When Jim Flaherty, the Minister of Finance, said in January that he would be directly involved in the choice of the successor to Mark Carney, the Governor of the Bank of Canada, he invited some speculation that this would mean greater political input in the decision, possibly a degree of politicization of a highly sensitive office.
In particular, Mr. Flaherty will be taking part in the interviewing of the shortlisted candidates.
Certainly, there is a delicate, shifting balance to be maintained and continually adjusted between technical expertise in monetary policy and macroeconomics, on the one hand, and the ultimate policy-making authority of elected politicians in the cabinet, on the other. The upshot of the Coyne affair in 1961 – an open conflict between the prime minister, John Diefenbaker, and James Coyne, the governor – though subsequently formulated in legislation, did not and could not resolve everything, as was vividly illustrated in 1994 in the non-renewal of John Crow’s appointment as governor, after a disagreement with Paul Martin, the finance minister.
There is, however, a significantly missing element in the governance structure of the Bank of Canada, which is particularly relevant to the process of choosing a new governor.
The Bank of Canada Act lays it down that the governor has to be chosen by the bank’s directors “with the approval of the Governor-in-Council,” in other words, the cabinet, and that is where one cabinet minister, Mr. Flaherty, very properly comes in.
A special committee of the board of directors has been formed to lead the selection process.
By law, the directors are to be chosen “from various occupations.” They are appointed by the minister of finance, with the cabinet’s approval. Every province is represented, including Prince Edward Island.
They largely consist of substantial business people. There are two economists; the research specialty of one of them is fisheries, a complex, important topic, but not directly connected to central banking. Overall, there is not much evidence on the board of deep knowledge of macroeconomics, banking or monetary policy – apart from Mr. Carney himself and Tiff Macklem, the Senior Deputy Governor.
The bank has a curious structure, with a governing council now consisting of Mr. Carney and his chief colleagues, people with undoubted expertise in the central bank’s work. Mr. Carney is also the chairman of the board.
It is no criticism whatsoever of the current directors to say that the board does not reflect contemporary criteria for boards in either the public or the private sector. The board still reflects what the bank’s first governor, Graham Towers, thought was best, as he articulated it to a royal commission in 1962: an ability to assess the bank’s managers’ judgment on the basis of their own common sense. David Dodge of Bennett Jones LLP, Mr. Carney’s immediate predecessor, upholds this approach, saying that directors are “not necessarily experts in the business of the corporation; they are kind of wise people.”
But today’s Bank of Canada board is very different, for example, from the board of the Public Sector Pension Investment Board, another Crown agency whose actions can have vast, complex consequences for the Canadian economy.
The Bank of Canada’s special search committee for the next governor might fairly feel a bit daunted in their deliberations. Mr. Flaherty is backed up by the expertise of his department, but the committee cannot heavily rely here on the bank’s own upper management, because Mr. Macklem is probably a leading candidate, who may well be favoured by Mr. Carney (the two often make joint appearances). In these circumstances, the Finance Minister holds a very strong hand – rather more than just the “approval” in the Bank of Canada Act.
Quite apart from executive-recruitment procedures, William Robson, the CEO of the C.D. Howe Institute and the chair of its Monetary Policy Council, thinks that a reinforced board would be a great help to the bank’s continuing operations. Such directors could take an active role in discussing what should be done, if, for example, the inflation target is being met, “but the economy’s pretty weak.... You need people who can see below the surface.”
A revised governance model, in Mr. Robson’s view, could add an ability to support the bank’s upper management in difficult circumstances – in an extreme case, “if the governor is floundering.” And directors with macroeconomic clout could help ease what Mr. Robson calls the dialectical process between the bank and the government, averting a resort to “the nuclear option,” that is, a use of a ministerial directive to the bank, in case of unresolved policy conflict.
Mr. Macklem is considered by many to be such a strong internal candidate for governor that present concerns about the process may seem hypothetical. Even so, the directors are right to look more widely, as a matter of due diligence.
And with that diligence should come a rethinking and enhancement of the Bank of Canada’s board – perhaps opening it up to some talent from outside the country. The departure of Mr. Carney, a governor who took on a star quality, is a good time to start moving to a more ambitious choice of directors.