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  • 1. Corporate Governance In Arms-Length Agencies – An International Overview July 2009
  • 2. EFFICIENCY UNIT VISION AND MISSION Vision Statement To be the preferred consulting partner for all government bureaux and departments and to advance the delivery of world-class public services to the people of Hong Kong. Mission Statement To provide strategic and implementable solutions to all our clients as they seek to deliver people- based government services. We do this by combining our extensive understanding of policies, our specialised knowledge and our broad contacts and linkages throughout the Government and the private sector. In doing this, we join our clients in contributing to the advancement of the community i while also providing a fulfilling career for all members of our team. This brief was researched and authored by the Research Division, Institute of Public Administration, Ireland (www.ipa.ie/research). The Research Division provides applied research services for policy makers in a wide range of public service organisations, drawing on an extensive network of contacts and experience gained over more than thirty years. Other Efficiency Unit Documents The Efficiency Unit has produced a number of guides on good practice on a wide range of areas, including outsourcing and contract management. These may be found on the Efficiency Unit website at www.eu.gov.hk. Full Version Simplified Version Corporate Governance in Arms-Length Agencies – An International Overview
  • 3. Foreword Corporate governance means different things to different people. Whilst it is an evolving concept in the public sector as much as in the private sector, it is not a strict science. It is more than financial accountability, yet it is not the same as ‘Governance’; the latter has a much broader scope. In Hong Kong, unlike many other jurisdictions, most government departments still follow the traditional vote-funded model and are subject to a comprehensive regime of controls and accountability that has been built up over many years. On the other hand, concerns have arisen over the corporate governance of non-government bodies. We have, therefore, devoted this issue of our public sector reform series to an overview of the challenges faced in other countries concerning corporate governance in arms-length agencies. We hope the overseas experiences related here will contribute to the debate on the most appropriate way forward in Hong Kong. ii Head, Efficiency Unit July 2009 Simplified Version Options of Red 0c 100m 100y 0k Corporate Governance in Arms-Length Agencies – An International Overview
  • 4. Contents Executive Summary 1 1. Corporate governance in the public sector: definitions and developments 5 What does corporate governance mean? Why has corporate governance come to prominence? Particular challenges for corporate governance in the public sector What does corporate governance encompass? 2. Standards of behaviour 13 Corporate governance codes of good practice Codes of conduct Leadership developments 3. Organisational structures and processes: governing body 19 Board size Board committees Board appointments Board tenure iii Board development Board performance Board composition Board remuneration 4. Control 27 Risk management Audit 5. External reporting 31 The need for transparency Balancing transparency with confidentiality 6. Conclusions 33 References 34 Full Version Simplified Version Corporate Governance in Arms-Length Agencies – An International Overview
  • 5. Executive Summary The importance of corporate governance lies in Corporate governance can be more challenging its contribution to accountability. The issue of in a public sector environment than in the private corporate governance has grown in prominence sector. The challenges include: policy is set by the in recent years, largely in response to a number government; board members may be selected by of financial scandals in the private sector such as ministers; ministerial directions can countermand the Enron collapse in the United States of America the wishes of the board at any time; and chief (USA). More recently, the collapse of Lehman executive officers may be formally employed by Brothers Holdings plc, which has precipitated the minister, creating accountability problems and contributed to financial downturns globally, for the board. has drawn attention to the consequences of weak controls. The focus of this report is on the corporate governance of organisations at arms length There has also been increased international public from government, i.e. those bodies outside of concern over the governance and accountability government departments or ministries, such of public sector organisations arising from cases as statutory agencies and publicly funded of fraud or mismanagement, or concerns over the non-governmental organisations (NGOs). In perceived absence of accountability of agencies. particular, the focus is on the functioning of the The public outrage at the abuse of the expenses governing board of the organisation. Even where 1 regime for parliamentarians at Westminister, while a board may not exist, there is usually a governing not a failure of corporate governance as such, body responsible for leadership and reporting on highlights the issue of standards of behaviour which stewardship. is of central concern to corporate governance. Failure to adhere to good standards of behaviour There are a number of common problems that can lead to failures in corporate governance can lead to corporate governance failures. such as misuse of public assets or resources Figure 1 shows seven warning signs of service for personal or political purposes or failure to failure. Governing body members and relevant exercise reasonable stewardship over public staff in sponsoring departments need to give assets or resources. particular attention to these signs. A good definition of corporate governance in the What does corporate governance cover? public sector states that: The International Federation of Accountants’ (IFAC) guidance that has been adopted in many Broadly speaking, corporate governance countries identifies four main dimensions of generally refers to the processes by which the corporate governance of public sector organisations are directed, controlled and organisations (Figure 2). held to account. It encompasses authority, accountability, stewardship, leadership, direction and control exercised in the organisation. (Australian National Audit Office, 1999) Simplified Version Options of Red 0c 100m 100y 0k Corporate Governance in Arms-Length Agencies – An International Overview
  • 6. Figure 1 The seven warning signs of service failure Analysis of public inquiries shows these common problems contributed to serious service failures. Source: Audit Commission of the United Kingdom 2 Figure 2 Dimensions of good corporate governance Organisational Standards of Structures and Behaviour Processes • codes of good practice • board dynamics • codes of conduct • leadership developments Good Corporate Governance External Control Reporting • need for transparency • risk management • balancing transparency • audit Full Version Simplified Version with confidentiality Corporate Governance in Arms-Length Agencies – An International Overview
  • 7. Standards of behaviour openness, independence, good faith, and Standards of behaviour are important to corporate service to the public, which underpin most governance as they establish how the leadership corporate governance codes of practice. operates, the values that drive the organisation, and the culture that prevails. As such, standards of Audits and inspections become a normal behaviour deal largely with what has been termed part of life in public organisations. An issue of the ‘soft’ attributes of corporate governance. concern for the governing body of many public Governments internationally have adapted private organisations is the choice of external auditors sector codes of practice and codes of conduct and the need to ensure auditor independence. In to provide guidance for board members and that context, auditor rotation is becoming more executives on these issues. common. Another feature of good corporate governance is the use of audit committees by Leadership is another crucial principle from a public organisations to provide an oversight of corporate governance perspective. There are two audit arrangements. key leadership roles that the governing bodies of public organisations need to pay attention External reporting to: the establishment of sound governance Transparency is a fundamental element of good structures and processes, and supporting good corporate governance. Public sector organisations governance through their own performance and rely on the continuing support and confidence of behaviours. their stakeholders who in turn need to be assured of the quality and ethical standards of public bodies 3 Organisational structures and processes with which they deal. Transparency in relation to There are eight issues to be addressed by governing matters such as procurement, remuneration and bodies and their sponsoring departments if they disclosure must be exemplary. are to deliver good corporate governance in terms of effective responsibility and accountability In practical terms, transparency in relation to (Table 1). reporting on performance and on future intentions and plans is achieved in a number of ways, Control including public and timely production of plans For public organisations, other than financial and reports. Sponsoring departments need to risk, their work is also subject to a much ensure that they have the skills and competencies broader category of risks, including policy risk required to critically evaluate such plans and and reputational risk. Risk management means reports. addressing these factors. What is now required by many codes of practice of corporate governance There are challenges in terms of discharging duties is to ensure that risk is explicitly stated and a in a transparent manner whilst simultaneously consensus on addressing risks formulated. protecting business or organisation sensitive information. The need for codes and practices to A particular dimension of risk management directly acknowledge the tension between confidentiality applicable to the governing bodies of public and transparency and to strike a balance between organisations is the management of conflicts these competing tensions requires constant of interest, which can significantly impact on scrutiny. It is important that governing bodies reputational risk. There is no prescriptive set periodically scrutinise their organisation’s guidance of rules specifying what constitutes ethical and practice with regard to striking a balance Simplified Version behaviour. Decision-making should be guided Options of Red between transparency and confidentiality. by the principles of integrity, honesty, transparency, 0c 100m 100y 0k Corporate Governance in Arms-Length Agencies – An International Overview
