EU newletter on Corporate Governance

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  • 1. Corporate Governance From: Kitty Choi, Head, Efficiency Unit To: Heads of Department Date: 29 July 2009 Governance has increasingly become an important management topic for heads of Head, EU departments. They are ultimately held accountable to the public for effective Kitty Choi governance of non-government organisations (NGOs) and various agencies under kkychoi@eu.gov.hk their purview to ensure public monies are properly used and the public good Tel: 2810 2021 protected. Deputy Head, EU Patricia Lau plau@eu.gov.hk The Efficiency Unit (EU) has recently released a public sector reform report titled Tel: 2810 3463 ‘An International Overview of Corporate Governance in Arms-Length Agencies’. To supplement that report the EU has collaborated with Aon Global Risk Consulting Assistant Director, EU to publish this newsletter with the aim of providing colleagues with an appreciation of Peggy Leung pwkleung@eu.gov.hk how corporate governance can be managed better in practice. Aon has shared with Tel: 2810 2306 us some of its proprietary approach which has been tried and tested on local non-government organisations. Assistant Director, EU W F Yuk wfyuk@eu.gov.hk Why Corporate Governance is Important for Government Departments? Tel: 2165 7228 Assistant Director, EU Poor corporate governance can bring about the decline or even demise of an Steve Barclay organisation 1. The purpose of good governance is to add “sustainable” value to the sbarclay@eu.gov.hk organisation; reduce financial, business and operational risks; strengthen stakeholders’ Tel: 2810 3408 confidence in the entity; and assist in the prevention of fraudulent, dishonest and PMSO, EU unethical behaviours. At risk is the credibility of the Government and the public’s Hedy Lo trust in it. hwhlo@eu.gov.hk Tel: 2165 7288 The key corporate governance principles of accountability, transparency, integrity and PMSO, EU stewardship are the pillars of the Hong Kong’s public administration. These David Hooi dwkhooi@eu.gov.hk principles are extended to the arms-length organisations that provide public services. Tel: 2810 3701 The primary duty of the department is to ensure that public monies are properly used, public services are delivered and the public good protected. Department heads PEO, EU need to have assurance that there are systems in place to alert them of any Judy Li jckli@eu.gov.hk abnormalities, and to provide them with remedies. Tel: 2165 7206 How do we distinguish good and bad corporate governance? One can detect indicators of the quality of corporate governance by observing the behaviours of the governing bodies, on how meetings are run, and on how the directors or senior officials conduct themselves in steering the entities to meet their objectives. Some key signs of good corporate governance are: 1 Public Sector Governance – Australia, CCH 2004 1
  • 2. Head, EU Kitty Choi Signs of Good Corporate Governance Possible Evidence kkychoi@eu.gov.hk Tel: 2810 2021 Commitment to good corporate Report of corporate governance practices governance by members of the governing in annual report; proactive in implementing Deputy Head, EU body necessary systems, not just those that are Patricia Lau plau@eu.gov.hk legally mandatory Tel: 2810 3463 Formal board structure Documented terms of reference of all committees and job descriptions for Assistant Director, EU Peggy Leung chairman and directors; key committees in pwkleung@eu.gov.hk place Tel: 2810 2306 Formal board processes in place and the Formal meeting procedures (e.g. quorum, Assistant Director, EU board focuses on strategic and directional attendance records, decision making W F Yuk issues processes, minutes); segregation of wfyuk@eu.gov.hk executive and non-executive roles Tel: 2165 7228 The governing body demonstrates Annual declaration of conflicts of interests; Assistant Director, EU directorship and professionalism directors declared interest and abstained Steve Barclay from voting on connected transactions; at sbarclay@eu.gov.hk Tel: 2810 3408 least 50% attendance rate; the chairperson is able to steer meetings and ensure PMSO, EU everyone contributes to decision making Hedy Lo hwhlo@eu.gov.hk The governing body demonstrates Annual report published within 3 months Tel: 2165 7288 transparency and full disclosure of financial year end; key papers delivered 48 hours prior to a meeting; minutes PMSO, EU delivered to attendees within 7 days after David Hooi dwkhooi@eu.gov.hk meeting Tel: 2810 3701 The governing body demonstrates public Formal decision making processes; board accountability decisions are made collectively, not by one PEO, EU Judy Li person; split role of non-executive jckli@eu.gov.hk chairman and CEO; independent audit Tel: 2165 7206 Formal and few overlapping decision Approved delegated financial authority; making processes decisions made are supported by analysis, are followed through and cannot be reversed without a formal process The governing body focuses on strategy 3 to 5 year strategic plan is in place and and policy formulation, not operational updated annually on a rolling basis; annual decisions business plan that aligns with the strategic plan in place Established risk management framework Internal audit team reports to the audit and effective and internal controls, so committee; formal policies to deal with problems are assessed early, managed and non-conformance, policy violation and solved prudently fraud Risk and crisis management systems in The board is able to identify and deal with place the top risks with appropriately drawn up contingency and service recovery plans in the event of crisis 2
