Transcript Document

“Developing Governance and
Leadership Performance in the Public
Sector”
CPA Australia’s Public Sector Governance
and Accountability Symposium
Brisbane, 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
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
Presenter’s 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: [email protected]; mobile
0421 702059
Corporate Governance
Elements …
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)
Public-Private Divide …
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’ (nondepartmental public bodies)
Uhrig Report on key agencies’ governance
New ANAO ‘better practice’ corporate governance
guides
Governmental customisation of ASX principles (eg
Victorian Treasury)
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 don’t try to put round pegs in
square holes”)
Eg Ministerial v Other Shareholders
Ministers are exclusive/dominant shareholders
Ministers don’t 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)
CORPORATIONS ACT 2001 SECT 180
180 Care and diligence--civil obligation only
Care and diligence—directors and other officers
(1) 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).
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.
COMMONWEALTH AUTHORITIES AND COMPANIES ACT 1997
- SECT 22
Care and diligence—civil obligation only
Care and diligence—officers
(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).
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.
Main Directors’/Officers Duties
•Act in entity’s “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)
•Don’t misuse position to gain personal advantage or cause harm to entity (s24 CACA,
s182 CA)
•Don’t 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
•Don’t 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
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 director’s 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)
The Uhrig Report and Beyond …
Public Sector Governance Concerns
(including Cth A-G’s 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)
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 semiautonomous public bodies and
departments/Secretaries, as ministerial portfolio
advisers
Departmental audits to match their portfolio
responsibilities/entities to the new Uhrig regime and
templates
Uhrig Report’s Strengths
Recognition of the weakness of purchaserprovider 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
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 arm’s 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?
Deloitte’s 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)
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
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 Board’s Relationships
III. Evaluating Performance:
7. Evaluating Board Performance
8. Evaluating Board Member Performance
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.canberra.edu.au/corpgov%2Daps/whatsnew/def
ault.htm)
Boards v Executive
Management …
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?
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
“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
“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
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 CEO’s 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 don’t 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
Interim Results (“The Jury’s 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)
Boards - Private Sector Model
Board
Directors
2nd-Tier Board
Managing
Director
Executive
Directors
CEO
Committees
Management
Non-Executive
Directors
Boards - Public Sector Model
Stakeholders
NGOs
Parliamentary
Committees
Participatory
Governance
Public
Accountability
Measures
Public
Interests
Advisory
Committee
Minister
CEO/Secretary
Board
Committees
Executive Board
(Sub-Department Heads)
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/aren’t answerable directly to the
Secretary/CEO/MD?
Corporate Governance and Corporate
Financial Performance
Board
Structure
?
?
Board
Effectiveness
Corporate
Financial
Performance
(Source: Richard Leblanc and James Gillies, 2004)
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
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 informationgathering, information-analysis)
Board
Structure
Board
Tasks
Board
Effectiveness
?
Corporate
Financial
Performance
Board
Process
Board
Membership
(Source: Richard Leblanc and James Gillies, 2004)
Behavioural
Board
Preparation
Board
Practices
Structural
Board
Regulation
Board Outcomes
Board
Structure
Board Performances
Board
Effectiveness
Board
Composition
Board
Culture
Board
Functions
Board
Relationships
Board DecisionMaking
Board
Composition
Board
Size
Board
Committees
Board
Practices/Process
Formal
Informal
Form
Substance
“Hard”
?
Tangible
Board
Recruitme
nt
Board
Independence
Board
Information
Structural
“Soft”
Board
Personalitie
s
Intangible
?
Superstructure
Board
Functions
Board
Relationships
Behavioural
Board
Culture
Substructure
Leadership
Strategy
Resources
Conformance
Performance
Assurance
Accountability
Board
Behaviou
r
Board
Roles
Board
Integratio
n
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
Corporate Governance
Standards …
ASX CG Principles
1‘Lay 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 company’s financial reports
Eg establish audit committee, with only non-executive
directors & a majority of independent directors
ASX CG Principles cont’d
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
ASX CG Principles cont’d
9 ‘Remunerate fairly and responsibly’
Eg establish board remuneration committee
Eg disclose to investors (i) the company’s
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