  • 8. Table 1 The eight key issues on board structures and processes Board size Six to nine members is considered a reasonable size in the private sector. Up to twelve is not uncommon in the public sector, to meet representational and balance requirements. Board committees Commonly used for detailed oversight and supervision of areas of special risk critical to success. Board appointments Board selection and composition are vital elements in securing effective boards. Identifying competencies needed, pro-active search for candidates and attention to personal attributes are amongst the items that must be given attention. Board tenure There is no set term limit for boards, though three years is a common time in a number of countries. Appointments may be renewed for a second term, subject to satisfactory performance. Staggering of replacement appointments is important. 4 Board development There is a need for board induction and continued review of training needs, and also to ensure that those involved in the appointment of board members are fully trained. Board performance Best practice suggests that formal annual assessment of board performance between the minister, sponsoring department and the chair of the board should take place to review board performance. Board composition Best practice guidance suggests that the majority of board members should be independent and that the chair and chief executive positions should be separate. There is a growing view that departmental staff should not be members of the board. Board remuneration Practice varies significantly. Many smaller public bodies tend to pay only out-of-pocket expenses. Others pay a set amount, based either on a daily rate or an estimated time commitment per month or per year. In general, remuneration is relatively modest. Full Version Simplified Version Source: adapted from Uhrig (2003) Corporate Governance in Arms-Length Agencies – An International Overview
  • 9. 1 Corporate governance in the public sector: definitions and developments What does corporate governance in the public sector by reference to the Australian mean? National Audit Office, which states that: Corporate governance is a concept that has been very much to the fore in public sector reform in Broadly speaking, corporate governance recent years. Understanding how to ensure and generally refers to the processes by which achieve best practice in corporate governance organisations are directed, controlled and presents significant challenges for public sector held to account. It encompasses authority, organisations internationally. But what does the accountability, stewardship, leadership, direction term corporate governance mean? and control exercised in the organisation. (Australian National Audit Office, 1999: 1 Corporate governance has its origins in the http://www.anao.gov.au/uploads/documents/ marketplace and emerged to describe the way Corporate_Governance_in_Commonwealth_ in which suppliers of finance to corporations Authorities_and_Companies.pdf) could assure themselves of getting a return on their investment. In this sense it is about ensuring Within private sector organisations, corporate that the management of private organisations governance is often viewed as being primarily operate and run their businesses in a manner concerned with the functioning of the board of 5 consistent with the wishes of the shareholders, the organisation. In the different parts of the public and that mechanisms for identifying and arresting sector, the equivalent of the group that fulfils the malpractice are in place and effective (Bovaird role of the board of a company in the private and Löffler, 2009: 9). sector is at times not so easy to identify. Within the public sector, when corporate But as the IFAC (IFAC, 2001, para. .019, governance is discussed the main focus, and http://www.ifac.org/Members/DownLoads/ the focus of this report, is often on the corporate Study_13_Governance.pdf) notes: governance of organisations at arms length In whatever way it is configured, constituted from government, i.e. those bodies outside of or described, all bodies need to have at their government departments or ministries (which are head a group which is responsible for giving usually well regulated by specific rules and statutes) leadership and strategic direction, defining such as statutory agencies and publicly funded control mechanisms and supervising the overall NGOs. In this context corporate governance has management of the entity’s activities, and become associated not only with financial reporting reporting on stewardship and performance. and controls, but also with standards of behaviour and organisational structures and processes. In this report, we understand corporate governance Simplified Version Options of Red 0c 100m 100y 0k Corporate Governance in Arms-Length Agencies – An International Overview
  • 10. It is this leadership or government grouping, referred to in this report either as the governing body or the board, which is the main focus for corporate governance in the public sector. For some public organisations, the governing body is relatively obvious, as with the board of an agency or a two-tier board structure where a non-executive supervisory board oversees an executive management board. But for other public sector organisations the role played by the governing body in corporate governance may not be clear, as the case study of Canada’s National Research Council governing council shows. Case study Role of governing council is unclear As part of a review of the National Research Council Canada in 2003, the Office of the 6 Auditor General examined the role of the National Research Council governing council. Its findings revealed a lack of clarity among governing council members about the role of the governing council: whether it was simply advisory in nature to the president or whether it included the obligation to direct and control the work of the corporation through the president. The governing council was found to be operating primarily as an advisory body. The Auditor General was concerned about this apparent lack of clarity, and believed that it has led to the absence of key governing council governance initiatives and structures. In a follow-up review in 2007, the Office of the Auditor General noted satisfactory progress on this issue, as the council had given itself a stronger role to meet the assigned responsibilities under the National Research Council Act. It had also established two new standing committees: the audit, evaluation and risk management committee and the human resources committee. Source: Office of the Auditor General of Canada, 2007, http://www.oag-bvg.gc.ca/internet/English/ att_20070203xe03_e_17507.html Full Version Simplified Version Corporate Governance in Arms-Length Agencies – An International Overview
  • 11. Why has corporate governance come and identified three fundamental principles of to prominence? corporate governance – openness, integrity and Interest in corporate governance has been driven accountability. A ‘combined code’ was developed primarily by a growing list of corporate scandals in 1998 which harmonised the key issues from in the private sector, such as the Enron collapse Cadbury with a number of subsequent reports. The in the USA. The problems have to do with the ‘combined code’ was binding on all companies pursuit of private interests (excessive compensation quoted on the London Stock Exchange. It has of top executives, overly generous benefits), been revised on a number of occasions. The most duplicity (failure to observe accepted standards recent version of the Code is available at: http:// of accounting, the disguising of transactions), www.frc.org.uk/documents/pagemanager/frc/ conflict of interest (accounting firms too close Combined%20Code%20June%202006.pdf. to client corporations) and corruption in various other forms. These issues have focused interest The OECD has also been active in relation to on a number of corporate governance issues promoting good corporate governance and such as the role of the board of directors, the published a series of Principles of Corporate independence of the board’s membership Governance in 1999. Following a comprehensive from management, the responsibilities of the survey of how member countries addressed the board chair, the chair’s relationship to the chief different corporate governance challenges they executive, and the transparency and accuracy faced, the Principles were revised in 2004: see of financial reporting (Plumptre, 2004, pp. 2–3). http://www.oecd.org/dataoecd/32/18/31557724. More recently, the collapse of Lehman Brothers pdf. 7 Holdings plc in the USA, which has precipitated In the USA, following the widely reported and contributed to financial downturns globally, accounting scandals at energy company Enron has drawn attention to the consequences of weak and telecommunications company WorldCom, controls. In a public sector setting, the public the federal government sought to pass laws outrage at the abuse of the expenses regime for which would prevent in future the fraudulent parliamentarians at Westminister, while not a failure reporting of accounts in private companies. The of corporate governance as such, has highlighted Sarbanes-Oxley Act of 2002 extended boards’ the issue of standards of behaviour which is of financial oversight responsibilities and imposed central concern to corporate governance. new financial disclosure requirements. In particular, Three sources for new practices and codes of it requires that management prepare a report on corporate governance are dominant internationally the internal control structures and procedures for in response to these scandals – the United financial reporting in their organisation, as well as Kingdom (UK), Organisation for Economic a report by external auditors on that assessment: Cooperation and Development (OECD) and the see http://www.soxlaw.com/. USA. In the UK, following a number of private While private sector examples of corporate sector corporate governance scandals, the governance failure have been driving improvement Committee on the Financial Aspects of Corporate initiatives at an international level, there have also Governance (the Cadbury Committee) was formed been an increasing number of such failures within in 1991 to investigate. The resultant Cadbury report the public sphere which have prompted reviews of developed an innovative ‘Code of Best Practice’ corporate governance practices and procedures Simplified Version Options of Red 0c 100m 100y 0k Corporate Governance in Arms-Length Agencies – An International Overview
