CORPORATE GOVERNANCE

Presentation to
Senior Emergency Services Leadership Program -
The Australasian Fire Authorities Council Executive Leadership Program -
Australian Institute of Police Management -
Manly NSW

By Wayne Cameron,
Auditor-General of Victoria

10 October 2003

Points to ponder when corporate planning

Much has been written in recent times about the nature of corporate governance, and why it is important. It would be presumptuous, therefore, of me to traverse in my presentation to you this afternoon what is available in an ever-increasing range of publications and from numerous websites. Yet, despite the prevalence of this material, instances come to the surface repeatedly highlighting the difficulties some have in applying these straightforward principles in practice.

So why all the focus on governance? Some answers may lie in the following areas:

• corporate failures;

• the pressure to perform;

• emergence of new risks;

• regulators and standard-setters are increasingly requiring organisations to adopt best corporate governance standards;

• changes in the way the public sector conducts its business;

• outsourcing - how many of you, for example, are involved in outsourcing? … what were some of the first things that you found you had to do?;

• clearly defining service requirements;

• changed business relationships - how many of you gave enough attention to the changed relationships?; and

• continuing effectiveness of core public service ethical, informational, consultative, collaborative arrangements - how did you ensure that they continued to be effective?

Corporate governance in the public sector is more complex, having to satisfy a broader range of political, economic, environmental and social objectives, according to a greater variety of requirements, influences and public expectations than do businesses in the private sector.

Suggested governance framework

This diagram is a modification of my Office’s 2003-04 Annual Plan. I share it with you to demonstrate how the elements of an effective governance structure are inter-related.

I will now discuss each of the 4 pillars.

Proposed Minister of Finance Directions require that “A public sector agency have a financial code of practice setting out a cohesive statement of the agency’s internal processes to ensure probity in the agency’s management”. The guide goes on to set out what the agency code of practice must include:

• tendering, conflict of interest confidentiality, unlawful or unethical behaviour; and

• a requirement that each agency maintain appropriate structures and responsibilities to ensure compliance with the code.

Much of the public debate has centered on the corporates and on issues unique to the corporate sector (such as incentivised remuneration arrangements, related party abuse, conflict of interest issues) - I hope!.

But we should not dismiss the debate as irrelevant. I am hear to tell you that we have our share of governance issues to be concerned about as well. We should take this opportunity to make sure that we all learn from the debate and ensure that we, in the Victorian public sector, apply best governance practice at all times.

Strategy and direction

Those with governance responsibilities must establish the entity’s strategy and direction.

Goals should be explicit about performance objectives and relate those objectives, supported by plans covering finance/costs, assets, technology and personnel requirements.

Both long and short-term goals and objectives need to be supported by specific strategies for their achievement.

It is important that strategy, policies and other directions be clearly specified, communicated and understood by those parties responsible for their implementation. Responsibilities and accountabilities must be clear.

Departments - Strategy and direction will be developed by the respective secretaries/ministers in the context of the government’s goals and desired outcomes.

Statutory boards - Strategy and direction will be developed in the context of enabling statute having regard for the government’s goals and desired outcomes.

An example: Statutory bodies

Parliament has established boards to oversee the management of the entity.

The board is responsible for setting corporate objectives, developing policies governing day-to-day operations, and overseeing the implementation of those policies through the CEO.

The Crown has retained certain rights, usually espoused in legislation, which are exercised through the responsible minister, namely:

• to exercise control over the entity and determine its direction, as expressed in legislation;

• to appoint and dismiss members of the board;

• to approve the size, shape and scope of the entity’s operations; and

• exercise other rights contained in legislation.

The board is immediately accountable to the responsible minister for the performance of the entity. The minister is responsible for ensuring that the entity is managed in the Crown’s interests, and so plays a key part in the governance framework for the entity.

Structures and relationships

Effective governance requires explicit role definition of key participants in the governance process and the control, reporting and accountability structures established to facilitate communication, action and monitoring.

Governing body members need a proper induction process to ensure that they are clear about their role and about that of management, and the nature of the relationship with government, (usually the responsible minister) and the department.

Determinations should be made about powers and delegations (this must be done in the context of the governing legislation).

The nature, timing and method of information flows need to be defined.

A clear view is needed about what must be referred to owners (minister) for consideration or information, such as:

• business plan (including financial plans) - define nature, scope and location of business;

• strategy, policy, performance monitoring information;

• regular assessment of relevant risks and proposals with potential to impact on the risk profile of the organisation;

• investment/divestment considerations; and

• information about the public profile.

