Privatization & the Radio Station

A cautionary tale

By Larry Pratt

A lawyer friend of mine says the fiasco surrounding last spring’s closure and reopening of CKUA radio station made her long for a return to the days when political leaders who had betrayed the public trust would be dragged out to a city square and locked in stocks for a few days of self-reflection, preferably in February.

What really outraged her was less the revelations about financial mismanagement or the incompetence of CKUA’s board than it was the total failure of anyone – board, management, government – to take any responsibility for the mess. How is it possible that no one was held accountable for the million dollars that the former directors of CKUA paid themselves and their own companies out of the station’s scarce funds from 1994 to 1997, the period after it was privatized by the Klein government, in spite of an explicit ban on any remuneration for the board members?

I sympathize with my friend, though I don’t like the idea of littering our public places with the bodies of disgraced politicians. Even I, a long-time skeptic of the hot gospellers on the Right and their universal cures of privatization, deregulation and restructuring, was stunned by the details of the CKUA crisis. The saga of CKUA is a cautionary tale for those who think privatization is bound to be popular with the public, but it also poses some tough questions for listeners who want public broadcasting but don’t know how to pay for it.

CKUA was an unlikely choice for successful privatization. It had operated on public funds since 1927, and in its attitudes to business practices, it still resembled the campus radio station it was when it was part of the University of Alberta’s extension department. But from the standpoint of its music, its library and its knowledgeable announcers, it had evolved into a unique and eclectic radio station – arguably the best in Canada. It boosted the careers of such varied homegrown talents as Tommy banks, Jann Arden, Ian Tyson and k.d. lang; it owns one of the best collections of recorded music in the country and a great archives; in jazz and blues circles in the United States, it is both known and respected; and it has a powerful (and costly) network of transmitters capable of reaching 85 per cent of the province’s population. From its rather dingy headquarters in the Alberta Block on Jasper Avenue in Edmonton, with a pre-1997 budget of about $2.7 million a year, CKUA was providing a diversity of programs to close to 100,000 loyal listeners.

But in an age preoccupied with deficits and big government, CKUA was vulnerable to political attacks on public broadcasting. Ralph Klein’s cabinet saw no benefit in keeping it for what was seen as a liberal audience; Conservatives, I was told by a prominent Tory, don’t listen to CKUA. It was privatized in 1994 as part of Klein’s revolution to roll back the state. Rather than simply shut down as non-viable, the government transferred ownership of the station from the ACCESS network to a charitable CKUA Radio Foundation under a new board of directors, all Tory loyalists who were notably short on broadcasting experience. They were to receive no remuneration aside from expenses.

For a mere $10, the Klein government handed over to the new private foundation all of CKUA’s capital assets and prestige, along with $4.7 million in transitional funds. The government was supposed to monitor the station’s progress until August 1997, by which time, it was assumed, it would be financially self-sustaining. This glib assumption – based on a seriously flawed marketing study’s revenue projections – was a harbinger of the trouble ahead; so was the potential conflict of interest inherent in Gail Hinchliffe’s dual role as CKUA’s chief executive officer and chair of the foundation. (It later emerged that Hinchliffe, a Calgary developer and the former chair of ACCESS, was in personal bankruptcy at the time of her appointment and did not disclose it).

Privatization is one of the forces that is generating greater economic inequality in the province.

Hinchliffe, who was still unrepentant about her role when I interviewed her, wanted to put the station on a business basis and wean it from its dependency on grants. She did a good deal to formalize fund-raising and, in the face of the staff’s resistance to change, initiated limited advertising. By shutting down CKUA in March 1997, she made it a cause célèbre and almost certainly saved it. As everyone’s favorite scapegoat, Hinchliffe unwittingly galvanized her opposition behind a revitalized foundation and station, deflecting the criticism away from a government that richly deserved it. If CKUA ultimately survives, part of the credit will have to go to her.

I once assumed, naively, that if the Klein government wanted its program of privatizations to succeed, it would have to keep a close eye on the managements and boards of newly-privatized bodies such as the CKUA and prevent insiders from reaping the short-term benefits of transferring public property to private control. Privatization always raises tricky issues of fairness. Call it the ‘fat-cat factor’.

The public perception that inside managers and directors grow fat on privatization while ordinary folks cough up higher rates for, say, water or power is a central reason, why even governments ideologically sympathetic to the general notion of privatization have become way about putting it into practice. If privatization is to succeed, it often must be accompanied by measures that prevent the privatized boards and corporations from exploiting consumers and keep them publicly accountable for their actions. Consumers have learned that a monopoly is a monopoly, no matter who happens to own it.