  • 12. in the public sector. Public sector scandals identifies, boards of public sector bodies carry have been a driving force for the increasing considerable responsibilities for the management focus on corporate governance in the public of public funds and must ensure they have the sector. So too has the increasing complexity ability to fully pursue matters they deem to be of of stakeholder relationships and expectations concern. Similarly, the Royal United Hospital Bath regarding performance and transparency, leading case study shows how boards can be misled to demands internationally for more effective by executive management unless they have the corporate governance arrangements in the public necessary competencies and skills to rigorously sector to help agencies steer their way through scrutinise performance. complex stakeholder demands. Also, changing trends in the way the public sector conducts its Corporate governance failures can result in business and in particular regulatory and standard- wasted public money or poor service experience, setting practices are increasingly requiring public and in some cases, may even result in serious organisations to adopt best corporate governance tragedies. The UK Audit Commission analysed standards. a number of inquiries into failures to see what contribution governance arrangements made The use and stewardship of public funds is an to organisational failure, as the case study on essential feature of corporate governance in the page 11 identifies. public sector. As the ‘Fast Ferry Fiasco’ case study 8 Case study Royal United Hospital Bath corporate governance failures Professor Robert Tinston was appointed by the trust in 2003 to hold an inquiry after two external reviews identified concerns about deliberate manipulation of waiting lists and serious deterioration in finances at the trust. The Tinston report describes ‘a trust in the grip of a powerful self-delusion about its real performance and the desire to continue to support this leading to a culture of misrepresentation’. In particular, the report noted major corporate governance failures. The inquiry noted that the former executive team appears to have adopted a policy of marginalising the trust board or, at the very least, presenting important information at board meetings in an unduly optimistic and favourable way. The report says the trust’s weak control and accountability arrangements combined to undermine fundamentally the performance of the hospital. Boards must be in a position to challenge constructively the financial and operational information they receive. This means they must understand the information presented to them and its implications for the organisation. They must also be able to identify risks to their corporate objectives, recognise the financial consequences and assess and monitor how effectively they are being addressed. Source: http://www.hsj.co.uk/ruh-bath-was-delude-claims-probe/19369.article Full Version Simplified Version Corporate Governance in Arms-Length Agencies – An International Overview
  • 13. Case study Board failure: the example of the ‘Fast Ferry Fiasco’ In British Columbia (BC), the ‘Fast Ferry Fiasco’ is an example of how the role of boards can have major impacts on organisational performance. The facts of the Fast Ferry Project are fully documented in the BC Auditor General’s 1999 report: A Review of the Fast Ferry Project: Governance and Risk Management. The government decided to purchase three high-speed aluminium catamaran car ferries at an initial estimated cost of $210 million. The initial board appointed to oversee the construction included three independent directors from the private sector with relevant skills and experience in marine construction. Over the first ten months of its operations, the board: • asked repeatedly for a full budget • asked to receive regular reporting against an approved budget, showing both forecast costs to complete, and variances • asked for a construction schedule • pointed out that the original budget was for a different type of ferry, and questioned both that budget and the latest changes to it 9 • stressed the need for a risk analysis of the current scope of the project • noted that forecast costs continued to rise, and that the scope of the programme had increased without an increase in budget. Its requests were consistently ignored or only partly met, with the result that the board resigned. A new board was appointed. The governance systems put in place to oversee the project were inadequate. Two years later, it was determined that the project was significantly over budget (the final cost was more than $450 million) and the ferries were not suitable for their intended use. Eventually, the ferries were shrink-wrapped in plastic and stored under wraps for several years until they were sold by auction for $18 million. The net loss to the taxpayers of BC was $430 million, not including the cost of all of the reports and lost productivity in responding to public outrage at the debacle. The fiasco became a lightening rod for discussions on the lack of appropriate governance. Source: Watson, 2004, pp. 3–4 http://www.iveybusinessjournal.com/view_article.asp?intArticle_ID=473 Simplified Version Options of Red 0c 100m 100y 0k Corporate Governance in Arms-Length Agencies – An International Overview
  • 14. Particular challenges for corporate The remainder of this report looks at how such governance in the public sector challenges can be managed. In brief, a review of The Auditor General of Western Australia provides good practice by Barker (2004) suggests that the a useful summary of the particular constraints governing body and the sponsoring department acting on public sector boards with regard to need to be clear about the organisation’s remit corporate governance (Office of the Auditor and position, and in particular that: General Western Australia, 1998). He notes that • the organisation has a clear remit and set of in the private sector, the board sets the strategic strategic priorities direction, management gives effect to that direction, • the organisation’s position within the delivery and shareholders provide support through their network is clearly understood investment and operate as a general check on • changes in strategies/priorities are rapidly the performance of the organisation. While there communicated between the sponsor can be grey areas between the various roles, department and the organisation particularly between the board and management, • consultation between the organisation, the relationships are not as complex as in the sponsor department and key stakeholders public sector. takes place, as appropriate, prior to any significant policy change In the public sector, the government is responsible for the setting of policy and usually has wide • effective communications between the powers to intervene. Management is responsible organisation, sponsor department and key for the day-to-day running to provide effective and stakeholders are in place • regular review of the organisation occurs to 10 efficient services in the pursuit of government policy. The ultimate ‘shareholders’ are the electorate ensure that governance is effective and that who have infrequent opportunities to vote and remits and relationships evolve in line with no direct authority over the affairs of any single organisational and policy change. agency. The public sector board often finds itself balancing between managing an agency and What does corporate governance setting strategic direction. Similarly, management encompass? finds itself balancing between a board that is The IFAC (IFAC, 2001, para. .066, http://www.ifac. responsible for the agency’s performance, and org/Members/DownLoads/Study_13_Governance. a minister responsible for the portfolio. These all pdf) identifies four main dimensions of the corporate make corporate governance more challenging governance of public sector organisations: in a public sector environment. The challenges • standards of behaviour – how the include: management of the organisation exercises • policy is set by the government leadership in determining the values and • board members may be selected by standards of the organisation, which define ministers the culture of the organisation and the • ministerial directions can countermand the behaviour of everyone within it wishes of the board at any time • organisational structures and processes – • chief executive officers may be formally how the board and top management within employed by the minister, which creates organisations are appointed and organised, accountability problems for the board how their responsibilities are defined, and • the board, as the accountable authority, carries the legal responsibility for the how they are held accountable Full Version Simplified Version performance of the agency. Corporate Governance in Arms-Length Agencies – An International Overview
  • 15. • control – the network of various controls Elements of what is encompassed by these established by the top management of the aspects of corporate governance, where there organisation to support it in achieving the have been notable developments in recent years, organisation’s objectives, and compliance are outlined in more detail in Figure 3. with applicable laws and regulations and internal policies These four dimensions of corporate governance form the basis for the structuring of the rest of this • external reporting – how the top management report. Significant developments and examples of the organisation demonstrates its financial of international best practice in each of the four accountability for the stewardship of public areas are discussed further in the following money and its performance in the use of chapters. resources. Case study Identifying corporate governance lessons from failures Each of the national inquiry reports identified that poor governance arrangements set the framework within which organisational systems and processes failed to detect or anticipate serious service failures. There was never a single failure or shortcoming in corporate governance that was solely 11 responsible for service failure. Rather, where there were serious and tragic outcomes, it was due to a combination of factors and an accumulation of governance failures. A number of common themes were brought to light by each inquiry: • the poor quality or absence of leadership • poor decision-making and decision-making processes • inadequate systems and processes, such as performance management • lack of clarity in roles, responsibilities and activities, creating poor accountability • poor working relationships and dysfunctional behaviours • an insular organisational culture and poor focus on community and user needs • inadequate contingency plans or risk-management strategies to deal with worst-case scenarios. Some combination of these factors was present at each failing organisation. Source: Audit Commission, 2003, p. 28 http://www.audit-commission.gov.uk/nationalstudies/localgov/Pages/ improvementtrustpublicservices.aspx Simplified Version Options of Red 0c 100m 100y 0k Corporate Governance in Arms-Length Agencies – An International Overview
  • 16. Figure 3 Dimensions of corporate governance Dimension Recommendations on governance 1. Standards of behaviour • Codes of good practice • Leadership • Codes of conduct 2. Organisational structures • Accountability for public money and processes • Roles and responsibilities: • Governing body • Chairperson • Executive management • Sponsoring department 3. Control • Risk management, including management 12 of conflicts of interest • Audit • Internal control 4. External reporting • Transparency • Confidentiality Source: adapted from IFAC, 2001, p. 14 http://www.ifac.org/Members/DownLoads/Study_13_Governance.pdf Full Version Simplified Version Corporate Governance in Arms-Length Agencies – An International Overview
