Key Challenges for Corporate Governance in the Public Sector

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					Key Challenges for Corporate Governance
          in the Public Sector:
   Private Sector Lessons and Models

           Professor Geoffrey Kiel

                9 March 2006
                     Outline

    • The private sector governance challenge

    • The response to this challenge

    • What does it mean for governance in the
      public sector?


2
    The power balance has shifted




      CEO                  Board


3
Why have we seen this fundamental
power change in the private sector?
                        Governance failures

           HIH          Enron                Marconi        Merck
                                                                            Hollinger International


                                   One.Tel
        Harris Scarfe                                  Bank of America
                                                                                 WorldCom

                 United Airlines
                                                                    Xerox
                                       James Hardie                            Eastman Kodak
    National Australia Bank



                                                                                       Coles Myer
                                   Walt Disney                  Pasminco
            Lucent

5
                      Governance in transition
    Approx.
                         Ownership            Governance                 Board focus
    time periods
    1850–1920
                      Founder/founder and
                      Founder/founder and
    Entrepreneurial                         Founder and family
                                            Founder and family            Reputation
                                                                          Reputation
    Capitalism
                             family
                            family



    1920–1980             Corporate/
                          Corporate/          Professional
                                              Professional              Resources and
                                                                        Resources and
    Managerial           Government
                         Government           management
                                              management                  networking
                                                                         networking
    Capitalism            ownership
                          ownership



    1980–
                        Funds industry/
                        Funds industry/                                 Performance and
                                                                        Performance and
    Institutional                           Board of directors
                                            Board of directors
                         general public
                         general public                                       control
                                                                             control
    Capitalism



    This is a model both through time and for individual corporations

6
         Governance performance

    Boards have failed in a number of areas:
    • Management salaries/payouts
    • Management/director greed and ethical
      failures
    • Accounting irregularities
    • Inadequate disclosure practices
    • Boardroom disharmony

7
Private sector responses to
     these challenges
             Responses to failures in the private sector
                                                                                                                                Standards Australia (AS8000-2003)
                                             Turnbull Report                   ASFA Draft Corporate Governance                             (Jun 2003)
                                             Internal Control                       Guidelines (Feb 2003)
 Greenbury Report                                 (1999)                                                                              Combined Code of Practice (Jul 2003)
    Director’s                                     (UK)                                                                                             (UK)
  Remuneration                                                      NACD Blue Ribbon Commission Role of the
      (1995)                    NACD Blue Ribbon                     Board in Corporate Strategy (2000) (US)                          ASX Principles (2003)
       (UK)                        Commission
                                      Director                             Myners Review (Mar 2001) (UK)                               NYSE Listing Standards (Nov 2003)
                                 Professionalism                                                                                                     (US)
    Hilmer
                                    (1996) (US)                                                                                              Clerp 9 (2004) (AUS)
    Report                                                          Tyson Report Recruitment & Development of
    (1993)                                                              Non-executive Directors (Jun 2003)
    (Aus)                                                OECD                                                                                Principles of Corporate
                                                       Principles                                                                            Governance (2004) (US)
                                                                       Smith Report (Jan 2003)
                                                           Of                   (UK)
                                Hampel Report          Corporate                                                                                OECD Revised Principles
 Cadbury                        Committee on                                                                                                    Of Corporate Governance
                                                      Governance
  Report                          Corporate                            Higgs Review (Jan 2003)                                                         (Apr 2004)
                                                         (1999)
  (1992)                         Governance                                     (UK)
   (UK)                          (1998) (UK)
                                                                          Sarbanes-Oxley                                                              APRA draft Discussion
                                                                          Act (2002) (US)                                                               Paper (May 2005)




                      Barings                                                                                   Marconi (2002) (UK)       NAB
   BCCI                (1995)
  (1991)                                                                                                WorldCom (2002) (US)          (2004) (AUS)
   (UK)                                                                                             Tyco (2002) (US)
                     Sunbeam                                                                                                          James Hardie
NSCA                (1998) (US)                                                                  Enron (Dec 2001) (US)                 (2005) (Aus)
(1991)
                                                                                            Pasminco (Sep 2001) (AUS)
(Aus)
                Waste Management                                                                                                                  AWB
                   (1998) (US)                                                         Ansett (2001) (AUS)                                     (2006) (Aus)

