Title: Corporate Governance
1Corporate Governance
Paul Capener and Matthew Butcher,
PricewaterhouseCoopers
CIPFA in the Midlands, 18 October 2002
2Introduction
- Why is corporate governance important?
- A case study in poor governance
- Conclusions drawn
3Why is governance so important?
- Why has the agenda changed in the private sector?
- A lack of confidence in the audit profession
- A lack of understanding of the audit process and
the resulting assurances - Conflicts of interest
- Increasing expectations from all stakeholders
- Corporate liability
- Public disclosure requirements on all risks
4Why is governance so important?
- Senior Executives who permitted or encouraged
misleading accounting treatment. - An Audit Committee that signed off misleading
accounts. - A Board that was ineffective in supervising
managers actions. - Whistleblowers complaints that were ignored or
whitewashed. - Individuals enriched by transactions with the
company that employed them.
5Why is governance so important?
The group's shares dropped 75 per cent in
after-hours trading after the company confirmedÂ
that Scott Sullivan, chief financial officer, had
stepped down and it had accepted the resignation
of David Myers, senior vice president and
controller.WorldCom confirmed that it was
investigating whether about 3.8bn of operating
expenses were recorded as capital spending over
the last five quarters, boosting cash-flow and
margins. If confirmed it would be one of the
biggest corporate frauds in history.
6Why is governance so important?
- and what about the public sector? Example
Health sector the NHS context - The cost of clinical negligence
- Public expectations
- Board accountability for clinical effectiveness
- Wide disclosure requirements for all risks
- Limited scope of traditional audit assurance
- Variable risk management and governance
practices
7Why is governance so important?
Harold Shipman
- Family GP Harold Shipman had become the focus of
Europe's biggest ever murder investigation - Convicted of 15 murders, he is suspected of
killing more than 297 patients over 24 years.
8Why is governance so important?
- In the period from 1991 to 1995 between 30 and 35
more children under 1 died after open-heart
surgery in the Bristol unit than might be
expected had the unit been typical of other
similar units in England at the time. - Whistleblower was systematically ignored
Bristol Royal Infirmary
9A case study in poor governance
Who killed the Chief Executive? A special
investigation
10A case study in poor governance
- The scenario
- FE College with an underlying deficit greater
than 10 of turnover - Very poor initial OFSTED and ALI reports and
follow-up identified for intervention or merger - Franchising activities have been deemed unlawful
and not fundable - .. And the Chief Executive has been found
dead in the Boardroom with a knife in his back!!
11Who Killed the Chief Executive?
The suspects
12Investigators report interviews with the
suspects (1)
COLONEL MUSTARD I really dont understand what
could have gone wrong. Every meeting was fully
minuted we always had a quorum and we kept to
standing orders. Besides, the Chief Executive
was a good sound man he would have stood by his
team no matter what.
13Investigators report interviews with the
suspects (2)
MISS SCARLET The Chief Executive had some really
exciting ideas for taking this organisation
forward. We needed a bit of vision on this board
we didnt need to have our heads buried in the
detail. If we took risks it was with the aim of
reaching our goals, and I dont think we should
apologise for that.
14Investigators report interviews with the
suspects (3)
PROFESSOR PLUM To be honest, my concern was with
the principles behind what the College was up to,
with the overall strategic thrust, and with how
this tied in with my theories on the development
of the community and the area. I left the rest
of it to my colleagues on the Board I felt that
they were more than capable.
15Investigators report interviews with the
suspects (4)
MRS PEACOCK Look, I saw my function on this
board as a facilitator. I kept things running
smoothly and I communicated with the outside
world. It was hard work and sometimes I didnt
feel that I was given all the information I
needed. I dont think Board members appreciated
how complicated my position was. I certainly
could have been given more support.
16Investigators report interviews with the
suspects (5)
REVEREND GREEN The main thing about the College,
as I saw it, was that we were doing good for the
community. Perhaps there was the odd area of
concern where I wasnt too sure about the
detailed implications of what was under
discussion. But I feel we shouldnt lose sight
of the main point we were doing a good job and
helping local people.
17Investigators report interviews with the
suspects (6)
MRS WHITE My role on the board was to represent
the employees of the College. I think its
unfair - the College is getting all this
criticism, but nobody understands the
difficulties that we were working under. To be
frank, I was fighting our corner the whole time,
and if people had listened to the workforce
rather than pursuing strange schemes they might
not be in this position now.
18Investigators report continued
Codes of Corporate Governance
19Investigators report continued
The Board were asked whether they were aware of
the various Codes of Corporate governance in
place. Here were some of their replies
20Investigators report continued
- PROFESSOR PLUM
- Ive made something of a study of the Hampel
report. It dealt with - the role of non-executive directors
- certain decisions being reserved for the board
- annual reviews of the effectiveness of internal
control - reviews of the relevance, quality and timeliness
of information received from the Board - among other things.