  • 17. 2 Standards of behaviour Standards of behaviour are important to corporate Corporate governance codes of good governance as they establish how the leadership practice of the organisation operates, the values that drive As new corporate governance codes extended the organisation, and the culture that prevails, all throughout the private sector, commercial of which influence the behaviour of all staff. As state-owned enterprises sought guidance from such, standards of behaviour deal largely with governments about equivalent standards. In the development of codes of practice and what response, governments internationally adapted has been termed the ‘soft’ attributes of corporate private sector codes to provide guidance for governance, which have been receiving more board members and executives on commercial prominence in recent years, drawing on best and non-commercial state bodies and agencies. practice in the private sector (see case study). These codes set the parameters for standards of behaviour required for good corporate governance of public organisations. Case study Addressing the ‘soft’ attributes of corporate governance: lessons from private sector practice 13 Research on corporate governance in the private sector has indicated that ‘hard’ attributes of governance, such as board independence, are necessary but not sufficient. There is a need to pay attention to the ‘soft’ side of governance, focusing on behavioural dynamics. Some of the ‘soft’ governance factors that appear to be important for performance in the private sector include: • A clarity in roles, responsibilities, and relationships between: chief executive officer (CEO) and chair; directors and management; directors and shareholders/stakeholders • Healthy chair/CEO interface • Directors working as a team • Culture, trust and open dissent • Right skills, competencies and characteristics, including ‘industry/business knowledge’ • A good induction process and ongoing access to training • Leadership skills of the chair • Information flows • Regular evaluation of board performance. Source: Edwards and Clough, 2005, p. 12 http://www.canberra.edu.au/corpgov-aps/pub/IssuesPaperNo.1_GovernancePerformanceIssues.pdf Simplified Version Options of Red 0c 100m 100y 0k Corporate Governance in Arms-Length Agencies – An International Overview
  • 18. For example, in Australia, the government An example of the type of issue covered by codes developed its Governance Arrangements of good practice is given for building the relationship for Australian Government Bodies in 2005: between the board and chief executive in the case http://www.finance.gov.au/financial-framework/ study taken from the Canadian code. governance/docs/Governance-Arrangements- for-Australian-Government-Bodies.pdf. What all of these corporate governance codes and guidelines have in common is a commitment Similarly, in Canada, the Treasury Board of to ensuring there is: Canada Secretariat has produced guidelines for ‘Corporate Governance in Crown Corporations • clarity over the roles and responsibilities of and Other Public Enterprises’: http://www.tbs-sct. government, boards of state bodies, CEOs gc.ca/gov-gouv/entreprise/entreprise02-eng. and external auditing bodies, as well as the asp. relationship between them • clarity over the public policy objectives In Ireland, the Department of Finance also expected of state bodies published in 2009 a revised and updated ‘Code • adequate financial reporting and internal of Practice for the Governance of State Bodies’: controls h t t p : / / w w w. f i n a n c e . g o v. i e / v i e w d o c . • standards of behaviour that reflect values asp?DocID=5824. of integrity, honesty and probity and that all actions taken within state bodies are in the best interests of that organisation. 14 Case study Canadian code of good practice guidance on building a relationship In a Crown corporation, the nature of the relationship between the CEO and the board is often critical. The board must work with the CEO to build a relationship of openness and trust. Position descriptions can assist greatly in the smooth functioning of these relations. The board of directors, the chair, and the CEO should develop position descriptions for the board, the chair and the CEO. Boards of directors, in conjunction with the CEO, should periodically review the allocation of responsibilities between the board and management. This review should focus on defining and describing both the board’s principal responsibilities and the limits to management’s authority. Source: http://www.tbs-sct.gc.ca/gov-gouv/entreprise/entreprise02-eng.asp Full Version Simplified Version Corporate Governance in Arms-Length Agencies – An International Overview
  • 19. Codes of conduct Particularly with regard to standards of behaviour, An important emerging feature of good corporate such codes of conduct are expected to governance practice internationally is the reflect the practice of the highest standards development of written, formal codes of conduct in public life. In the UK, the Nolan Committee by organisations that set out their obligations with (http://www.archive.official-documents.co.uk/ regard to corporate governance. Like corporate document/parlment/nolan/nolan.htm) inquired governance codes, codes of conduct have into standards of public life and established seven proliferated in recent years. They identify the principles of public life that have been widely behaviour expected of those to whom they adopted internationally: apply by articulating a coherent set of values and a means of addressing maladministration • Selflessness. Holders of public office should where it occurs (see Transport for London (TfL) take decisions solely in terms of the public case study). interest. They should not do so in order to gain financial or other material benefits for The Public Audit Forum (2001) sets out important themselves, their family, or their friends. elements which it is expected most codes of • Integrity. Holders of public office should conduct will address: not place themselves under any financial or other obligation to outside individuals or • outlines of expected professional and organisations that might influence them in personal behaviour the performance of their official duties. • defined restrictions on business and political 15 • Objectivity. In carrying out public business, activities (where appropriate) including making public appointments, • criteria and procedures for declarations of awarding contracts, or recommending interests, both business and political individuals for rewards and benefits, holders • definitions of conflicts of interest of public office should make choices on • a statement of the aims and values of the merit. body • Accountability. Holders of public office are • statements of the obligations of the body accountable for their decisions and actions towards its customers, staff, community and to the public and must submit themselves other interested parties to whatever scrutiny is appropriate to their office. • information about the body’s approach to openness, and arrangements for acquiring • Openness. Holders of public office should be information about its activities as open as possible about all the decisions and actions that they take. They should • procedures for raising complaints with an give reasons for their decisions and restrict independent body information only when the wider public • definition of the dividing line between the role interest clearly demands. and responsibilities of the governing body and those of the executive staff. Source: Public Audit Forum (2001), http://www. public-audit-forum.gov.uk/propriety.pdf Simplified Version Options of Red 0c 100m 100y 0k Corporate Governance in Arms-Length Agencies – An International Overview
  • 20. • Honesty. Holders of public office have a duty Failure to adhere to such standards can lead to to declare any private interests relating to their the failures in corporate governance noted earlier public duties and to take steps to resolve any and in particular to: conflicts arising in a way that protects the public interest. • failures of principles of fairness, in the treatment of staff, suppliers or contractors, • Leadership. Holders of public office should whether due to conflicts of interest or other promote and support these principles by reason leadership and example. • misuse of public assets or resources for personal or political purposes • failure to exercise reasonable stewardship over public assets or resources. Case study Transport for London (TfL) code of conduct TfL’s corporate governance code of conduct addresses the main principles of good corporate governance by setting out a series of undertakings that TfL has committed itself to deliver 16 under five main headings: • Public focus • Structures and processes • Risk management and internal control • Service delivery arrangements • Standards of conduct For example, under risk management and internal control, TfL, amongst other things, commits that its annual report will contain an objective and understandable statement and assessment of its risk-management system, including systems of internal control and internal audit and their effectiveness in practice. Source: http://www.tfl.gov.uk/corporate/about-tfl/2876.aspx#PublicFocus Full Version Simplified Version Corporate Governance in Arms-Length Agencies – An International Overview
  • 21. Leadership developments In terms of developing board members’ leadership Leadership is a crucial principle from a corporate skills, knowledge and aptitude, mentoring of board governance perspective. There are two key members has been of growing prominence in leadership roles the governing body of public recent years (see case studies). organisations needs to pay attention to: the establishment of sound governance structures A particular leadership challenge for the chair is and processes, and supporting good governance managing the relationship with the chief executive. through its own performance and behaviours. Chief executives are professionals with specific training in their job. Chairs often come to the A range of commentators such as Kalokerinos role with no or limited experience of chairing. (2007) note the central role of the chair of the The chair and chief executive may experience a governing body in the leadership of public sector culture clash between a management approach organisations. This includes the traditional duty to a question and a layperson’s approach. They of ensuring the proper functioning of the board may be talking about the same problem using and its meetings, but also covers maintaining a very different vocabularies and terms of reference. close relationship with the chief executive and Chief executives and chairs may also have different representing the authority to outside stakeholders. definitions of success and consequently may A study undertaken for the UK Public Services end up working towards different goals. The Productivity Panel (Barker, 2004) states that the development of a good working relationship with chair should: an agreed common vision as to the organisation’s purpose is the key to effective leadership of the 17 • act as board team leader, with an organisation. understanding of what skills, knowledge and aptitudes the board needs • regularly carry out skills, knowledge and aptitude audits, which may be relatively low key and informal, to help understand the current board composition and provide board members with further clarity about their individual roles • act as board ‘conductor’, fostering an environment where dissenting voices can be heard without damaging collective responsibility • act as the interface between the board and its executive team, and the organisation and its sponsor department. Simplified Version Options of Red 0c 100m 100y 0k Corporate Governance in Arms-Length Agencies – An International Overview
