Reflecting Ethics, Accountability, and Transparency in Municipal Pay Structures
The Court of Appeal’s decision last year in Ferri v Ontario (Attorney General), 2015 ONCA 683 [Ferri] shocked many in the municipal law community. Mario Ferri, a well-known Regional and City Councillor for Vaughan, brought an application on his own volition under the Municipal Conflict of Interest Act, R.S.O. 1990, c M.50 (“MCIA”) in the Ontario Superior Court (“ONSC”). The application sought to determine whether he could participate in council proceedings with respect to an appeal of the City’s Official Plan to the Ontario Municipal Board (“OMB”). The appellant of the Official Plan was represented by a local law firm that employed the Councillor’s son, Steven Ferri, who happened to work directly on the OMB Appeal. In a troubling decision, the Ontario Court of Appeal (“ONCA”) held that “a reasonable elector apprised of all these circumstances would not conclude that the appellant’s deemed interest in the [OMB] Appeal would be likely to influence his participation in debate or voting on the matter before council.” While the MCIA is only one avenue for holding municipal politicians and senior municipal staff members accountable, this decision reinforces a more general shift away from the purportedly high bar where municipal ethics, accountability, and transparency should be. However, instead of focusing solely on legal structures of accountability and their purported inadequacies, it is equally important to focus on how city councillors can be better incentivized into raising the proverbial bar on ethics, accountability, and transparency. Based on recent developments in the field of corporate governance addressing how to incentivize executives into more responsible governance, the focus in the municipal context should be on how to evaluate politicians when it comes to their pay.
Managerial Power Theory
Corporate governance scholars have long been pre-occupied with how the governance structure within public corporations contributes to the abuse by corporate managers of their powers. Not only does the conduct of corporate managers have widespread repercussions for societal groups outside the corporation, but it also impacts the corporation’s efficiency, productivity, and long-term viability. The ramifications of misuse of corporate powers range from the appropriation of corporate assets, conflicts of interest, corporate waste, widespread inefficiencies, managerial shirking, extreme short-termism, and excessive risk-taking. Managerial abuses of power have been enabled by high levels of legally protected board discretion, lack of independent boards, the ability of managers to influence board decision-making, and a lack of incentives amongst shareholders to discipline corporate boards.
In the 1980s corporate legal scholars began to focus on the wasteful and inefficient practices of corporate managers in large publicly held firms and defined such conduct as agency costs. The goal of good corporate governance became defined as reducing agency costs and creating maximum performance for shareholders. By the 1990s, the manner in which corporate executives, namely CEOs, were being paid and incentivized into better performance became the focus of corporate governance reform. The mantra around executive pay quickly became “its not how much you pay but how” meaning that high levels of executive pay, previously viewed as corporate waste, became justifiable if the receiving executive created proportional growth for the company. Thus, the new norm became the widespread use of pay-for-performance incentives.
Yet by the 2000s scholars began to question the efficacy of this approach and noticed large disparities in the total earnings of CEOs and the actual performance of large public firms. A new theory titled ‘the managerial power approach’ was developed to explain such purported failings of the pay-for-performance model. The managerial power approach posited that while the ultimate solution to solving the agency problem in the firm and creating optimal performance levels was a properly designed pay incentive, corporate boards in practice fail to create such optimal incentives due to significant interference by top executives in the pay setting process. Thus, the firm’s internal governance structure and legally protected board discretion were thought to enable corporate executives to undo their constraints. The solution proposed for creating more accountability and transparency with respect to corporate managers was to give shareholders more rights to monitor and discipline corporate boards to counter the effect of managers’ pervasive influence of directors.
