A SORE SPOT ABOUT
GOVERNMENT MALFEASANCE
IS EXPOSED.

WHEN ASKED TO NAME the worst business scandal of the past generation, one percent of our poll respondents identified the federal sponsorship debacle. In any other context, a vote of one percent would be insignificant, but the fact that a government scandal got even a scant mention in a list of ostensible business scandals speaks volumes as to how Bay Street feels about the integrity of our elected officials.

“I think that business leaders have become very upset at any thought that only companies are susceptible to rigged books, misappropriation, misspending or fraud,” says Conrad Winn, president of national polling agency COMPAS Inc., which surveys executives every week on a variety of issues. “They always respond [to questions about corporate scandals] by saying, ‘Well, look at what the federal government is doing.’ ”

The sponsorship scandal may have gotten only a passing reference in COMPAS’s poll, but based on his weekly discussions with corporate executives, Winn reports that resentment about the government’s lack of accountability is paramount in the minds of Canadian business leaders.

“They are very aware not only of all of the scandals in the private sector, but very alert to all the ones in the public sector,” says Winn. “They’re amazingly knowledgeable about accounting, even if they’re not CFOs.”

Reports of corporate malfeasance have filled newspapers in the past few years. Although they won’t defend business corruption, many executives feel that government swindles—like the sponsorship fiasco, which squandered $100 million of taxpayers’ money—are as egregious as any of the recent accounting scams. (In case you’ve spent the past five years under a boulder, in the mid-’90s, the Liberals handed over a combined $100 million to various communications agencies to raise the feds’ profile in Quebec. Because these agencies in some cases appear to have produced little or no work, opposition parties allege these payments were meant to reward Liberal party supporters.)

That’s only the most prominent example of vice in the current 11-year reign of the federal Liberals. There was also the profligate spending of ex-privacy commissioner George Radwanski, and Shawinigate, where former PM Jean Chrétien expedited a loan for a hotel in his home riding. Many see the Liberals’ recent $3.2-billion purchase of 28 Sikorsky S-92 military helicopters, meant to replace the country’s decrepit fleet of Sea Kings, as another shady deal. Critics say the S-92s are inferior to the Cormorants, the competing model built by a British-Italian consortium led by AgustaWestland. The allegation is that the government adjusted the tendering process, so that the best helicopters would not win the contract.

“The government has much lower expectations of its own behaviour than it has for the corporate sector,” says one Toronto business executive, who asked not to be named. (Few business people are willing to be quoted on the record on this topic, largely because most companies have extensive dealings with government.) He points out that, while there are approximately 4,000 public companies in Canada, there is only one federal government. Granted, corporations such as Livent, Olympia & York, Bre-X and YBM Magnex have each, in their own way, put a taint on the image of Canadian business, but they comprise a very small fraction of Canadian companies, the majority of which are honest and law-abiding.

“When corporations do something terrible, and are exposed for [it], that’s a good thing,” this business exec says. “That’s our law, that’s how we keep people honest. But the governments are not holding themselves to the same standard they’d like to hold the business community.”

He suggests that businesses have greater checks and balances than government. A public company must appease the provincial securities commission, as well as the companies that insure its business. Then there are the rating agencies, like Standard and Poor’s, which appraise their bonds and securities. Then come the audit committees. And let’s not forget the shareholders, who have no compunction about asking the tough questions. If the company is interlisted, it can also count on stateside scrutiny.

That said, the various U.S. accounting scandals proved that a seemingly objective system could be flawed. “If the members of the board are appointed by friends of the guy who’s in trouble, if the auditors are also consultants for the company—as they were with Enron—and have a financial interest in not upsetting the client, if the brokers also have various interests in not upsetting the client, then all of these checks and balances come under a cloud,” says Andrew Stark, a professor of strategic management at the University of Toronto. “That’s the Enron problem, that’s the Conrad Black problem to a large degree. The checks and balances have been compromised or tainted.”

Stark feels that the federal Liberals have also manipulated the notion of objectivity. “I would say that [in the Canadian government] during the last 10 years, there’s also been an absence of checks and balances, because of the centralization of power in one party, and then the centralization of that party’s power in the office of the prime minister,” he says. “That means that the prime minister controls what the ethics counsellor says or does, controls what parliamentary committees are allowed to investigate and not allowed to investigate.”

The way that malfeasance is dealt with at the corporate and government levels is notable. For the most part, corporations are forced by law and the market to take very decisive action in the event of a scandal. Whether it’s Enron, Hollinger or the legendary Bre-X scam, most corporate scandals culminate in dismissals, insolvency or legal action. Few government scandals can claim the same sense of closure. Take the sponsorship fiasco: like most political misdeeds, it’s been a rambling cycle of blame-shifting and feigned ignorance that will likely fade into oblivion.

“There are a lot of [questionable issues] surfacing with respect to the government,” says one industry observer, who says the Canadian public voiced its frustration in the recent federal election. “It’s been in the media and it was something Canadians thought about at the polls.”

Financial markets can only survive if investors have faith in their credibility, which is why corporations have demonstrated a willingness to root out impropriety. In 2002, the U.S. government initiated the Sarbanes-Oxley Act (SOX), which exerts greater pressure on public companies in the U.S. to meet regulatory standards. Although SOX only governs American firms, its effect has radiated north of the border, because the fortunes of Bay Street are so closely tied to Wall Street, through trade and investment.

In a speech delivered to executives in April 2002, John Hunkin, CEO of CIBC, made a rather gutsy concession by saying that humans are by nature unethical, but that we must fight this impulse, adding that “we must all take some responsibility for the ebb and flow of greed and fear we’ve seen in the markets.”

“Unethical behaviour,” he continued, “can promise many things: survival, a solution to a conflict or punishment, the opportunity to exploit or flatter, and self-enrichment. In business, its impact on both the innocent and guilty and on social trust is profound.” Hunkin should know. According to the U.S. Department of Justice, some of the loans that CIBC extended to Enron “aided and abetted” some dubious transactions, an allegation that has had a lingering effect on the bank’s image. In December, Canadian and American regulators forced CIBC to pay a US$80 million settlement.

In the speech, Hunkin said that corporate governance “should be energetic, noisy, constant and effective—especially in these times when management is under increased pressure to make their numbers.” For its part, CIBC announced in February that it would spend $50 million to set up an “ethics hotline,” which would allow staff to report suspicious conduct within the company.

Stark applauds such initiatives, but remains wary of the outcome. “I think that systemic changes can work to some extent, but not completely,” says Stark. “When it comes down to it, you ultimately have to rely on individuals and their behaviour and judgment.”

— A.M.