  • 22. Case study Mentoring support for a young chair Jamie Dear became chair of newly established charity Jacari in the UK in 2005 at the age of twenty-three. He availed of the opportunity provided by government-funded support for mentoring of chairs to provide him with guidance on his new role. He met with his mentor three times over a couple of months. ‘Of all the development opportunities I’ve experienced this has made the most impact on me,’ said Jamie, ‘I couldn’t recommend it highly enough.’ The mentoring provided reassurance that the issues facing Jamie and the board were faced by others. The mentor also provided invaluable technical input on governance and management issues. It helped clarify roles and functions. Source: http://www.ncvo-vol.org.uk/governanceandleadership/?id=9474&terms=chairing Case study Mentoring and board development 18 In a national development agency in the USA every new board member is assigned two mentors – a veteran board mentor and a staff mentor. Mentoring partners meet in person and/ or virtually before and after each board meeting for the first year of board service. The board mentor introduces the new member to the issues and workings of the board. The staff mentor introduces the new board member to the organisational issues around current and future operations. The mentoring programme enables new board members to familiarise themselves with standards of behaviour and practice in the organisation. Source: http://www.communitydevelopmentworks.org/Portals/12/word_docs/Board%20Articles/ Mentor%20Your%20Way%20to%20Board%20Development.pdf Full Version Simplified Version Corporate Governance in Arms-Length Agencies – An International Overview
  • 23. 3 Organisational structures and processes: governing body With regard to corporate governance issues around of the owners or members of the corporation, organisational structures and processes, the main essentially as their proxies and representatives, issues focus on the roles and responsibilities board size can be somewhat larger, often up to of governing bodies and their accountability twelve, to meet representational and balance processes. A government-commissioned review requirements (http://www.browngovernance. of corporate governance of statutory authorities com/asktheexperts/4.htm). and office holders in Australia (Uhrig, 2003) identified six issues to be addressed in governing Board committees bodies if they are to deliver in terms of effective Board committees are a commonly used mechanism responsibility and accountability: board size, for boards to enhance their effectiveness through committees, appointments, tenure, development further detailed oversight and supervision of areas and performance. To these can be added board of special risk critical to success. Uhrig (2003) notes composition and board remuneration. that to assist in the efficiency of operations and for reasons of accountability committees should Board size operate with a clear written mandate from the full Public sector boards tend to be large in size. The board. The operations of committees should also Uhrig report (Uhrig, 2003) suggests that based be agreed, including how committees will report 19 on current thinking on best practice in the private to the board and how committees will interact with sector a board of between six and nine members management and other relevant parties. This will (including a managing director if there is one) clarify whether a committee has the power to make represents a reasonable size. Boards with less decisions and approve management proposals than six members may have difficulty in meeting or report to and make recommendations to the their statutory responsibilities due to workload board. A director should be appointed to chair pressures and the potential lack of breadth of each committee, and should be responsible for views. This situation is likely to be exacerbated its operations, reporting back to the full board. in periods where vacancies exist. There is also It is considered good practice that the chairman the risk that smaller boards may find it easier to of the full board should not be the chairman of become involved in management decisions rather all committees. than overseeing them. Board appointments Uhrig also notes, however, that there are Board selection and composition are vital elements circumstances where a larger board may be in securing effective boards that can deliver on warranted. For example, when management of their accountability requirements. The case study the risks of the organisation is such that a number from BC addresses the issue of best international of board committees are required, larger board practice with regard to board selection. membership may be appropriate. Particularly in the public sector where boards act in the interests Simplified Version Options of Red 0c 100m 100y 0k Corporate Governance in Arms-Length Agencies – An International Overview
  • 24. Case study Best practice in board selection In Canada, the premier of BC in 2001 established the Board Resourcing and Development Office (BRDO) (http://www.fin.gov.bc.ca/brdo/). After reviewing best practices in director recruitment and selection in the private and public sectors around the world, the BRDO put in place the following key elements of board selection: Competency matrix. All corporations are required to think strategically about the issues facing the corporation and, from that, to identify a matrix of competencies that sets out the required skill set for the board of directors as a whole. Personal attributes. In the recruitment process, close attention is paid to the behaviour and personal attributes of potential directors. Importance is also placed on a candidate’s commitment to corporate governance and his or her understanding of the responsibilities of directors today. As part of due diligence, directors of crown corporations are asked to commit to a Charter of Expectations. Work with the chair/board. If a new board is being created, the chair is identified first. The BRDO then works with that chair to establish the competency matrix and to recruit and evaluate potential board members. If the recruitment is for a vacancy on a board, the BRDO works with 20 the chair and/or governance committee to identify and evaluate potential candidates. Pro-active search for candidates. Candidates are identified from a variety of sources and any person who is interested in serving on a board may make his or her interest known by submitting a résumé and expression of interest to the BRDO. For specific vacancies, boards are encouraged to identify potential candidates. In addition, the BRDO retains a national executive search consultant to provide ongoing search and referencing services. Due diligence. The due diligence process for each candidate includes a review of the candidate’s probity, identification of potential conflicts of interest, and a declaration by the candidate accepting his or her fiduciary and other responsibilities to the corporation. All candidates who wish to be considered for a position on a public sector corporation must complete a written Candidate Profile and Declaration. The formal due diligence process has been particularly helpful in identifying potential conflicts of interest. Diversity. There is a feeling that the membership of public sector boards should reflect the cultural and geographical makeup of the population. The challenge is to make sure that token or unqualified appointments are not made. The BRDO undertakes a search process, including searching in non-traditional places, to ensure that qualified candidates are identified from many diverse communities. Full Version Simplified Version Corporate Governance in Arms-Length Agencies – An International Overview
  • 25. Building the talent pool. Boards are normally structured with a mixture of seasoned board directors and others who are very senior and skilled in their professions but may not have had extensive board experience. The intention is to build the talent pool for the next generation of private and public sector directors for BC and elsewhere. Transparency. The BRDO publishes the names, terms and full biographies of all appointees to all public sector boards on the BRDO website. Members of the public and other interested parties can review and assess whether the board members appear to have the requisite skills and experience for the positions they hold. Quality control. During the recruitment and evaluation process, the BRDO works with ministers and boards to identify and recruit candidates. Because the BRDO has expertise in the area of corporate governance and board building, it is able to bring this expertise to the process and to provide advice in this area, regardless of the ministry involved. Also, after the recruitment and evaluation process is complete, the BRDO is required to endorse the appropriateness of every candidate before the appointment instrument is presented to the appointing body for final approval. Commitment to best practices. In addition to appointments, the BRDO encourages and supports public sector organisations to adopt best practices in corporate governance. These 21 include things such as: position descriptions for the board, chair, individual directors and committees and written documents that outline the board’s process and structure; board composition and succession plans; appropriate orientation and ongoing director education; board, chair, committee and individual director evaluation processes; separation of the chair and CEO except in exceptional circumstances; and a board plan for evaluating and compensating the CEO, and for CEO succession. Source: Watson, 2004 http://www.iveybusinessjournal.com/view_article.asp?intArticle_ID=473 Board tenure Terms of appointment can be for any period The length of tenure on a board and the associated between one and five years. Appointments issue of staggering of replacement of board may be renewed for a second term, subject members are important issues to be addressed, to satisfactory performance. Members may as the case study from Canada suggests. be re-appointed to the same position only once without open competition. A member There is no set term limit for boards, though three who has served an initial term and has been years is a common time in a number of countries. re-appointed may, however, choose to apply for The experience of the Scottish government a third re-appointment or subsequent term with regarding length of board appointments would the same public body. He or she must apply in not be untypical: open competition for each new term. (http:// www.scotland.gov.uk/Topics/Government/ public-bodies/faq-pa#a14) Simplified Version Options of Red 0c 100m 100y 0k Corporate Governance in Arms-Length Agencies – An International Overview
