Background What is corporate governance? 12.1 Corporate governance can be defined as the process and structure used to direct and manage the business and affairs of an organization with the objective of achieving the corporate mandate. Without effective corporate governance, establishing effective accountability is impossible. What are the characteristics of effective governance? 12.2 The following is a list of the characteristics of effective governance. Boards must: • be comprised of people with the necessary knowledge, ability and commitment to fulfill their responsibilities; • understand their purposes and whose interests they represent; • understand the objectives and strategies of the organization they govern; • know and obtain the information they require to exercise their responsibilities; • once informed, be prepared to act to ensure that the organization’s objectives are met and that performance is satisfactory; and • fulfill their accountability obligations to those whose interests they represent by reporting on their organization’s performance. 12.3 If a board truly exemplifies these characteristics, it will be providing effective governance, thereby promoting accountability. How does effective governance promote accountability? 12.4 For accountability to be achieved, three conditions must exist. First, all parties must understand and agree with the mandate, mission, and strategic goals of a corporation. Second, information that adequately communicates the degree of achievement of the mandate, mission and goals of the organization, and compliance with guidelines must be passed upward through the accountability chain. Third, those in authority in the accountability chain must be willing to act within their authority in response to information received. All three of these conditions will be met in an environment of effective governance. Why did we undertake this project? 12.5 As we mentioned in last year’s Report, it was our intention to perform a detailed governance review of at least one New Brunswick Crown corporation during the 1996-97 audit year. Because an audit project had already been scheduled in the area of governance, accountability and management control framework pursuant to the joint audit of the Atlantic Lottery Corporation Inc. (ALC) with the Auditor General of Nova Scotia, we chose that corporation. ALC is a Crown corporation under provincial legislation and we felt that any findings from the joint audit project could also be used in completing our own governance review. In effect, then, our work in the governance and accountability area for ALC fulfilled a dual role. It helped us to meet our commitment relating to the joint audit of ALC while at the same time allowing us to do a detailed governance review of a New Brunswick Crown corporation. Why is effective governance important for ALC? 12.6 ALC has four shareholders, representing four distinct provincial jurisdictions. Therefore, the establishment and maintenance of appropriate accountability relationships is very important. As we discussed above, the board can promote accountability by effectively fulfilling the governance role it has been assigned by the shareholders. Why is this important to the Legislative Assembly of the Province of New Brunswick? 12.7 It is clear that the main objective of the Atlantic Lottery Corporation is to maximize its profits, thereby maximizing the dollars available for public use in the four shareholder provinces. However, provincial policies sometimes restrict ALC’s ability to meet this primary goal. For example, the Province has placed certain restrictions on games in order to try to limit the perceived negative social consequences of gaming. Measurement of the degree of success in achieving ALC’s mandate, then, is more complicated than simply looking for growth in the bottom line. 12.8 If there is effective corporate governance, the board of ALC will be providing the Province with the information it needs to evaluate the degree to which ALC has achieved its mandate. That information can be used as an important Legislative control. 12.9 On the other hand, if governance and accountability structures are weak, then the Legislative Assembly may lack some of the information it needs to make accurate assessments of ALC’s performance. The Corporation 12.10 The Atlantic Lottery Corporation was incorporated under the Canada Business Corporations Act in 1976 to be a co-operative venture between the four Atlantic provinces in the lottery business. Both revenues and net profits paid to shareholders have shown substantial growth over the past twenty years, coinciding with rapid growth in the lottery business in North America during the same time period. Many new games have been introduced both nationally and regionally. From relatively modest beginnings, the corporation has grown to employ a staff of over four hundred and twenty-five persons, with head offices in Moncton, and regional offices in Nova Scotia and Newfoundland. 