GOOD GOVERNANCE AND THE
DEPARTMENT OF EDUCATION AND TRAINING

Presentation to the
Department of Education and Training

By Wayne Cameron
Auditor-General of Victoria

5 August 2004

Much has been written in recent times about the nature of corporate governance, and why it is important. It is hardly necessary for me, therefore, to traverse in my presentation to you 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?

• Corporate failures.

• The pressure to perform.

• Emergence of new risks.

• Regulators, standard-setters and investors (stakeholders) are increasingly requiring organisations to adopt best corporate governance standards.

• Changes in the way the public sector conducts its business.

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 define your service requirements.

But how many of you gave enough attention to your changed business relationships?

How did you ensure that the core public service ethical, informational, consultative and collaborative arrangements remain effective?

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

But we should not dismiss the debate as irrelevant. 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 VPS, apply best governance practice at all times.

What is Corporate Governance?

“Corporate governance refers to the processes by which organisations are directed, controlled and held to account. It encompasses authority, accountability, stewardship, leadership, direction and control exercised in the organisation.” (ANAO)

The Commonwealth definition supports this well-recognised definition and translates it into the hotbed of public sector application.

“Public sector governance has a very broad coverage, including:

• how an organisation is managed

• its corporate and other structures

• its culture

• its policies and strategies

• the way it deals with its various stakeholders.

“The concept encompasses the manner in which public sector organisations acquit their responsibilities of stewardship by being open, accountable and prudent in decision-making, in providing policy advice, and in managing and delivering programs.”

Thus, 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 does the private sector.

Suggested Governance Framework

This diagram is a modification of my Office’s 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.

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

• it also requires that each agency maintain appropriate structures and responsibilities to ensure compliance with the code.

Suggested Governance Framework

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 government 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

• 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.

The Legal and Policy framework will be a key influence on a public agency’s ability to set strategy and direction – and understand them! They come from:

• Specific legislation

• Generic legislation – FMA, PSM etc.

• Core government policy – VGPB, Employment, OH&S, codes of conduct, MOF Guidelines etc.

• Associated agencies – Privacy commissioner, Auditor-General, Ombudsman

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:

• 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

• information about the public profile.

Structures in government must factor central information requirements into processes and relationships.

Standards of behaviour

• Leadership

• Ethics

• Transparency and openness

• Integrity

Performance Monitoring

“Facts do not cease to exist because they are ignored” (Aldous Huxley)

Determine what should come to the executive/board – content and frequency - governing bodies should be monitoring the big things.

Track 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-coordinated, integrated and accurate. There is some evidence that some entities continue to struggle in this area post-amalgamation.

The lack of discipline about information requirements rank as the 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.

Area of future audit attention - mmonitoring of risks needs to be targeted:

• Different types of risk in the public sector, i.e. more than merely financial risk, also political risk - community confidence, social risk, environmental risk, 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 Managing risk across the public sector – highlights some progress, but there is still some way to go – especially in internal awareness about what constitutes risk, and in reporting procedures – it’s a best-seller publication!

• Pay attention to culture.

• When do you need to alert the minister about matters, which may materially affect the Crown’s interests?

Compliance and Accountability

Accountability and stewardship is very important in the public sector because the public servant is, in effect, a trustee - exercising powers on behalf of the state. In effect, accountability is an obligation to answer for a responsibility (and powers) conferred. This responsibility extends across a range of areas, including probity, ethics, as well as effective use of public resources.

The accountability model is reinforced through external scrutiny – parliament and its auditor.

• Public Sector Management and Employment Act 1998: sets out obligations of the agency head – supported by a “Code of Conduct” published by the Commissioner for Public Employment: s. 13. 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.

• Financial Management Act 1994: s. 42 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 of Finance and which includes reporting performance and preparing financial statements and a report on operations each year.

New Compliance Framework issued under MOF Directions echoes Sarbanes/Oxley thinking of the US.

Importance of recognising trade-offs between performance and compliance.

Important to monitor compliance. Need proper reporting processes for surfacing non-compliance. (Compare this with COSO requirements of the USA.

Disclosure of corporate governance practices: In ex ante documents and ex post reports.)

APRA winners of good governance disclosures – Melbourne Health, CSR Ltd

Research shows that in the corporate world, openness and transparency in reporting is rewarded.

Financial Management Package

New Framework:

• Embeds compliance in work practices

• Integrates risk management into the Framework

• Doesn’t, in my view, adequately encourage performance measurement and reporting

• Developed based on AS 3806 and the 5 Elements in that standard

• Culture and commitment

• Systems and procedures

• Resourcing and responsibilities

• Reporting – Internal, external & intra-government

• Maintenance (training and review).

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 the balance between the interests of parliament, executive oversight and the autonomy of the governing body and/or management

• effective communications

• good external reporting

• sound risk management practices.

Organisations frequently fail when there is:

• lack of sound goals

• inadequate internal control and non-disclosure

• dominance of individuals

• deficiency of values, ethics

• absence of arms-length approach to some transactions

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

• 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

Good corporate governance is fundamental to achieving effective, efficient and economical outcomes.

The purpose of my presentation to you 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 Sarbanes/Oxley legislation in the USA, and CLERP 9 here in Australia.

The Victorian Government’s response has been new the Compliance Framework – effective this year.

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 the community trust is maintained.

There is much more guidance around now:

• PAEC report on examination of corporate governance issues in Victoria – check list.

• WA and Queensland Public Service guidance

• ANAO better practice guide

• New MOF Directions effective I July 2003.

Much of the governance debate has been about the rules – principles, but it’s not just about applying good governance principles, it’s also about the PRINCIPLED application of those principles.