right people around the table.

GH

That's right. Yes. The more that we can facilitate some of these exchanges between business and governments, I think everyone wins.

JB

And you and I have discussed this, but we are going to be next year creating a new course for our HBA students, undergraduate students specifically looking at that business, government interaction. So before we finish, just give us a sense of where you where are you going next? What is your what's your next research project?

GH

So I'm continuing to do some, work on crown corporations. And, one of the studies that I want to do is really to understand how are crown corporations, particularly in the, in the energy sector, thinking about megaprojects and setting themselves up to be successful on mega projects. So that's, a study that I'll be doing. I'll be interviewing, board chairs, board members, CEOs, just to try and understand, the extent to which some of these lessons from past practice are transforming current, board thinking,

JB

As you said already, I mean, these are huge projects with huge implications, financial as well as strategic

GH

That's right. And I think Canada can lead the way here. So we've got lots of experience. We've got a lot of planned, mega projects. And so we can demonstrate to the world some of the best practices here.

JB

Perfect thanks. You've been listening to Dialogue with Dean from Ivey Business School. A big thank you to my guest, Guy Holburn, for sharing his time and insights on corporate governance in the public sector. And of course, thank you for tuning in and see you next time. Goodbye.

KB

This was Dialogue with the Dean an Ivey Impact Podcast series. For more insights from Ivey, including thought leadership on critical issues and additional podcast episodes, visit www.iveyimpact.ca, or subscribe on your preferred podcast platform. Thanks for tuning in.