12.11 The environment in which ALC operates has changed rapidly in recent years. While technological advances have led to major improvements at ALC, they have also created significant risks, particularly in the area of competition. When ALC was incorporated, it had a monopoly in Atlantic Canada over public gaming, with the exception of charity events and harness racing. However, with the rapid growth of the Internet, competition from gaming organizations outside the Atlantic provinces could soon become a very important strategic issue. Governance at ALC 12.12 ALC is an unusual public-sector corporation in that it has not just one government’s set of interests to consider, but the interests of four provincial governments. This puts the board of ALC in the unique position of having to ensure all provincial concerns are dealt with, while still attempting to make decisions that are in the best interests of the corporation. The full board of directors of ALC is made up of eight members, two of whom are appointed by each of the four provincial shareholders. The shareholders include the Lotteries Commission of New Brunswick, the Nova Scotia Gaming Corporation, the government of the Province of Newfoundland and Labrador, and the Prince Edward Island Lottery Commission. Scope Objective 12.13 Our objective in carrying out this project was to review the governance, accountability and management control framework for the corporation’s activities, including an assessment of the quality of information and reporting available on its plans and performance. However, for purposes of this chapter, we have focussed on findings relating to governance and accountability issues only. Criteria 12.14 For purposes of our governance review, we have used the first six criteria developed for use in the joint audit project. Because these criteria were developed in consultation with the Auditor General of Nova Scotia, they are not identical to the governance criteria we developed last year and reported in our 1996 Auditor General’s Report. However, we do not feel the differences to be significant. These criteria are presented in the “findings” section of this chapter. Procedures 12.15 Our examination procedures for this project included surveying and interviewing all seven of the ALC directors who were on the board at the time of our examination. Additionally, we interviewed the President of ALC, along with several members of senior management. We reviewed minutes of the Board of Directors, the Audit Committee, and the Senior Management Committee. We also reviewed pertinent reports and documents at ALC. General governance and accountability literature was also referred to in completing our work. Results in brief 12.16 Many of the findings from the joint audit of ALC relating to governance and accountability are included in this chapter. We would like to note that we have expanded upon certain items in the Shareholder’s Audit Report issued by the Auditor General of Nova Scotia. A summary of our observations and key suggestions / recommendations relating to this project is presented in the “findings” section. Some highlights follow. 12.17 There is a defined governance structure for ALC. 12.18 At the time of our audit, there was no code of conduct in force setting standards of behaviour for board members, management, and staff. 12.19 The corporate mission statement and high-level strategic objectives for the corporation were developed by management as part of their strategic planning exercise. The strategic plan was approved by the board of directors. At the time of our audit, it had not been formally approved by the shareholders. 12.20 Under the current governance structure, the “directing minds” of ALC are the four Ministers responsible for the four provincial shareholders, not the board of directors. 12.21 The roles, responsibilities and accountabilities of the board of directors have not been documented. 12.22 The division of responsibilities between management and the board of directors has not been documented. 12.23 Board members have traditionally been senior public servants from the four shareholder provinces. 12.24 Current directors cannot meet the standard of performance relating to independence as required in the Canada Business Corporations Act. 12.25 The two New Brunswick board members are in a conflict-of- interest situation because they also serve on the board of ALC’s regulator in the province, the New Brunswick Lotteries Commission. 12.26 The board has not developed a high-level policy framework that provides guidance to management in areas of concern to the board. 12.27 Current reporting by management to the board does not address the degree of achievement of non-financial strategic objectives. 12.28 ALC’s annual report does not provide performance reporting information that would allow the reader to assess the degree to which the corporation has met its corporate strategic goals, and therefore its mission. 12.29 It is important to note that while we make a number of observations and suggestions for improvement relating to governance practices at ALC in this chapter, nothing was identified during our work which would directly impact on or cause a loss of integrity or credibility related to the quality of the gaming products that are being delivered by the Corporation on behalf of its shareholders. Exhibit 12.1 Atlantic Lottery Corporation Findings Exhibit 12.1 - cont. Atlantic Lottery Corporation Findings Exhibit 12.1 - cont. Atlantic Lottery Corporation Findings Exhibit 12.1 - cont. Atlantic Lottery Corporation Findings Exhibit 12.1 - cont. Atlantic Lottery Corporation Findings