                                                                               One.Tel (May 2001) (AUS)
                      Robert Maxwell Group
                          (1991) (UK)
                                                                         Harris Scarfe (Apr 2001) (AUS)

                                                                       HIH (Mar 2001) (AUS)
                                                                        Cendant (2000) (US)
      Responses to failures in the private sector

                 Cadbury Report (1992) (UK)
                 Hilmer Report (1993) (Aus)

                    Greenbury Report Director’s
                    Remuneration (1995) (UK)
                        NACD Blue Ribbon Commission Director
                        Professionalism (1996) (US)
                           Hampel Report Committee on Corporate
                           Governance (1998) (UK)
                                  Turnbull Report Internal Control
                                  (1999) (UK)
                                       OECD Principles Of Corporate
                                       Governance (1999)


                                       Waste Management (1998) (US)

                                 Sunbeam (1998) (US)

                         Barings (1995)

                 Robert Maxwell Group (1991) (UK)
          NSCA (1991) (Aus)
     BCCI (1991) (UK)
10
     Responses to failures in the private sector

                NACD Blue Ribbon Commission Role of the
                Board in Corporate Strategy (2000) (US)


                       Myners Review (Mar 2001) (UK)

                             Sarbanes-Oxley Act
                                 (2002) (US)


                                                              Marconi (2002) (UK)
                                                        WorldCom (2002) (US)
                                                  Tyco (2002) (US)
                                             Enron (Dec 2001) (US)
                                         Pasminco (Sep 2001) (AUS)
                                  Ansett (2001) (AUS)

                           One.Tel (May 2001) (AUS)

                      Harris Scarfe (April 2001) (UK)

                    HIH (March 2001) (AUS)

                   Cendant (2000) (US)

11
     Responses to failures in the private sector

                                                              Combined Code of Practice
                            Standards Australia               (Jul 2003) (UK)
                               (AS8000-2003)
                                 (Jun 2003)                   ASX Principles (2003)
                           Tyson Report                        NYSE Listing Standards
                           Recruitment &                       (Nov 2003) (US)
                        Development of Non-
                         executive Directors                         CLERP 9 (2004)
                             (Jun 2003)
                                                                     Principles of Corporate
                    ASFA Draft Corporate                             Governance (2004) (US)
                    Governance Guidelines
                         (Feb 2003)                                      OECD Revised Principles
                                                                         Of Corporate Governance
                         Smith Report
                                                                                (Apr 2004)
                       (Jan 2003) (UK)
                         Higgs Review                                      APRA draft Discussion
                         (Jan 2003) (UK)                                   Paper (May 2005)


                                                  NAB (2004) (AUS)

                                            James Hardie (2005) (Aus)

                                                           AWB (2006) (Aus)


12
         Corporate governance change
                                  Internal Factors
                 Community
                Community
                 and investor
                and investor     Practical redefinition
                                 Practical redefinition
               dissatisfaction
               dissatisfaction   of the role of boards
                                 of the role of boards
                                     and directors
                                     and directors

 CORPORATE                                                 CHANGES IN
                                                           CHANGES IN
 CORPORATE
MALFEASANCE/
MALFEASANCE/   Media attention                               PRIVATE
                                                            PRIVATE
               Media attention   Voluntary codes of
                                 Voluntary codes of
 CORPORATE
 CORPORATE                        practice/conduct
                                                             SECTOR
                                                            SECTOR
    GREED                         practice/conduct
   GREED                                                  GOVERNANCE
                                                          GOVERNANCE


                 Regulatory      Changing standards
                                 Changing standards
                 Regulatory
                   scrutiny        and regulations
                                   and regulations
                  scrutiny

                                 External Factors



 13
            External change drivers

     • Legal, e.g.
       – CLERP 9 amendments
       – Sarbanes-Oxley Act (US)
     • Regulations, e.g.
       – ASX Principles
       – Combined Code (UK)
     • Best practice frameworks, e.g.
       – Standards Australia’s Good Governance Principles
14
              Governance in the 21st century
External Governance                    Internal Governance