  • 26. Case study Board appointments and staggering of terms A review carried out by the Office of the Auditor General of Canada (2005) found that in 2004 over one-third of directors of the fifteen largest Crown corporations were still sitting on boards after their term had expired, in several cases for over six months. It also found that appointments were not staggered evenly, with one Crown corporation being in the process of replacing eight of its twelve directors during 2004. This increased the risk that continuity of expertise and corporate memory will be lost. Source: http://www.oag-bvg.gc.ca/internet/docs/20050207ce.pdf, paras 7.30–7.32 Board development With regard to the continuing development needs There is a need for board induction and continued of board members, board mentoring has been review of training needs, and also to ensure discussed in Chapter 2. Board self-evaluation that those involved in the appointment of board (see section on board performance below) can members are fully trained. Many board members also be used to identify competency and skills come from the private sector, and may be unfamiliar limitations where development is needed. with the challenges and opportunities associated 22 with working in a public sector environment. The case study of training provided by Canada’s Induction is important in these circumstances Privy Council Office and the Cabinet Office in to enable board members to settle into their the UK shows examples of training for board roles. The Auditor General of Western Australia members and for public servants involved in (1998) has further identified several areas where board appointments. individual and collective training needs of board Board performance members should be regularly reviewed: As the Auditor General of Western Australia • specific skills such as the ability to understand (1998) notes: financial statements and non-financial There is a tendency to equate the performance performance information of a governing board with the performance of the • changes to legislation that will affect the agency, thus excusing the board from separate agency’s operations or obligations scrutiny. However, boards have numerous • significant public sector trends choices on all aspects of how they conduct • emerging issues of general significance, such themselves. A poorly run board may waste as electronic commerce and the potential time, spend disproportionate effort on minor uses and impacts of new technology. matters, fail to provide strategic leadership and have inadequate methods for monitoring agency performance. All boards should make appraisals of how they conduct themselves. Full Version Simplified Version Corporate Governance in Arms-Length Agencies – An International Overview
  • 27. Case study Training provision A 2000 review of practice by the Office of the Auditor General in Canada found that while new directors of Crown corporations were given orientation training, they were not briefed adequately on their duties and responsibilities, the corporation’s relationship to government, policies on the compensation of Crown corporation executives and boardroom procedures. In response, the Privy Council Office established a new orientation course specifically addressing these issues. Most Crown corporations have participated in the training programme. In the UK, following recommendations from the Public Administration Select Committee that senior officials should receive training in public appointments, the Cabinet Office worked in partnership with the National Health Service Appointments Commission to develop a short briefing event for members of the senior civil service. The aims of the event were to: provide an overview of the public appointment process and the role of senior officials in that process; and to enable participants to undertake a fair appointments process that is fully compliant with both the Code of Practice and equality legislation. Sources: http://www.oag-bvg.gc.ca/internet/docs/20050207ce.pdf; 23 http://www.cabinetoffice.gov.uk/media/cabinetoffice/corp/assets/publications/reports/public_ bodies/2006/co_pa_plan_2006.pdf However, it is not that common for board • using frameworks for board member appraisal performance to be assessed. Best practice based on the Office of the Commissioner for suggests that formal annual assessment of Public Appointments Code of Practice and board performance between the minister and the Cabinet Office guidance chair of the board should take place to review • using evaluations and appraisals to identify board performance (Uhrig, 2003). Barker (2004) areas for future development to drive through suggests that a comprehensive board evaluation performance improvements. in a UK setting for non-departmental public bodies should include: For this process to be effective, the board members • subjecting the board collectively to annual themselves must evaluate their own performance evaluation against performance plan or alongside a departmental assessment. Barker overarching list of objectives, which may be (2004) suggests a performance evaluation externally facilitated framework that board members, its executive • senior responsible officers in the sponsor team and members of the sponsoring department department appraising the chair’s can use to collaboratively assess performance performance annually (see case study). • board members being assessed individually for their performance against personal objectives Simplified Version Options of Red 0c 100m 100y 0k Corporate Governance in Arms-Length Agencies – An International Overview
  • 28. Case study Illustrative example of board performance rating Rating Description Headline action Highly performing The board and sponsor • Produce timeline for future department are clear about reviews the organisation’s aim and its • Ensure that processes position within the department’s for two-way strategy strategy communication continue to be as effective as possible Performing Both the board and the department • Ensure that the department are quite clear about what they and the board meet regularly want from the organisation but this so that both understand the is not communicated effectively agreed strategies and their between them implications Developing The board understands aspects of • Arrange high-level meetings 24 the sponsor department’s strategy of the chair and the senior but does not see how it can be responsible officer in the married with the current direction department or the minister of the organisation • Ensure agreed alignment of priorities is sustainable and able to be implemented Under performing The board does not see how the • Carry out review of the organisation fits into the role of the organisation to agree its department and the department position within the department’s feels that the organisation’s landscape objectives are at odds with the • Clarify the independent nature department’s priorities and needs of the body • Clarify the requirements of the department Source: Barker (2004), p. 9 http://www.hm-treasury.gov.uk/pspp_buliding_effective_boards.htm Full Version Simplified Version Corporate Governance in Arms-Length Agencies – An International Overview
  • 29. Board composition Uhrig (2003) similarly notes that care should be Guidance from the Office of the Auditor General exercised when appointing public servants to of Canada (2005) draws on international best boards. He states: practice to suggest that the majority of board members should be independent, that the In circumstances where a departmental staff independent members hold regular meetings member is appointed on the basis of representing without management in attendance, and that the the government’s interests or having a ‘quasi’ board chair be an independent director (that is, supervision approach, conflicts of interest may the chair and chief executive positions should be arise and poor governance is likely. Through separate). The Auditor General notes that these participation in decision-making, either directly best practices are not always adopted in Crown or implied, the departmental representative may corporations in Canada, where the practice of become an advocate for the organisation rather holding board meetings without management in than contributing critical comment. This also has attendance is uneven. Further, in a few Crown the potential to create an incentive for the other corporations, the same individual acts as chair members of the board to meet to discuss and and chief executive. agree on important issues separately from formal meetings, without involving the departmental A further issue of debate is whether departmental representative, thereby removing the formal staff should represent government departments board meeting as the main decision-making on boards for which they have responsibility. While forum of governance. Membership of the board practice here varies, the trend internationally is by the related departmental representative is 25 tending towards the position that departmental unwise unless there are specific circumstances staff should not serve on boards. The Office which require it. The above points do not of the Auditor General of Canada (2005) has mean that departmental representatives should raised concerns about the role played by senior not attend board meetings as agreed by the public servants appointed to the boards of some chairman. No objections are raised to either staff Crown corporations. In their view, departmental of the entity or other public servants attending representatives can too easily be viewed as specific parts of a meeting to discuss or clarify having a ‘super voice’ and thereby unduly affect issues with the board. the direction of the board. For departmental representatives themselves, having the fiduciary The selective attendance of government responsibility to act in the best interest of the representatives at board meetings, as outlined corporation and owing loyalty to their minister can above, is one of the ways in which sponsoring place them in difficult situations. At times boards departments may exercise effective control over require access to public sector decision-makers public bodies in the absence of a board member but not necessarily as members of the board. from a sponsoring department. Also, regular formal and informal communications with the board, primarily the chair, are vital to control. So too is the effective scrutiny and use of performance plans and reports. Simplified Version Options of Red 0c 100m 100y 0k Corporate Governance in Arms-Length Agencies – An International Overview
  • 30. Board remuneration every one to three years at the sponsor team’s Practice with regard to governing body discretion. Any review conducted should take remuneration varies from country to country; into account: any changes to the duties or and within countries across different types of time commitment required of appointees; any organisation. Many of the smaller public bodies recruitment or retention issues; rates paid by tend to pay only out-of-pocket expenses such as other Cabinet Office bodies; and, any increase travel, overnight accommodation and childcare. in the retail price index since the previous review Others pay a set amount, based either on a daily (http://www.cabinetoffice.gov.uk/media/ rate or an estimated time commitment per month cabinetoffice/corp/assets/publications/reports/ or per year. In general, however, remuneration is public_bodies/2006/co_pa_plan_2006.pdf). relatively modest and lower than for non-executive members of private sector boards. Research undertaken by the Auditor General Western Australia (1998) suggests that total fees for a board of seven to ten members are likely to be about the same as the salary of a single middle to senior manager. Practice varies as to whether there is centrally imposed guidance and/or control on remuneration levels. In South Australia, for example, the chief 26 executive of the Department of the Premier and Cabinet has the delegated authority of cabinet to assess and recommend fees for the members of government appointed part-time to boards and committees. The determination of fees is undertaken in accordance with a cabinet-approved classification structure which the chief executive may review from time to time (http://www.premcab. sa.gov.au/pdf/circulars/remuneration.pdf). In the UK, by way of contrast, in 2005 the Cabinet Office undertook a remuneration review of its own public appointments. The review concluded that individual sponsor teams should retain responsibility for setting and reviewing rates of remuneration, due to the diverse nature and work of the department’s non-departmental public bodies. It was also decided that remuneration rates must be reviewed by the sponsor team Full Version Simplified Version Corporate Governance in Arms-Length Agencies – An International Overview