Performance monitoring
“Facts do not cease to exist because they are ignored” - Aldous Huxley

Determine what should come to the board - content and frequency. Governing bodies should be monitoring the big things - tracking against agreed goals, money, tasks and risk management activities.

The monitoring and reporting systems need to be timely for senior management and the governing body when things begin to divert from planned outcomes.

This means coherent data collection and reporting systems that need to be co-ordinated, integrated and accurate. There is some evidence that some entities continue to struggle in this area of post-amalgamation.

In my experience, the lack of discipline about information requirements would rank as the single most common reason why difficulties develop and may frequently become terminal in organisations. The lack of complete information denies timely intervention to turn adverse circumstances around.

This may be an area for future audit attention.

Monitoring of risks needs to be targeted

There are different types of risk in the public sector, i.e. more than merely financial risk, there is also political risk (community confidence), social risk, environmental risk and public safety risk.

Monitoring arrangements for an entity needs to reflect an assessment of the risks and opportunities facing the business, with a view to protecting and promoting the owners’ interests.

Our March 2003 report on Managing risk across the public sector identified some progress, but there is still some way to go, especially in internal awareness about what constitutes risk, and in reporting procedures.

A key question: When do you need to alert the minister about matters which may materially affect the Crown’s interests?

Compliance and accountability

It is important to monitor compliance. There needs to be a proper reporting processes for surfacing non-compliance.

Public Sector Management and Employment Act 1998

S13. Department heads are responsible to agency, minister or ministers for the general conduct and the effective, efficient and economical management of the functions and activities of the department.

This Act sets out the obligations of the agency head, and is supported by a “Code of Conduct” published by the Commissioner for Public Employment.

Financial Management Act 1994

S42. Requires that there be an accountable officer for each department and public body.

An accountable officer has certain obligations/responsibilities mainly related to financial management and maintenance of proper systems, compliance with directions issued by the Minister for Finance and which includes reporting performance, and preparing financial statements and a report on operations each year.

I continue to be amazed at the number of those with governance responsibilities not familiarising themselves with the primary legislation of their organisation.

Importance of recognising trade offs between performance and compliance

The public sector is under the public gaze - all the more reason to invest in explicit processes so that our talented people can seek innovative solutions.

Disclosure of corporate governance practices (in ex-ante documents and ex-post reports

Some APRA winners of good governance disclosures include Melbourne Health and CSR Ltd.

Research show that in the corporate world, openness and transparency in reporting is rewarded (market capitalisation) … yet corporates continue to fight it.

Key pre-requisites

In bringing this presentation to a close, in my view, the pre-requisites for effective governance are:

• Establishing clear roles for each of the parties, and ensuring that all parties understand their own roles and those of the other parties;

• Constructive relationships and accountabilities based on those roles;

• An effective governing body;

• Effective monitoring arrangements which reflect of balance between the interests of Parliament, Executive oversight and the autonomy of the governing body and/or management;

• Effective communications;

• Good external reporting; and

• Sound risk management practices.

Organisations frequently fail when there is:

• a lack of sound goals;

• inadequate internal control and non-disclosure;

• dominance of individuals;

• deficiency of values, ethics;

• an absence of an arms-length approach to some transactions;

• a lack of action by other directors to scrutinise/challenge the financial information; and

• poor risk management and poor reporting to the board.

(Not to know is bad; not to wish to know is worse - West African proverb.)

Good corporate governance - summary

The purpose of my presentation to you this afternoon has been to provide my perspective on what constitutes good governance.

Good governance has been the subject of much consideration and public debate in recent times … and for good reason.

The community is entitled to be assured that practices in the public and private sectors are as they should be, in order to maintain confidence.

Where confidence is eroded, governments must act to re-establish confidence in our institutions - hence the Carbines/Oxley legislation in the USA, and CLERP 9 here in Australia.

The public sector, as we are all too aware, is not immune from these winds of change, and must collectively and individually re-examine its own practices to ensure that community trust is maintained.

There is much more guidance around now:

• PAEC report on examination of corporate governance issues in Victoria – Checklist;

• WA and Queensland Public Service guidance;

• ANAO better practice guide;

• new Minister for Finance Directions, effective 1 July 2003; and

• we will also await John Uhrig’s review of corporate governance of Commonwealth statutory authorities and office holders

Much of the governance debate has been about the rules - principles – but … It’s not just about applying corporate governance principles – it’s also about the PRINCIPLED application of those principles.

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