Developing Governance and Leadership Performance in the Public Sector CPA Australias Public Sector G

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Developing Governance and Leadership Performance
in the Public SectorCPA Australias Public
Sector Governance and Accountability
SymposiumBrisbane, 6 December 2004

• Professor Bryan Horrigan
• Professor, School of Law, University of Canberra
• Director, National Centre for Corporate Law and
  Policy Research
• Consultant, Allens Arthur Robinson
• Former Deputy Director, National Institute for
  Governance

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Overview

• Corporate governance concepts, elements, and
  dimensions
• Impact of the public-private divide on corporate
  governance
• Corporate governance milestones, lessons, and
  emerging issues across the public and private
  sectors
• Post-Uhrig roll-out of federal public sector
  corporate governance reforms
• Special challenges for corporate, executive, and
  advisory boards in the public sector
• Latest empirical research on the drivers of good
  corporate governance and performance

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Presenters Expertise

• Current ARC research grant on corporate
  governance in the federal public sector
• Previous ARC research grant on governance and
  liability of state GBEs
• Formerly Deputy Director of the National
  Institute for Governance (eg public sector
  governance roundtables, consultancies, and
  research/training)
• Consultant to national law firm on governmental
  and business matters
• Currently teaching corporate governance at
  masters and MBA levels
• Published research on corporate governance in
  both private sector and public sector contexts
• Contact bryan.horrigan_at_canberra.edu.au mobile
  0421 702059

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Corporate Governance Elements
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Standard Private Sector View

• Strategy
• Resourcing
• Conformance
• Performance
• Assurance
• Accountability
• Shareholders/owners
• Stakeholders
• Inner circle (eg employees, creditors, suppliers,
  financiers)
• Outer circle (eg regulators, customers, peers,
  society)

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Public-Private Divide
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Recent Corporate Governance Milestones

• Private Sector
• Enron, HIH, One.Tel, Ansett corporate collapses
• US Sarbanes-Oxley Act reforms
• UK Higgs report (non-executive directors)
• HIH Report
• ASX CGC Corporate Governance guidelines
• CLERP 9 corporate disclosure and auditing
• ASIC cases on directors duties and/or business
  judgments Rich, Whitlam, Adler (NB CAC Act
  impact?)
• Public Sector
• UK Nov 2004 Building Better Boards
  (non-departmental public bodies)
• Uhrig Report on key agencies governance
• New ANAO better practice corporate governance
  guides
• Governmental customisation of ASX principles (eg
  Victorian Treasury)

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Public Sector v Private Sector

• Orthodox view some things the public sector can
  learn from the private sector (eg commercial
  imperatives, corporate boards)
• Growing realisation some things the private
  sector can learn from the public sector (eg
  triple bottom line performance, stakeholder
  engagement)
• Some core corporate governance elements across
  both sectors (eg accountability, compliance,
  performance) but within different contexts
• Hybrid model of corporate governance straddling
  public/private divide (if you cross a fish with
  a human you get something which is neither one
  nor the other - a mermaid! so dont try to put
  round pegs in square holes)

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Eg Ministerial v Other Shareholders

• Ministers are exclusive/dominant shareholders
• Ministers dont trade their shares in the market
• Ministers shareholdings are held on public trust
• Ministers can issue directions
• Ministers influence law-making, policy, and
  regulation affecting the organisation and the
  markets in which it competes
• Ministers have multiple accountabilities across
  multiple constituencies (eg departments,
  parliament, cabinet, government, electorates,
  public)

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• CORPORATIONS ACT 2001 SECT 180
• 180 Care and diligence--civil obligation only
• Care and diligencedirectors and other officers
• A director or other officer of a corporation must
  exercise their powers and discharge their duties
  with the degree of care and diligence that a
  reasonable person would exercise if they
• (a) were a director or officer of a corporation
  in the corporation's circumstances and
• (b) occupied the office held by, and had the same
  responsibilities within the corporation as, the
  director or officer.
• Note This subsection is a civil penalty
  provision (see section 1317E).