  • 31. 4 Control Two areas of control where there have been framework see the approach adopted by the particular developments in recent years are risk Higher Education Funding Council for Wales (2006): management and audit. With regard to good http://www.hefcw.ac.uk/InternalPolicies_Docs/ corporate governance practice, the governing Risk_Management_Policy_and_Guidelines.doc. bodies of public organisations are expected to ensure that their organisations have effective A risk-management policy can help clarify risk-management practices in place, and to accountability and responsibility for risk ensure effective internal and external audit of management and thereby further support financial and performance information regarding the adoption of good practice governance the organisation. arrangements within the organisation. Risk management A particular dimension of risk management directly In considering risks and controls, the obvious applicable to the governing bodies of public area frequently highlighted is financial exposure or organisations is the management of conflicts financial risk. However, there is also a much broader of interest, which can significantly impact on category of risks relevant to public organisations, reputational risk. Managing conflicts of interest including policy risk (the appropriateness and can be a particular challenge where departmental quality of policy decisions) and reputational risk representatives are also board members (but (the public reputation of the organisation and see also the section on board composition 27 consequent effects). Risk management means in Chapter 3) as the hypothetical case study addressing this wide range of organisational factors from Western Australia illustrates. There is no and not focusing solely on financial exposure. prescriptive set of rules specifying what constitutes Of course, public organisations are subject to ethical behaviour for all situations or all public rapidly changing economic, social and political organisations. Decision-making should be guided environments, and planning for risk management by the principles of integrity, honesty, transparency, is difficult to implement in reality. Nonetheless, openness, independence, good faith, and service some lessons can be derived from international to the public, which underpin most corporate experiences. governance codes of practice. The additional hypothetical case study from New Zealand further Public organisations have for many years illustrates this point, where a board member incorporated risk management, albeit informally, may face potentially competing duties to two into their management and decision-making organisations. processes. What is now required by many codes of practice is that corporate governance procedures and practice ensure that risk is explicitly stated and a consensus on addressing risks formulated. For an example of how to develop a risk-management Simplified Version Options of Red 0c 100m 100y 0k Corporate Governance in Arms-Length Agencies – An International Overview
  • 32. Hypothetical case study Conflict of interest challenges for a departmental board member Juanita is the director general of a state government department with responsibility for developing and delivering cultural tourism in Western Australia. The director general is responsible for allocation of funds to the statutory authorities comprising the cultural tourism portfolio. As a voting member of several boards within the portfolio, Juanita is well aware of the competing demands for funding. During a board meeting, one of the members proposes a motion to cease a key regional programme if funding cannot be guaranteed for the next three years. As the public officer responsible for allocation of government funds across the portfolio, Juanita has competing interests between her role as director general, and as a board member. This makes it difficult for Juanita to always be seen to be impartial, and acting in the best interests of the agency with regard to decisions about allocation of funds for cultural tourism. If it is not possible for Juanita, as director general, to resign from the board, it may be necessary to restrict her involvement in certain board discussions such as that surrounding budget strategy. For example, the director general could offer the board information on the overall cultural tourism portfolio budget and advise members on matters of government policy, but remove herself from participating in any budget decisions made by the board. Given the potential for conflict, it would be wise for the board, in conjunction with the director general, to develop specific 28 protocols in a code of conduct for how such competing situations will be handled. Source: http://www.opssc.wa.gov.au/icg/documents/coi/scenario3.pdf Audit Another audit issue of growing prominence in the A particular feature of corporate governance public sector corporate governance literature is the developments in recent years has been the use of audit committees by public organisations to growing use of audits and inspections by external provide an oversight of audit arrangements. Audit bodies. One issue of concern for the governing committees are becoming an increasingly important body of many public organisations is the choice of part of the corporate governance framework in the external auditors and the need to ensure auditor public sector for many organisations (though they independence rather than ‘capture’ of the auditors are not necessarily required for all organisations, by the organisation. In that context, auditor rotation for example, in small or less complex organisations has been discussed as a possible mechanism. The there may not be a need for an audit committee). case study on this topic suggests that striking a Audit committees regularly review the plans and balance between rotation and too quick a turnover reports of internal audit and quality assure the of external auditors is important. work of internal audit. Full Version Simplified Version Corporate Governance in Arms-Length Agencies – An International Overview
  • 33. Case study Good practice principles for audit committees The Controller and Auditor General in New Zealand, on the basis of a review of best international practice, issued guidance on the formation and operation of audit committees in the public sector. Among the items addressed was the identification of good practice principles for audit committees: • the governing body or departmental chief executive should appoint an audit committee in which most of the members are independent of the management team • the chairperson of the audit committee should be someone other than the chairperson of the governing body or the chief executive • people appointed as audit committee members should have skills and experience adequate for the role of the committee • the audit committee needs to be clear about its mandate, purpose, and role in the organisation and within the governance structure as a whole • the roles and responsibilities of the audit committee should be documented and clearly defined in the context of the overall governance framework • the activities of the audit committee should be linked to risk-management disciplines • the chairperson of the audit committee should ensure that the audit committee has open and effective relationships with other governance committees, the chief executive, senior 29 management, and internal and external auditors. Source: Controller and Auditor General (2008) http://www.oag.govt.nz/2008/audit-committees/docs/audit-committees-public-sector.pdf Hypothetical case study Duties to two different organisations Jean-Paul is a member of the governing body of a tertiary education institution (TEI). The TEI has some contracting arrangements with private organisations to help to deliver some educational courses. One of those arrangements is with a charitable trust, under which the trust is funded by the TEI to prepare, administer, and teach the course on behalf of the TEI. However, the TEI is now about to decide whether to discontinue this arrangement. Jean-Paul is also a trustee of the charitable trust. Jean-Paul has a conflict of interest in this decision. He may not be affected personally by the decision, but the trust he is a trustee of will be. As a member of the governing body of the TEI, Jean-Paul has a duty to act in the best interests of the TEI, but, as a trustee, he also has a duty to act in the best interests of the trust. In this case, the best outcome for one entity may not be the best outcome for the other, and so it may be impossible for Jean-Paul to faithfully give effect to his obligations to both organisations. Jean-Paul should declare a conflict of interest at relevant meetings of the TEI’s council, and refrain from discussing or voting on the TEI’s decision. It might be wise for him not to be provided with confidential information about the matter. Jean-Paul may also need to consider whether Simplified Version he hasOptions of Redinterest in the matter at meetings of the trust. a conflict of Source: http://www.oag.govt.nz/2007/conflicts-public-entities/docs/oag-conflicts-public-entities.pdf, pp. 42–43 0c 100m 100y 0k Corporate Governance in Arms-Length Agencies – An International Overview
  • 34. Case study The impact of independent auditors and auditor rotation Corporate auditors are assigned to review financial statements and evaluate the accuracy of the information provided. The lack of auditor independence is one of the major issues in the recent history of corporate governance. Calls have been made for the introduction of provisions requiring the auditor to be appointed independent of management and for mandatory auditor rotation, which compels organisations to change the audit firm at regular predetermined intervals. An empirical investigation by Schelker focuses on USA state level government, where state auditors are often elected or appointed for a fixed term. Auditors are elected or appointed for a different term length or sometimes face term limits. The study estimates the impact of such differences on Moody’s state credit ratings for USA long-term state bonds. The evidence shows a U-shape relationship, indicating that auditor performance is weak for very short and very long terms. This is consistent with theories pointing towards audit failure due to a lack of expertise in the beginning of a mandate as well as with theories suggesting problems associated with diminishing independence with extended auditor–client relationships. Furthermore, the results indicate beneficial effects of term limits, which can be interpreted as being in favour of mandatory rotation requirements. Schelker proposes that auditors should be elected or appointed by either the board of directors for a fixed term, with the possibility of re-electing or reappointing the auditor. He advocates a term limit restricting the auditor from serving too long. Such a design is related to auditor rotation requirements, but is more flexible and preserves 30 auditor expertise for an extended period of time. Source: Schelker, 2008, http://papers.ssrn.com/sol3/papers.cfm?abstract_id=959392 Full Version Simplified Version Corporate Governance in Arms-Length Agencies – An International Overview