Structures of Municipal Accountability
Structures of municipal ‘responsibility’ typically exist in three realms as alluded to above: ethics, accountability, and transparency. The first type of responsibility, municipal ethics, typically deals with how ethical rules in municipal politics and administration are codified and enforced. The Municipal Act gives Ontario municipalities the option of establishing a code of conduct that subjects its council and committees to specific ethical rules and protocols. A code of conduct is implemented and enforced by the council itself to govern individual council members. However, a code of conduct cannot make it an offence under law for a council member to violate the code. The only consequences are a reprimand or a suspension of pay. Municipalities may appoint an Integrity Commissioner (“IC”) to oversee the enforcement of the code of conduct, however they are not required to do so by law. Moreover, the IC’s role is to make recommendations to the council that it can decide to adopt.
The second type of municipal responsibility, accountability, revolves around the municipal ombudsman and auditor general. Accountability deals with the extent to which existing legal powers are exercised in the public interest, through review of administrative decisions made by municipalities and oversight regarding a municipality’s finances. Municipal ombudsman are independent from city councils. The role of the ombudsman is to investigate actions of municipal administration either of their own accord or in response to a complaint. Legislation requires the ombudsman’s reports to be public, however there is no requirement to investigate. The only ‘disciplinary’ tool available to a municipal ombudsman is to make recommendations to council on how to improve administration. The municipal auditor general on the other hand, is responsible for holding council and administration responsible for stewardship over public funds and for obtaining value for money. Independent from council and administration, the auditor general can conduct investigations into a municipality’s finances and report to council. Likewise, the only tool available to the auditor general is to make recommendations to council.
Finally, the transparency component of municipal responsibility is analogous to the public disclosure requirements applicable to publicly listed corporations. Transparency is facilitated by a series of legislative requirements. The principal requirement is the ‘open meeting rule’ requiring all council meetings to be open to the public, except for specified exceptions. Further to this, municipalities are required to provide notice of all meetings and an agenda of the topics to be discussed. To enforce this key requirement, a municipality will typically have an open meeting investigator who investigates the alleged violation and then reports these findings to council, who in turn has no obligation to act.
Like corporate governance, the overarching problem with the current municipal responsibility apparatus is that it relies on those who it purports to govern to make and enforce the rules. However, much like corporate governance, there appears to be little incentive for municipal politicians—notwithstanding election time—to raise the bar on ethics, accountability, and transparency. Creating metrics for ethical, accountable, and transparent conduct for municipal politicians and senior staff and incorporating those metrics into their pay would be a good start to addressing the weaknesses of a system that is at its core based on the foxes guarding the henhouse.
First, municipal politicians and senior staff could have an incentive component to their salary that compensates them for supporting the adoption of the above ‘accountability officers’. Second, individual council members could get scored throughout the year on how many recommendations they vote to adopt, with the important recommendations being given more weight. Meeting certain scoring targets should be a pre-condition for receiving the incentive portion of the annual pay. Third, council and the mayor should be scored on the initiatives and actions they take to improve transparency throughout the year. Once a transparency milestone is reached, to avoid losing the incentive the following year, the score should be given in subsequent years for maintaining or improving the transparency initiative. This would motivate continuous improvements. Councillors or the mayor could score additional points for bringing motions that improve ethics, accountability, or transparency in a number of pre-defined areas.
Lessons drawn from managerial power theory suggest that in municipal council context, incentives alone might not be all that effective, especially where council members are designing and implementing their own restraints. For this reason, it is crucial for incentives structures to be developed by an independent body or task force probably at the provincial level in accordance with a newly developed scheme of best practices agreed to by municipalities.
Like the managerial power theory suggests, the overarching problem with the current municipal responsibility apparatus is that it relies on those who it purports to govern to make and enforce the rules. However, instead of focusing solely on legal structures of accountability and their purported inadequacies, it is equally important to focus on how city councillors can be better incentivized into raising the proverbial bar on ethics, accountability, and transparency. Based on recent developments in the field of corporate governance, specifically how executives can be better incentivized into more responsible governance, the focus in the municipal context should be on how politicians are motivated and evaluated when it comes to their pay. Yet, as the managerial power theory suggests, the development and implementation of such incentives cannot be left in the hands of those it seeks to motivate or restrain.