Governments – set the
Governments – set the                         OWNERS
                                              OWNERS
  legal and regulatory                                                        Confirm
 legal and regulatory                                                       appointment
      environment
     environment
                                     Reporting and    Appointment and
                                     accountability       review        Reporting and
                                                                        accountability
  Stock exchange –
  Stock exchange –                                                      Recommend         External
                                                                                          External
    set a regulatory
   set a regulatory        Set the                                      appointment
                                     BOARD OF DIRECTORS                                    Auditor
                                                                                          Auditor
   environment and
  environment and        framework   BOARD OF DIRECTORS
      governance                                                        Reporting and
     governance                                                         accountability
      expectations
     expectations
                                     Reporting and    Appointment and
                                     accountability       review            Review and
                                                                            recommend
 Industry/professional
Industry/professional
   bodies, accounting
  bodies, accounting                 MANAGEMENT, LED BY
   standards, industry               MANAGEMENT, LED BY
  standards, industry                      A CEO
                                           A CEO
      standards etc.
     standards etc.

 15
            CLERP 9 amendments

     Reforms relate to:
     • Auditor independence
     • Financial reporting
     • Continuous disclosure
     • Executive remuneration
     • Shareholder participation


16
      Sarbanes-Oxley Act of 2002 (US)

     • Key governance reforms relate to:
       – Audit quality control, ethics and independence
         standards
       – New standards for boards and audit committees
       – CEO/CFO certification of disclosures in
         quarterly and annual reports




17
      International regulations/guidelines

     • Report of the NACD Blue Ribbon
       Commission on the Role of the Board in
       Corporate Strategy (US)
     • Combined Code on Corporate Governance
       (UK)
     • OECD Principles of Corporate Governance
       (OECD)


18
              Standards Australia’s
           Good Governance Principles

     Sets out:
     • How to implement a corporate governance
       framework
     • Responsibilities of the board, chairman,
       individual directors, CEO and company
       secretary
     • Ethical principles that should underlie
       corporate governance
19
                    ASX Principles

     •   In March 2003, the ASX Corporate Governance
         Council released its Principles of Good
         Corporate Governance and Best Practice
         Recommendations (ASX Principles)
     •   The document articulates ten core principles that
         form the basis of good governance
     •   Intended as a reference point for companies to
         understand stakeholder expectations and restore
         investor confidence

20
        Purpose of the ASX Principles

 •   Central reference point for companies wanting to
     understand stakeholder expectations
 •   Promote and restore investor confidence
      – Post Enron and HIH
 •   Recommendations which reflect international best
     practice
 •   To be used as a reporting framework – not a set of
     mandatory rules

21
       Purpose of the ASX Principles
                  (cont’d)
     • Generate discussion and raise awareness of
       governance issues
       – Transparency
       – Accountability
     • Educative role to promote the value of good
       governance
       – Carrot not the stick approach


22
            What are the ASX Principles?
     1. Lay solid foundations for management and oversight
     2. Structure the board to add value
     3. Promote ethical and responsible decision making
     4. Safeguard integrity in financial reporting
     5. Make timely and balanced disclosure
     6. Respect the rights of shareholders
     7. Recognise and manage risk
     8. Encourage enhanced performance
     9. Remunerate fairly and responsibly
     10. Recognise the legitimate interests of stakeholders

23
              Internal change drivers

     •   Director education
     •   Board charter
     •   Meeting effectiveness
     •   Board and director evaluation
     •   The skills-based board



24
     Publications on corporate governance
           have grown exponentially




25
     Director education is a growth
                industry




26
     The corporate governance charter

     A written policy document which defines
      the respective roles, responsibilities and
     authorities of the board of directors, both
          individually and collectively (and
     management) in setting the direction, the
         management and the control of the
                     organisation


27
Essential corporate governance principles

     “It is suggested that the board adopt a
     formal statement of matters reserved to
     it or a formal board charter that details
     the functions and responsibilities of the
     board…”

     Source: ASX Corporate Governance Council, 2003. Principles of Good
     Corporate Governance and Best Practice Recommendations, Principle 1.