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Business judgment rule   (2) A director or other
officer of a corporation who makes a business
judgment is taken to meet the requirements of
subsection (1), and their equivalent duties at
common law and in equity, in respect of the
judgment if they (a) make the judgment in good
faith for a proper purpose and (b) do not have
a material personal interest in the subject
matter of the judgment and (c) inform
themselves about the subject matter of the
judgment to the extent they reasonably believe to
be appropriate and (d) rationally believe that
the judgment is in the best interests of the
corporation.   The director's or officer's
belief that the judgment is in the best interests
of the corporation is a rational one unless the
belief is one that no reasonable person in their
position would hold. Note This subsection only
operates in relation to duties under this section
and their equivalent duties at common law or in
equity (including the duty of care that arises
under the common law principles governing
liability for negligence)it does not operate in
relation to duties under any other provision of
this Act or under any other laws.   (3) In this
section business judgment means any decision to
take or not take action in respect of a matter
relevant to the business operations of the
corporation.
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COMMONWEALTH AUTHORITIES AND COMPANIES ACT 1997
- SECT 22 Care and diligencecivil obligation
only Care and diligenceofficers (1) An
officer of a Commonwealth authority must exercise
his or her powers and discharge his or her duties
with the degree of care and diligence that a
reasonable person would exercise if he or she
(a) were an officer of a Commonwealth authority
in the Commonwealth authority's circumstances
and (b) occupied the office held by, and had
the same responsibilities within the Commonwealth
authority as, the officer. Note This subsection
is a civil penalty provision (see Schedule 2).
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Business judgment rule (2) An officer of a
Commonwealth authority who makes a business
judgment is taken to meet the requirements of
subsection (1), and their equivalent duties at
common law and in equity, in respect of the
judgment if he or she (a) makes the judgment
in good faith for a proper purpose and (b)
does not have a material personal interest in
the subject matter of the judgment and (c)
informs himself or herself about the subject
matter of the judgment to the extent he or she
reasonably believes to be appropriate and (d)
rationally believes that the judgment is in the
best interests of the Commonwealth authority.
The officer's belief that the judgment is in the
best interests of the Commonwealth authority is a
rational one unless the belief is one that no
reasonable person in his or her position would
hold. Note This subsection only operates in
relation to duties under this section and their
equivalents at common law or in equity (including
the duty of care that arises under the common law
principles governing liability for negligence)it
does not operate in relation to duties under any
other provision of this Act or under any other
laws. (3) In this section business judgment
means any decision to take or not take action in
respect of a matter relevant to the operations of
the Commonwealth authority.
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Main Directors/Officers Duties

• Act in entitys best interests
• Use care diligence to the standard of a
  reasonable director in your position (s22 CACA,
  s180 CA)
• Business judgment defence applies (s22 CACA,
  s180 CA)
• Act in good faith for proper purposes (s23
  CACA, 181 CA)
• Dont misuse position to gain personal advantage
  or cause harm to entity (s24 CACA, s182 CA)
• Dont misuse information to gain personal
  advantage or cause harm to entity (s25 CACA, s183
  CA)
• Disclose material personal interests (ss27F-K
  CACA, ss191-196)
• Avoid conflicts of interest/duty
• Dont trade while insolvent (s592 CA)
• Oversee and monitor regulatory compliance in
  general
• Comply with reporting, auditing, accounting,
  disclosure obligations in particular
• Advise management on strategy
• Oversee management performance

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Multiple BJRs

• BJR defence to breach of duty of care/diligence
  (CACA CA)
• Preconditions for directors reliance on
  information/advice (CACA CA)
• Judicial discretion to relieve directors of
  liability (CACA CA)
• Judicial relief against directors acting contrary
  to corporate rules, especially for proposed
  conduct (CA)
• Preconditions for statutory derivative action by
  members (CA)
• Showing reasonable grounds to expect solvency,
  reasonable reliance, reasonable steps to
  prevent incurring of debt re proceedings for
  corporate taxation liabilities (CA)
• Defences to breach of directors duty to prevent
  insolvent trading (CA)
• Due diligence defence to personal liability for
  being knowingly involved in a corporate
  disclosure contravention (CLERP 9 CA)
• ve judge-made rules deferring to directors
  commercial judgments about corporate benefit
  best interests (general law)
• -ve judge-made rules which second-guess
  directors commercial judgments (eg exceptions to
  indoor management assumptions about directors
  performing their duties)