The fat-cat factor comes into play every time a government tries to put a price on something it owns – an airline, an energy company, an Ontario Hydro. If the asking price is too high, investors will be scared off; if the shares are too cheap, the government will be accused of giving away the store to the capitalists. And if the shares are widely dispersed, management insiders will end up in the control of the assets and the profits. The key political issue in many privatizations is the public’s perception that its valuable assets are being handed over to the friends of the party in power.

Even the British, who invented privatization during Margaret Thatcher’s revolution as a way of breaking the power of public-sector unions, have now gone off it, largely because of the excessive prices charged by the big privatized utilities and the high salaries they pay their executives. When Britain’s big water companies were privatized, the consumers were promptly hit with a hefty rate increase, and the companies used the revenues to go multinational, investing in Europe and Latin America. Two-thirds of British voters actually favour the renationalization of water and electricity, and only one-fifth want any more privatization, according to The Economist, which admits that “was was supposed to be a recipe for popular capitalism has too often turned into a bitter lesson in the risks of investing.”

If Klein and Steve West, the cabinet minister responsible for the Tory privatization thrust after the 1993 election, were aware of the risks of a political backlash, they didn’t let it stop them. Their agenda was to build support on the Right by getting rid of bureaucrats and transferring government boards, commissions and public companies to private control. Public spending was to be curtailed, the deficit reduced, and taxes held down to attract investment. Monitoring the progress of the newly privatized entities was not on their list of priorities.

The Tories cast their net widely: liquor stores and distribution, registries, ACCESS TV, CKUA, provincial parks, campsites and campgrounds, highway maintenance, the Petroleum Marketing Commission, Consumer and Corporate Affairs, hospital labs, credit counselling, the Sheriff Office’s role in seizing property, many government properties (sale of the latter entailed a $2.5 billion loss), swimming pools, a tree farm, even a pheasant hatchery. Private clinics and charter schools nibbled at the margins of health care and the public education system, while welfare departments pushed cost-sharing with families. By moving into self-monitoring and self-regulation in the resource industries and waste management, phasing out many of the activities of the Environment department, Alberta has also eliminated many professional jobs.

As the government’s fiscal hawk, West (who made his reputation for austerity by limiting the inmates of Alberta’s jails to two pieces of toilet paper per, ah, trip) likes to say that you don’t need a government employee to put a bottle of Crown Royal in a brown bag. He refers to bureaucracy in much the same way General Colin Powell used to talk about the Iraqi Army – as something to be destroyed, “killed.” Cutting down on government is about revenge, toughness, machismo. In hearing West outline his steps to success in a privatized world, you would be forgiven for thinking that “killing” metaphor was based on a teenage boy’s reading of some lurid warfare magazine. West’s marching orders on privatization contain nothing on the issues of governance and accountability or the economic requisites of success.

The American thinker, Edward Luttwak, refers to the Nineties “cult of the ‘tough’ executive who fires his subordinates without sentiment or hesitation,” a concept that seems to speak to West. Government bureaucrats were expected to take the brunt of privatization for having wasted taxpayer’s money: an angry and shrunken middle class demanded a politics of punishment. Public-sector unions would be weaker and privatization of government departments would drive down wages.

In the case of CKUA, having given it away to a small group of Tory developers and realtors, the government took no interest in how the new board spent the transitional funds or how it planned to get the radio station onto a viable footing once those funds ran out. Over the three years following its privatization, there was no monitoring, no communication. According to Hinchliffe, the cabinet “didn’t want it. They wouldn’t fund it. They took absolutely no action at all to see that this would work.” That, admitted Premier Klein, was a “valid criticism.”

The debacle at CKUA is a disturbing example of what can happen under privatization – though it certainly doesn’t have to happen – when the fat-cat factor comes into play and there is no governance or accountability. The Auditor General’s report of May 5 1997 and a forensic accounting review of the CKUA Radio Foundation by the firm Deloitte & Touche, leaked by the Liberals last August, uncovered an appalling situation.

After 1994, the members of the CKUA board, its management, and the charitable foundation overseeing it were basically one and the same. They were directors as well as contractors for CKUA’s services. They appointed themselves; they answered only to themselves. There was no public disclosure, they published no financial statements, and they ran the station as if they had sole ownership. Three inside directors – Hinchliffe, Gerry Luciani and Larry Clausen – essentially had control of the foundation, CKUA’s board, and the station’s resources.

So what’s wrong with that? Gail Hinchliffe says she had asked the foundation’s lawyers and had been assured she was not in a conflict of interest, nor was she in violation of the rules governing charities. If that is the case, then she received some remarkable advice.