28
                       Board charter framework
                                              Role of the board
                                              Role of the board    Board meetings
                                                                   Board meetings
                                               Board structure
                                               Board structure     Board meeting agenda
                                                                   Board meeting agenda
                                    Role of individual directors
                                    Role of individual directors   Board papers
                                                                   Board papers
                                       Role of the chairperson
                                       Role of the chairperson     Board minutes
                                                                   Board minutes
                                          Role of the company
                                          Role of the company      The board calendar
                                                                   The board calendar
                                                      secretary
                                                      secretary    Committees
                                                                   Committees
                                               Role of the CEO
                                               Role of the CEO


                                       Defining                                 Improving board
                               governance roles                                 processes

                                    Continuing                                  Key board
                                  improvement                                   functions


                                           Director protection
                                           Director protection     Strategy formulation
                                                                   Strategy formulation
                                             Board evaluation
                                             Board evaluation      Service/advice/contacts
                                                                   Service/advice/contacts
                                        Director remuneration      Monitoring
                                                                   Monitoring
                                        Director remuneration
                                                                   Compliance
                                                                   Compliance
                                        Director development
                                        Director development
Source: Kiel, G.C. and G.J.                                        Risk management
                                                                   Risk management
                                          Director selection &
                                          Director selection &
Nicholson, 2003, Boards that                        induction
                                                     induction
                                                                   CEO evaluation
                                                                   CEO evaluation
Work: A New Guide for                                              Delegation of
                                                                   Delegation of
Directors, Sydney: McGraw-                                         authority
                                                                   authority
Hill.
   29
     Boards that Work – the “handbook”
             for board charters




30
            Meeting effectiveness

     Good boards have:
     • Redefined the purpose of meetings
     • Made agendas much more effective
     • Improved the quality of board papers
     • Introduced board calendars of events/key
       tasks


31
       Board and director evaluation

     • Boards-as-a-whole evaluation
     • Individual director evaluation




32
How common are board evaluations?

                                                         2002    2005
                          Topics
                                                         % yes   % yes

     Regular formal board evaluations                    33%     84%

     Individual director evaluations                     19%     37%

     Effectiveness of board evaluations                  43%     67%

     Effectiveness of individual director
                                                         37%     70%
     evaluations

     Source: Corporate Board Member and KPMG – US Data

33
     There are many methodologies...




34
        Boards are reviewing their skills base

  Board performance can be understood by considering the
  links between these four characteristics:

        Inputs                              Transformation Process                                    Outputs


                                       Board
                                        Board
    Institutional
     Institutional                  Intellectual
                                     Intellectual                                               Organisational
                                                                                                Organisational
                                                                   Board Roles
                                                                   Board Roles
      Influences
       Influences                      Capital
                                       Capital                                                   Performance
                                                                                                 Performance




Source: Nicholson, G. J., and G. C. Kiel. 2004. A framework for diagnosing board effectiveness. Corporate Governance: An
International Review 12 (4): 442-460.

   35
            Board intellectual capital
      The Individual                  The Team


                                     Board Social
                                     Board Social
     Human Capital
     Human Capital                     Capital
                                       Capital


     Individual Social
      Individual Social    Board
                            Board
           Capital
           Capital        Dynamics
                          Dynamics



     Societal Capital                 Structural
                                      Structural
     Societal Capital
                                       Capital
                                        Capital




36
What does this mean for
governance in the public
        sector?
     Public vs. private sector governance

•     Whereas corporations focus mainly on shareholder returns and
      the preservation of shareholder value, the public sector role is
      to cost effectively implement programs in accordance with
      government legislation and policies
•     In carrying out this task, public sector agencies have:
        - to satisfy a complex range of political, economic and social
          objectives
        - to operate according to a different set of external
          constraints and influences from private companies
        - more diverse stakeholders, often with contradictory
          demands
38
              Public Sector Responses
               Corporatised Models
     Recent examples:
     • Uhrig Report (2003) – review of the corporate
       governance of statutory authorities
        – Looked at the lessons and developments in the private
          sector for the public sector
     • Inquiry into Corporate Governance in the
       Victorian Public Sector (2005)
        – Reviewed whether corporate governance arrangements
          in Victoria have kept pace with developments in other
          jurisdictions (including other Australian states,
          Commonwealth, Canada and New Zealand)
39
                           Summary
     • Governance must continually change as society, institutions
       and economies change
     • An appropriate regulatory framework is essential – but
       regulation of itself is not the answer
     • Boards can’t manage, and managers should not direct
        – Defining the governance role and the distinction between
           those who govern and those who manage is essential
     • Good “structural capital” – how to perform the governance task
       – is essential
     • The right people, with appropriate skills and social capital, are
       essential
     • Continual evaluation of boards and their involvement in
       governance is essential for increasing governance performance

40