- It was good stuff but I dont think we were
ready to implement it yet.
21Investigators report continued
COLONEL MUSTARD I remember the Greenbury report!
All about disclosure. Weve always been very
open and weve never held information back from
the public. How do I know? The Chief Executive
told me so. MISS SCARLET The Turnbull Report
that was all about risk management, risk
registers and so forth, wasnt it? Well, we went
through the motions of compliance, but you cant
really set down the workings of an organisation
like ours in those formal terms, can you? It was
just more bureaucracy.
22Investigators report continued
MRS WHITE No, I havent read about Cadbury,
Hampel or Turnbull. These ideas were drawn up
for the private sector. Dont you realise weve
got enough to deal with in the public sector with
bureaucratic requirements coming from the
government? We dont need to try to copy the
private sector as well.
23Interlude
Havent you got enough to do already?
24Current initiatives in corporate governance
local government
- Local Government Act 2000
- Standards Committee
- Codes of Conduct for Members
- Corporate Performance Assessment
- Addresses corporate governance arrangements over
internal control, legality and standards - Best Value Performance Plan
- Top-down account of how objectives to be met
25Current initiatives in corporate governance the
NHS
- Statement of Internal Control
- NHS requirements for internal audit, audit
committee, non-executive directors Assurance
agenda - Management under threat if performance ratings
poor an incentive for good corporate governance
26Current initiatives in corporate governance
Education
- LSC requirements for committee structures
- Requirement to implement recommendations of
Turnbull report, and disclose progress against
this
27Interlude concluded
- So
- It would be hard to argue that corporate
governance did not have prominence in the public
sector - The public sector is evolving its own methods of
applying principles developed in the private
sector, and adding structures of its own - But
- Failures of corporate governance are regularly
exposed - As regulation and inspection continues we may see
more
28Investigators report First conclusion
The Board of the College did not act corporately
29Investigators report First conclusion
The Board did not govern corporately - even if it
met its regulatory requirements
30What were the skills of the Board
Colonel Mustard Regulation Miss
Scarlet Vision Professor Plum Theory Mr
s Peacock.. Facilitation Reverend
Green. Ethics Mrs White.. Commitment
and knowledge
31Failure to govern corporately examples from the
public sector
- A local authority where budgetary reports are
provided on inconsistent bases and where
departments are working to diverging agendas - - Members combining knowledge could detect this
and take corrective action - An NHS Trust where weaknesses in clinical
governance are hidden from the Board due to
internal politics - - Directors combining skills might have requested
more information
32Governing corporately in the public sector the
role of officers
- Are officers actions contributing to achieving
corporate objectives? - If not
- Is it because they are working to their own
agenda? - Or is it because the corporate objectives do not
fit reality? - Either way, what can be done?
33Investigators reportSecond conclusion
- The Board did not have the information to
exercise good corporate governance - The Board did not seek the information to
exercise governance
34(No Transcript)
35Failures of information in corporate governance
examples from the public sector
- The activity data presented to the Board of an
NHS Trust is out of date this is known to
employees, but the Board are not informed.
Overspends result. - A local authority reports statutory performance
indicators in services which it has plans to
transform. However, little care is taken to
ensure that they are robust and they are not
considered by members. - A College Corporation receive results of user
satisfaction surveys, but these are not fed back
to departments.
36Information in corporate governance the role of
officers
- Filling in the information gaps
- Reporting to allow those charged with governance
to govern - Expecting to be challenged
- Analysing and challenging information provided,
where it matters to the governance of the
organisation
37Investigators report third conclusion
- Focus on procedure rather than needs of the
organisation - Insufficient knowledge of activity within the
organisation - Insufficient sharing of information within the
organisation - Reluctance to question the information provided
- Lack of consultation and internal communication
- Defensive culture of blame
38Investigators report what normally goes wrong?
A consistent conclusion of public inquiries is
that systems are to blame. Communication, record
keeping, monitoring of policy implementation,
training, leadership are all examples of commonly
cited system failures. Responsibility for the
effectiveness of systems rests unequivocally at
the Board table. Usually someone in the
organisation knew that a problem existed but did
not feel able to raise their concerns..
39Some questions
- Should corporate governance be imposed by
government and regulators? - Should organisations be judged on their outputs
and be left to achieve these as they see fit? - What is the right balance between top-down
control and bottom-up devolved responsibility? - Are there models of corporate governance that
have not been considered?
40Investigators report overall conclusion
Corporate governance is still in its early and
formative stages in the public sector
41Who killed the Chief Executive? The investigation
concludes
42The verdict was CORPORATE MANSLAUGHTER
43None of the Board had intended to kill the Chief
Executive
But all were found to be equally culpable!!
44Pwc