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The Uhrig Report and Beyond
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Public Sector Governance Concerns (including Cth
A-Gs concerns)

• Past
• Legal procedural compliance
• Agency/governmental budgeting/funding
• Financial auditing/reporting
• Formal governance structures/processes
• Executive boards for agencies/bodies
• Future
• Program outcomes (Barrett)
• Better performance measurement (Barrett)
• Uhrig Report application across the sector
• Integrating hard soft governance factors
• Participatory governance stakeholder engagement
• Horizontal governance (ie cross-organisational
  cooperation, whole-of-government perspectives,
  and inter-departmental relationship management)

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Post-Uhrig Implementation Other Issues

• Flow-through beyond key agencies (eg Centrelink,
  ATO, ACCC) to the federal public sector generally
• Greater differentiation between corporate board
  and executive management structures
• Reservation of corporate board model for
  commercial functions/activities
• Bringing more federal public bodies back under
  departmental control/supervision
• Enhancing reporting/supervisory lines between
  semi-autonomous public bodies and
  departments/Secretaries, as ministerial portfolio
  advisers
• Departmental audits to match their portfolio
  responsibilities/entities to the new Uhrig regime
  and templates

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Uhrig Reports Strengths

• Recognition of the weakness of purchaser-provider
  model internal to government
• Recognition of need to confine the use of boards
  to entities whose management can properly be
  undertaken by a corporate board
• Recognition of the need to streamline the range
  of different governmental organisational types
  across the federal public sector
• Putting board-department-minister relationships
  under the microscope

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Post-Uhrig Critiques (eg Wettenhall)

• Internal, non-public inquiry (cf
  public/stakeholder consultation)
• Simply the latest in a line of developments
  covering the tension between central agency and
  line department thinking on degree of
  independence from direct executive government
  control
• Adoption of back to first principles approach
  without adequate reference to previous public
  reports or wider engagement with literature and
  existing/alternative public sector governance
  models
• Heavily draws on private sector expertise and
  perspective (ie the tail that wags the dog)
• Views governance narrowly rather than broadly,
  in the sense of an instrumental approach to
  governmental oversight, control, and
  accountability
• The simple Board Template v Executive
  Management Template Dichotomy inadequately
  accommodates the needs of particular bodies for
  arms length relationships from government
• Would a Uhrig-type approach deal with the real
  governance difficulties involving entities like
  the National Museum of Australia, the ABC, the
  ABA, ATSIC, and HREOC?

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Deloittes 2005 Public Sector Developments

• Improved service delivery (including
  e-government)
• Enhanced cooperation for security and defence
• Attention to socio-economic costs (eg health,
  welfare) of an ageing population
• Spread of CLERP 9 and Sarbanes-Oxley Act
  governance/accountability reforms from the
  private sector to the public sector
• Government by networking, including
  inter-agency cooperation and public/private
  cooperation in infrastructure and service
  delivery
• (Source The Gradual Demise of the Strongman,
  AFR, 19/12/04, at p 68)

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2003 NIG Federal Public Sector Study Key
Governance Issues Nominated by Interviewees

• Awareness of new governance dimensions and best
  practice
• Different board concepts in FMA agencies and CAC
  bodies
• Board appointments
• Conflicts of roles and representational interests
  for board members
• Governance expertise of board appointees
• Interaction between government policy and board
  autonomy
• Need for protocols in Minister-Board-Agency
  comunication
• Whole-of-government perspectives/issues
• Cross-portfolio and cross-governmental policy
  coordination

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2004 UK Performance Evaluation Framework for
Non-Departmental Public Bodies (NDPBs)

• Framework 3 Elements (I-III), broken down into
  8 Components (1-8), broken down into discrete
  Good Practice guideline per component, broken
  down into numerous Indicators of Strong
  Performance per guideline
• I. Structures and Functions
• 1. Executive NDPB Function and Purpose
• 2. Board Function and Position
• 3. Fit for Purpose Board
• II. Actions and Behaviours
• 4. Effective Board Leadership
• 5. Effective Decision-Making
• 6. The Boards Relationships
• III. Evaluating Performance
• 7. Evaluating Board Performance
• 8. Evaluating Board Member Performance

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Staying Ahead of Corporate Governance
Developments in the Public Sector

• 2003 Uhrig Report and 2004/2005 implementation
• Conflicts and Tensions in Commonwealth Public
  Sector Boards (NIG, 2003)
• Current Issues in Public Sector Governance
  (NCCLPR and NIG, 2003)
• Building Effective Boards Enhancing the
  Effectiveness of Independent Boards in Executive
  Non-Departmental Public Bodies (UK Treasury,
  2004)
• Revised 2003/2004 ANAO Better Practice guides
  on corporate governance
• Public Sector Governance Australia (2004, CCH)
• Government by Network The New Public Management
  Imperative (2004, Deloitte and Harvard JFK School
  of Government)
• ARC-funded federal public sector corporate
  governance research project (http//www.blis.canbe
  rra.edu.au/corpgov2Daps/whatsnew/default.htm)

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Boards v Executive Management
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Key Questions Linking Corporate Governance and
Board/Executive Performance

• What do CLERP 9, the ASX CGC principles, Uhrig
  focus on?
• Which governance dimensions?
• Hard v soft measures of governance?
• What evidence is there for this regulatory
  focus?
• Which board dimensions matter most?
• What is the relationship between good
  organisational governance/performance and good
  board governance/performance?
• What is the relationship between good corporate
  governance good corporate performance?
• What is the relationship between bad corporate
  governance bad corporate performance?
• Are these relationships different?
• What evidence is there for this in practice?

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Factors Affecting Evidence

• Timescale
• Economic climate
• Choice of jurisdictions
• Choice of companies
• Choice of corporate governance features
• Causal relations
• Pre-2003/4 - Post-2003/4

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Hard v Soft Governance? (eg Edwards)

• Hard Measures
• One-tiered v two-tiered boards (eg European
  model)
• Separation of Chair/CEO roles
• Split/rotated audit functions
• Number of independent/non-executive directors
• Range of board committees
• Transparent board recruitment processes
• Non-binding shareholder vote on executive
  remuneration

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Hard v Soft Governance?

• Soft Measures
• Roles, responsibilities, relationships
• Dangers of group think
• Board cultures, trust, open dissent
• Information and communication flows (upwards,
  downwards, sideways)
• Qualitative directorial skills, qualifications,
  competencies, behavioural types
• Board, committee, leadership dynamics

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HIH Report CG Aspects

• HIH Report suggests correlation between bad
  corporate governance and bad corporate
  performance (and possible liability), eg
• Lack of clearly defined and recorded policies and
  procedures
• Absence of adequate board analysis of future
  strategy
• Board domination/intimidation by CEO
• Inadequately defined limits on CEOs authority
• Over-reliance by board on advice/information from
  senior management
• Failure of middle management to accept
  responsibility
• Too much I just prepare the information/report
  but dont have to sign it and I sign and rely
  on information/report prepared by others
  buck-passing between middle/senior management
• Inadequate internal whistle-blowing mechanisms
• Unclear understanding of legal obligations
  involving corporate groups
• Inadequate understanding/handling of conflicts of
  interest
• Inadequate corporate governance culture internally

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Interim Results (The Jurys Still Out)

• No/little correlation between formal board
  structures and financial performance alone
• Good corporate governance is a necessary but not
  sufficient condition for good corporate
  performance (ie good corporate hygiene)
• But what exactly constitutes good corporate
  governance is a combination of mandated
  frameworks, organisation-specific features, and
  context-dependent dynamics (ie no one size fits
  all best practice model)
• Both board/organisational effectiveness tied to
  interaction between hard and soft corporate
  governance measures (ie having the right
  blend/mix)
• Some organisations/boards prosper despite the
  non-conformity with standard/regulated hard
  measures, and some organisations/boards who can
  tick those boxes still do not have good
  governance
• Strong correlation between bad corporate
  governance and bad corporate performance (eg
  setting up preconditions for breach of duties and
  inability to rely on business judgment defences)

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Boards - Private Sector Model
Board
Directors
2nd-Tier Board
ManagingDirector
ExecutiveDirectors
Non-ExecutiveDirectors
CEO
Committees
Management
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Boards - Public Sector Model
Stakeholders
NGOs
ParticipatoryGovernance
ParliamentaryCommittees
PublicAccountabilityMeasures
PublicInterests
AdvisoryCommittee
Minister
CEO/Secretary
BoardCommittees
Executive Board(Sub-Department Heads)
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Corporate Boards v PS Executive Boards

• Secretary/CEO/MD has ultimate/shared
  responsibility?
• Board members have consultative/decision-making
  roles?
• Board members have statutory/directors duties
  for which they are personally liable?
• Board members are wholly internal/external?
• Board members are subject to formal/informal
  ministerial direction/influence in terms of
  appointment, decision-making, dismissal?
• Board members have other/ministerial roles?
• Board members have little/much control over their
  Secretary/CEO/MD?
• Board members are/arent answerable directly to
  the Secretary/CEO/MD?

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Corporate Governance and Corporate Financial
Performance
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As Professor Leblanc identifies, the empirical
evidence from overseas suggests that board
effectiveness at least depends upon the interplay
between board structures, board composition, and
board processes, while the correlative
effectiveness of directors rests on the interplay
between directorial independence, directorial
competence, and directorial behaviour
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What the Experts Say Leblanc (2004)

• Board Effectiveness Board Structure Board
  Membership Board Process
• Board structure (eg size/range of committees,
  balance of independent/non-executive directors)
• Board membership/composition (eg mix of
  directorial experience skills)
• Board processes/practices (eg information-gatherin
  g, information-analysis)

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Behavioural
Board Practices
Board Preparation
Structural
Board Regulation
Board Structure
Board Outcomes
Board Performances
Board Effectiveness
Board Functions
Board Composition
Board Relationships
Board Culture
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Board Decision-Making
Board Composition
Board Information
Board Size
Board Practices/Process
Board Relationships
Informal Substance Soft Intangible Behavioural
Substructure
Formal Form Hard Tangible Structural Superstruct
ure
BoardCommittees
?
BoardPersonalities
?
BoardRecruitment
BoardCulture
BoardBehaviour
LeadershipStrategyResourcesConformancePerforma
nceAssuranceAccountability
BoardIndependence
BoardIntegration
BoardFunctions
BoardRoles
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The Bottom Line

• In other words, you probably need to focus on
  structural/procedural/compliance factors like
  having an audit/remuneration/corporate governance
  committee as a bare minimum, but those things
  alone are no guarantee of board effectiveness or
  organizational performance, having them does not
  matter if they do not work well, and whether or
  not they work well is more likely to be a product
  of soft factors

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Corporate Governance Standards
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ASX CG Principles

• 1Lay solid foundations for management
  oversight
• Eg formalise/disclose management/board
  functions/roles
• 2 Structure the board to add value
• Eg majority of independent directors
• Eg Chair to be independent director
• Eg establish nomination committee
• 3 Promote ethical and responsible
  decision-making
• Eg establish code of conduct
• Eg disclose policy on trading in company
  securities
• 4 Safeguard integrity in financial reporting
• Eg require CEO/CFO sign-offs on companys
  financial reports
• Eg establish audit committee, with only
  non-executive directors a majority of
  independent directors

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ASX CG Principles contd

• 5 Make timely and balanced disclosure
• Eg written policies/procedures implementing ASX
  Listing Rule requirements
• 6 Respect the rights of shareholders
• Eg external auditor to attend/answer at AGMs
• 7 Recognise and manage risk
• Eg establish policies on risk oversight and
  management
• Eg written certification from CEO/CFO to board
• 8 Encourage enhanced performance
• Eg disclose performance evaluation
  criteria/process for board, board committees,
  individual directors, and key executives

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ASX CG Principles contd

• 9 Remunerate fairly and responsibly
• Eg establish board remuneration committee
• Eg disclose to investors (i) the companys
  remuneration policies, (ii) costs/benefits of
  those policies, and (iii) link between corporate
  performance and remuneration paid to
  directors/executives
• 10 Recognise the legitimate interests of
  stakeholders
• Eg establish/disclose code of conduct including
  legal and other obligations to stakeholders