Anyone who has been the director of a corporation or has sat on the board of a non-profit society is aware of the concept of fiduciary responsibility. Simply put, it means that directors are like trustees who must act in good faith and with a view to the best overall interests of the company or society. Your own interests cannot conflict with those of the company on whose board you sit. It is also a breach of fiduciary duty for the directors of a charitable foundation to receive compensation without the express order of the courts.

As the Deloitte & Touche audit said, “the former directors of CKUA breached their fiduciary duty when they entered into contracts with CKUA, first because they received remuneration from CKUA without prior court approval, and second, because those contracts were neither fair and reasonable to CKUA nor in CKUA’s best interests.” The CKUA Foundation could sue for breach of fiduciary duty – if it only had the money. Or the Alberta government could sue – if It weren’t culpable, too.

CKUA’s bylaws clearly state that “No Director or member of the Society shall receive any remuneration for his or her services.” But from 1994 until the board was thrown out in April 1997, several directors used their own corporations to contract with CKUA (and, according to the forensic accounting audit, arguably overcharged it), and they paid themselves handsome salaries while claiming expenses that in some cases ran to several thousand dollars a month.

Rather than control expenditures, the directors spent heavily on fund-raising and marketing the radio station, but much of that spending was to the direct benefit of their own management and consulting companies. In total, the audit states, the directors received close to a million dollars from CKUA over this three-year privatization period: Ms. Hinchliffe’s share was reported to be $388,325; Larry Clausen’s company received $245,348; Gerry Luciani charged $120,190; another director, Greg Olynik, received $78,645 ($7000/month) in expenses in the form of marketing fees, plus $15,000 for travel and living costs.

Meanwhile, CKUA’s problems were mounting. Revenues failed to keep pace with spending, and the government’s transitional funding was soon used up. The station’s original revenue projections were far too high: corporate sponsorships were a disappointment, fund-raising could not fill the gap. Spending was 30 per cent higher than forecast.

In addition, an atmosphere of autocracy and intimidation reportedly pervaded the station. Deloitte & Touche noted that Hinchliffe’s “human resource management skills” were lacking, that she “alienated everyone whom she dealt with except for Clausen and Luciani.” CKUA staff were certainly not neutral on the issue of their chief executive officer.

This information only began to sift out to the media and the public after Hinchliffe suddenly shut down CKUA at midnight March 20, 1997 on the grounds that it was almost out of funds. That bolt-from-the-blue, taken without warning or public discussion, was an inept move by a management and board that enjoyed no base of support, even in the government that had given the private foundation its blessing.

The silencing of CKUA provoked a popular revolt. Even before the shock had worn off, the station’s fans were mobilizing. A large and influential body of listeners, CKUA staff, media sympathizers, arts groups and prominent business figures, led by Edmonton musician Tommy Banks, formed a rival group that favoured a new approach to public broadcasting. A power struggle ensued for control of the board of the CKUA Radio Foundation.

Interestingly, the Internet played a key political role in uniting the opposition. The website continued to function when the station was closed, and this gave the revolt a meeting-place to discuss tactics and strategy. It was an early Internet coup d’état, an example of how the new technology can be used against a power elite.

On April 11, following a massive publicity campaign to restore the station under a fully accountable, unpaid board, Hinchliffe’s group succumbed to pressure and resigned in favour of a new board chaired by Edmonton lawyer Bud Steen. A Conservative who thought CKUA could gain the Tories “swing votes” in Edmonton, Steen was there to save the government from the inundation of protest mail – and because he’s a fan. It was his personal threat to sue several of the old board members that, he claims, forced the resignations. In effect, it was a successful hostile takeover. CKUA began broadcasting again on April 25, and in early May launched a highly successful 10-day fund-raiser. While this remarkable show of support put a million dollars in the beleaguered station’s coffers, it offered only short-term relief from CKUA’s fiscal troubles.

CKUA is neither government-owned, nor is it a corporation. In a sense, it is community-owned and accountable to its audience. Its finances are very tight. The province has not committed itself to any further financial assistance to the station, though some may come from the lottery-financed Alberta Foundation for the Arts. CKUA has several revenue-raising options. But for me, the crucial point is that there still has been no accountability for what happened between 1994 and March 1997. No lawsuits have been undertaken. No one has been punished. None of that million dollars has been returned. Perhaps my indignant friend has a point: maybe a little reflective time in the stocks on a cold winter day isn’t such a bad idea after all.

Larry Pratt is an Edmonton writer and author of several books on Alberta’s political economy. He is a doctoral graduate of the London School of Economics.


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