  • 35. 5 External reporting The need for transparency In practical terms, transparency in relation to As well as accountability, transparency is a reporting on performance and on future intentions fundamental element in the promotion of good and plans is achieved in a number of ways, including corporate governance. The pivotal role of the managing the relationship between government governing body in issues of transparency and departments and organisational governing bodies. accountability is as relevant to the public sector as it Performance dialogues between managers in is to the private sector. Public sector organisations central government authorities and governing rely on the continuing support and confidence body members and executive management of of their stakeholders (e.g. ministers, customers, public organisations are increasingly common. employees, lenders, suppliers, and business Performance dialogue refers to regular, structured, partners). These stakeholders need to be assured face-to-face meetings between managers and of the quality and ethical standards of public managed, which draw on performance data to bodies with which they deal, and governing review performance and agree prioritised action bodies are expected to set an example in terms plans. of transparency in relation to matters such as procurement, remuneration and disclosure Public and timely production of reports, as policies. illustrated in the case study on the ex-ante reporting of business and corporate plans, are another means of enhancing transparency. 31 Case study Ex-ante reporting of business and corporate plans The preparation of corporate planning documents that cover short, medium and long-term periods is a feature of corporate governance arrangements for public sector agencies. The arrangements requiring the preparation of such plans are typically part of an agency’s establishing legislation or legislative or administrative elements of a financial management framework. In New Zealand the responsible minister of a Crown corporation is required to table the organisation’s statement of corporate intent (a detailed plan covering a three-year period) in parliament within twelve sitting days of the statement being delivered to the minister. In New South Wales, a copy of a completed statement of corporate intent (a three-year plan reviewed annually that contains the agency’s objectives and performance targets and measures to judge its performance) for state-owned companies is required to be tabled within fourteen sitting days of the date on which the responsible ministers received the statement. (However, in 2004 for the fourteen government business enterprises covered by the Act the reports were delivered more than eight months after the start of the reporting period.) Source: Public Accounts and Estimates Committee, 2005, pp. 89–90 http://www.parliament.vic.gov.au/paec/inquiries/publicgovernance/ Simplified Version Options of Red 0c 100m 100y 0k Corporate Governance in Arms-Length Agencies – An International Overview
  • 36. Case study Weaknesses in departmental review of public bodies’ corporate plans A review by the Office of the Auditor General in Canada found that government departments had limited knowledge and expertise to challenge the corporate plans of Crown corporations and that in effect the government was approving many deficient corporate plans. They found that neither the Treasury Board Secretariat nor the applicable departments have clearly defined their respective roles in the process for reviewing and approving corporate plans or assessed the capacity and skills needed to fulfil their roles. Source: http://www.oag-bvg.gc.ca/internet/docs/20050207ce.pdf The public production of reports such as corporate plans by the governing bodies of public organisations also puts an onus on staff in parent departments to assess and validate these reports. The case study from Canada shows that there may be weaknesses at departmental level 32 that needs to be addressed if transparency is to be fully effective. Balancing transparency with confidentiality Studies show that there may be difficulties for individuals and organisations in relation to discharging governing body duties in a transparent manner whilst simultaneously protecting sensitive business or organisation information. The need for codes and practices to acknowledge the tension between confidentiality and transparency and to strike a balance between these competing tensions requires constant scrutiny. Full Version Simplified Version Corporate Governance in Arms-Length Agencies – An International Overview
  • 37. 6 Conclusions Understanding how to ensure and achieve best Control involves both risk management and practice in corporate governance is a significant regular audit. A risk-management policy and the challenge for public sector organisations. There active management of conflicts of interest can has been much cross-fertilisation of corporate help address risks and thereby further support governance standards and codes in recent the adoption of good practice governance years, particularly those from the UK, USA and arrangements within the organisation. Audits OECD, which have provided many of the basic and inspections by external bodies are now a frameworks. Many developments in public sector normal part of life in public service organisations. corporate governance have borrowed from practice Issues of concern for the governing body of in the private sector, though public authorities many public organisations include the choice of operate within unique statutory, regulatory and external auditors, auditor rotation and the use of managerial environments. audit committees. The principal dimensions of corporate governance External reporting is one means of demonstrating are: standards of behaviour, organisational a commitment to transparency. However, public structures and processes, control, and external servants and public organisations routinely reporting. Standards of behaviour are important face difficulties in terms of discharging duties to corporate governance as they establish how in a transparent manner whilst simultaneously the leadership of the organisation operates, protecting business or organisation sensitive 33 the values that drive the organisation, and the information. As well as developing guidance on culture that prevails in the organisation, all of such issues, it is important that governing bodies which influence the behaviour of all staff. Formal periodically scrutinise their organisation’s guidance codes of conduct are an important emerging and practice with regard to striking a balance feature of good corporate governance practice between transparency and confidentiality. internationally to ensure good standards of behaviour. Leadership is a crucial principle from While there are particular challenges regarding a corporate governance perspective. the application of corporate governance in the public sector, the examples of good practice Organisational structures and processes should here (and the lessons to be learned from the be designed to achieve and successfully manage failures outlined) show that good governance different accountability demands. The boards of is possible for arms-length agencies. Effective public organisations, as the governing bodies corporate governance can contribute to a better with responsibility for the organisation, require functioning public service. Scandals and waste particular attention to be paid to their operation of public money can be avoided if corporate and performance. This demands action both on governance issues are clearly addressed by the the part of the board and also of staff within the governing bodies of arms-length agencies and sponsoring government department. officials from their sponsoring departments. Simplified Version Options of Red 0c 100m 100y 0k Corporate Governance in Arms-Length Agencies – An International Overview
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  • 39. Kalokerinos, J. (2007) Developments in the Role of the Chair in the Private and Public Sectors, Issue Paper Series No. 4 (Canberra: University of Canberra) http://www.canberra.edu.au/corpgov-aps/pub/IssuesPaperNo.4_ DevelopmentsInTheRoleOfTheChair_Final_March07.pdf OECD (2004) OECD Principles of Corporate Governance (revised) (Paris: OECD) http://www.oecd.org/dataoecd/32/18/31557724.pdf Office of the Auditor General of Canada (2005) Governance of Crown Corporations (Ottawa: Office of the Auditor General of Canada) http://www.oag-bvg.gc.ca/internet/docs/20050207ce.pdf Office of the Auditor General of Canada (2007) 2007 February Status Report of the Auditor General of Canada http://www.oag-bvg.gc.ca/internet/English/att_20070203xe03_e_17507.html Office of the Auditor General of Western Australia (1998) Public Sector Boards (Perth: Office of the Auditor General) http://www.audit.wa.gov.au/reports/report98_9.html Plumptre, T. (2004) The New Rules of the Board Game (Ottawa: Institute On Governance) http://www.iog.ca/publications/board_game.pdf 35 Public Accounts and Estimates Committee (2005) Report on the Inquiry into Corporate Governance in the Victorian Public Sector (Melbourne: Government Printer for the State of Victoria) http://www.parliament.vic.gov.au/paec/inquiries/publicgovernance/ Public Audit Forum (2001) Propriety and Audit in the Public Sector http://www.public-audit-forum.gov.uk/propriety.pdf Schelker. M. (2008) Auditors and Corporate Governance: Evidence from the Public Sector http://papers.ssrn.com/sol3/papers.cfm?abstract_id=959392 Treasury Board of Canada Secretariat (2002) Corporate Governance in Crown Corporations and Other Public Enterprises – Guidelines (Ottawa: Treasury Board) http://www.tbs-sct.gc.ca/gov-gouv/entreprise/entreprise02-eng.asp Uhrig, J. (2003) Review of the Corporate Governance of Statutory Authorities and Office Holders (Canberra: Commonwealth of Australia) http://www.finance.gov.au/financial-framework/governance/docs/Uhrig-Report.pdf Watson, E. (2004) ‘Public sector corporate governance: British Columbia’s best-practices reforms’, Ivey Business Journal, March/April http://www.iveybusinessjournal.com/view_article.asp?intArticle_ID=473 Simplified Version Options of Red 0c 100m 100y 0k Corporate Governance in Arms-Length Agencies – An International Overview
  • 40. EfficiEncy unit 13/f., West Wing central Government Offices 11 ice House Street central Hong Kong Email: euwm@eu.gov.hk tel: 2165 7255 fax: 2524 7267 Website: www.eu.gov.hk Full Version Simplified Version Options of Red 0c 100m 100y
  • 41. 香 港 特 別 行 政 區 政 府 THE GOVERNMENT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION