Bloated Pay, Conflict at Top of BC Ferries: Ministry Report

The Tyee
By Andrew MacLeod

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A new finance ministry report has found B.C. Ferry Services Inc. board members and executives are overpaid, directors of the British Columbia Ferry Authority are in a conflict of interest, and TransLink’s board is a mess and should have acted sooner to get the agency’s finances in order.

But the person who requested the review, B.C. Transportation Minister Shirley Bond, said she’s not ready yet to make any changes.

“BCFS executive compensation was significantly higher than that paid by several larger public sector entities,” said British Columbia’s comptroller general Cheryl Wenezenki-Yolland in the 97-page Report on Review of Transportation Governance Models.

“For example, the Chief Executive Officer’s (CEO) total 2008/09 compensation was more than double that of the larger public sector comparators,” it said. “We also found that the performance measures and targets used to determine the incentive bonuses for executives made the bonuses easier to attain than we would have expected.”

In July, B.C. Ferries revealed CEO David Hahn last year made over $1 million and four more executives each made around $500,000.

Wenzenki-Yolland’s report examined how those salaries were set, noting they were based on the pay of executives at some 92 other companies and agencies. “In our view, appropriate comparators for BCFS would be public sector monopolies of similar size,” she wrote. “Instead, the majority of the 92 comparators used in the 2009 executive benchmark study were large, private sector organizations in competitive markets.”

A few organizations like BC Hydro and the Vancouver Port Authority were used, she said, but fully 90 per cent of the companies used for comparison were “large corporations” like the Coca Cola Bottling Company, Ford Motor Company of Canada, Nike Canada Limited and McDonald’s Restaurants of Canada.

Wenzenki-Yolland had a pretty good idea of what might have skewed the process: “The BCFS Board and executive management had significant input into the selection of the comparators a consultant used as benchmarks, which raises questions about the independence of the benchmarking process.”

Speaking of the 12-person board, the report said they too are paid more than would be expected.

When the B.C. Liberal government restructured the ferry system in 2003, changing it from a Crown corporation to a quasi-private publicly owned company, they created the BCFS board as well as the B.C. Ferry Authority Board to oversee it and represent the company’s sole shareholder, the B.C. government.

But the nine members of the authority board all sit on the BCFS board, as does B.C. Ferries CEO David Hahn.

‘Accountable to themselves’

“The BCFS Board establishes its own compensation, without accountability to anyone for the level of compensation it sets for itself,” wrote Wenzenki-Yolland. “Since all Authority members are directors on the BCFS Board, Board members are effectively accountable to themselves.”

They too set their pay in 2007 by comparing to 17 “substantially larger” organizations. “Average sales and assets of the comparators were both approximately five times larger than those of BCFS. Also, 12 of the 17 comparators were publicly traded corporations operating in competitive markets, while only four were public sector organizations.”

In 2008-2009, the chair, lawyer Elizabeth Harrison, made $154,000 for her work, the report said. Other directors were paid between $67,000 and $91,000. The bulk of the pay was made up of retainer fees “three to five times the amounts set out in a provincial Treasury Board directive to Crowns.”

B.C. Ferries isn’t a Crown corporation, the report said, but “we would not expect BCFS to vary so much from the levels the directive specifies.”

The report uses the words “conflict of interest” to describe the situation, and makes clear it is part of a wider problem with the ferry service.

“The Authority members have thus placed themselves in a position of conflict of interest because the interests of the Authority as shareholder are not identical to the interests of BCFS,” the report said. “As a result, the Authority’s proper role as overseer of BCFS has been compromised. The absence of independent oversight of BCFS by the Authority weakens accountability and increases the risk that the company’s spending and priorities may not be acceptable to its shareholders.”

CEO on board: bad idea

Nor did she like CEO David Hahn sitting on the board. It’s not illegal under the rules the Liberals wrote in 2003, she said, but nor is it wise. “A board needs to maintain independence from their CEO and other executive to support the governance model that separates the roles and responsibilities of the board and management and to allow the board to properly fulfill their roles of assessing the CEO’s plans and evaluating, compensating and, if necessary, replacing the CEO.”

CEOs should attend board meetings, but not vote as part of them, she said. “The board’s independence from management is at risk of being compromised if the CEO or another executive is a voting board member.”

Wenzenki-Yolland also suggested making the ferry company subject to the province’s freedom of information laws, giving the B.C. Ferry Commissioner more latitude to represent the interests of customers and the public and abandoning the law that forces B.C. Ferries to seek alternative service providers to run routes.

Otherwise, she said, B.C. Ferries’ operations have basically been well managed and despite dropping passenger levels customer satisfaction has surveyed high.

TransLink has its own set of problems, Wenezenki-Yolland found, most of which could be traced to a cumbersome governance model. There are likely to be “substantial operating deficits” starting in 2010, the report said, due to “Inaction by TransLink and the Mayors’ Council to maintain a balance between expenses and revenues.”

There needs to be more certainty about roles and responsibilities in the two-year old governance structure, the report said, as well as a way to determine shared priorities and action should have been taken earlier to contain costs.

“In both organizations, the governance models should be strengthened to ensure that they meet their public service mandates while protecting the interests of users and taxpayers,” the comptroller general wrote. “We have proposed a common governance framework that requires more accountability from the companies and their Boards, stronger oversight by the groups who are effectively the operating companies’ shareholders, and stronger roles for the Commissions.”

Private company set salaries: Bond

Transportation minister Bond said today’s report shows changes need to be made in the governance of both agencies, but that they don’t need to be completely overhauled. “The report does not suggest we start from ground zero,” she said. “We are completely open to looking at what these recommendations have suggested to us, otherwise we wouldn’t have asked for them.”

That said, it may be difficult to shrink the salaries at B.C. Ferries. “I don’t want to speculate about rolling back salaries,” she said. “The company made those decisions as a private company.”

The government will consider the recommendation to tie salaries more closely to what they would be in the public sector, at least for any similar organizations set up in the future, she said. “We’ve had the report for a week,” she said. “What we’re going to do is take the time to go through each recommendation, including the compensation recommendation, and consider what options government might take.”

Bond said she will consult with the stakeholders at B.C. Ferries and TransLink, as well as her cabinet colleagues, before deciding what to do.

“I think it confirms what we’ve been saying and many others have been saying all along,” said Harry Bains, the New Democratic Party’s transportation critic and MLA for Surrey-Newton.

TransLink is in a financial mess and there’s no clear accountability at either TransLink or B.C. Ferries, he said. “The fault lies at the doorstep of the former minister of transportation, the current minister of transportation and the Liberal cabinet.”

The report shows the interests of taxpayers and customers have been left out of decisions, he said. “It show the arrogance and the incompetency of the people at the cabinet table,” he said. “They didn’t care as long as their friends were happy.”

Bains said he will be watching to see what the government does with the report, whether they act on it or ignore it.

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