  • 3. How to manage corporate governance proactively and systematically? Head, EU Kitty Choi Aon has developed a systematic four-stage 12-step approach, which follows the kkychoi@eu.gov.hk logical steps of finding issues, designing solutions, taking action and taking feedback. Tel: 2810 2021 This approach facilitates the governing body to steer, direct and monitor the organisation’s operations and performance. Deputy Head, EU Patricia Lau plau@eu.gov.hk Tel: 2810 3463 Assistant Director, EU Peggy Leung pwkleung@eu.gov.hk Tel: 2810 2306 Assistant Director, EU W F Yuk wfyuk@eu.gov.hk Tel: 2165 7228 Assistant Director, EU Steve Barclay sbarclay@eu.gov.hk Tel: 2810 3408 PMSO, EU Hedy Lo hwhlo@eu.gov.hk Tel: 2165 7288 PMSO, EU David Hooi dwkhooi@eu.gov.hk Tel: 2810 3701 Figure 1 Aon’s Institutional Governance Improvement Programme PEO, EU Judy Li The typical starting base is a scan of the governing body (the board). The board scan jckli@eu.gov.hk aims to quickly identify potential areas of weaknesses in the corporate governance Tel: 2165 7206 infrastructure. A 10-part questionnaire survey assesses the structure and processes of the board. Each part uses 10 survey questions to address a particular attribute of corporate governance. Each question is rated on a 0-5 scale based on evidence of behaviour of the board. For example, for a question on whether roles of the board are clearly defined, evidence of an updated director’s handbook will score a “5” and absence of any written terms of reference will be a “0”. The summated score forms a Board Scan Index particular to the organisation. As a reference, out of a perfect score of “5”, around “1.5” is considered a pass. This means the organisation has started some individual elements but significant exceptions are found. The score facilitates performance tracking when the scan is repeated periodically. It is designed to be self-assessed but is more effective if administered by a third party. Additional benefits accrue when it is followed by a post-survey workshop, engaging the board members to discuss findings, agree on gaps and action plans. 3
  • 4. Head, EU Two of the 10-part questions are illustrated below: Kitty Choi kkychoi@eu.gov.hk Tel: 2810 2021 Board Scan – the 10 parts Deputy Head, EU 1. Commitment to Effective Corporate 6. Public accountability Patricia Lau Governance 7. Decision Making plau@eu.gov.hk Tel: 2810 3463 2. Board structure 8. Strategy and policy formulation 3. Board processes 9. Internal control and compliance Assistant Director, EU Peggy Leung 4. Directorship and professionalism 10. Risk and Crisis Management pwkleung@eu.gov.hk 5. Transparency and disclosure Tel: 2810 2306 Each part contains 10 questions on a 0-5 scale. Two examples below: Assistant Director, EU 1. Commitment to Effective Governance 7. Decision Making W F Yuk wfyuk@eu.gov.hk 1.1 Chairman’s and directors’ verbal and written 7.1 A clear decision making process Tel: 2165 7228 support of better corporate governance (hierarchy, checks and balances, 1.2 Mission clearly articulated and followed by delegation of authority) Assistant Director, EU the board 7.2 Practices to push decision making Steve Barclay sbarclay@eu.gov.hk 1.3 Respective written roles of the board and to those who need to make them Tel: 2810 3408 senior management are clearly defined 7.3 No one has the authority to 1.4 Organisation’s corporate governance code single-handedly put the PMSO, EU in place organisation at risk (e.g. by Hedy Lo hwhlo@eu.gov.hk authorising major commitment) 1.5 Code of ethics published (ICAC or own) Tel: 2165 7288 7.4 Clear and updated organisation 1.6 Strong culture for fairness and equity (e.g. chart and reporting line PMSO, EU not using public funds for personal David Hooi expenses) 7.5 All major board decisions on new dwkhooi@eu.gov.hk projects are supported by proper Tel: 2810 3701 1.7 Directors have clear procedures on business case arguments highlighting potential areas of conflict PEO, EU 7.6 Complex decisions are vetted by a 1.8 Papers for board meetings are disseminated Judy Li standing committee before jckli@eu.gov.hk at least 48 hours before meeting presenting to the board Tel: 2165 7206 1.9 Minutes are written up and distributed 7.7 A clear and transparent process to within 7 days reverse past decisions 1.10 Continual attempts to improve how 7.8 Management provides relevant corporate governance practices are exercised and appropriate amount of information to the Board to facilitate decision making 7.9 Board decisions are minuted and followed through 7.10 Service professionals are able to make operational decisions to deal with customers 4
  • 5. Conclusion Head, EU Kitty Choi For the governing body, the board scan is a logical starting point to take stock of the kkychoi@eu.gov.hk Tel: 2810 2021 organisation’s governance, identify gaps to close and effect improvements. There is not a single one-size-fits-all strategy for achieving effective corporate governance. Deputy Head, EU However, establishing agreed upon metrics and clearly defined performance and Patricia Lau conformance indicators, as well as installing an effective feedback system, provides a plau@eu.gov.hk Tel: 2810 3463 good platform for sustainable and effective corporate governance. Assistant Director, EU Efficiency Unit Peggy Leung pwkleung@eu.gov.hk July 2009 Tel: 2810 2306 Assistant Director, EU W F Yuk wfyuk@eu.gov.hk Tel: 2165 7228 Assistant Director, EU Steve Barclay sbarclay@eu.gov.hk Tel: 2810 3408 PMSO, EU Hedy Lo hwhlo@eu.gov.hk Tel: 2165 7288 PMSO, EU David Hooi dwkhooi@eu.gov.hk Tel: 2810 3701 PEO, EU Judy Li jckli@eu.gov.hk Tel: 2165 7206 5