Public Sector Governance

  • Date:01 Feb 2007
  • Type:CompanyDirectorMagazine
Boards of public sector organisations face a range of different challenges to their private sector counterparts. But, as Ann-Maree Moodie reports, there is now increasing debate on what constitutes good governance in the public sector.

Putting the spotlight on public sector governance


Following a series of corporate collapses here and overseas in the past five years – such as Enron, WorldCom, HIH, One.Tel, Harris Scarfe – the public sector has generally remained unscathed by charges of malfeasance until the problems surrounding the activities of the Australian Wheat Board were revealed.

Since Commissioner Cole’s report into the inquiry about the ‘oil-for-food’ scandal and Australia’s involvement, both federal and state governments are focusing on its impact for the governance and accountability frameworks of public sector organisations.

“The notion of accountability relates to the fact that public sector board members are public servants responsible in various ways to the government of the day and answerable to parliament,” says Dr Peter Shergold, Secretary of the Department of the Prime Minister and Cabinet. “Therefore, they are responsible not for shareholder value but for acting in the public interest.”

Governance issues in the public sector are complicated by the complexity and variety of public sector organisations and in particular, the way in which they are governed. Companies in which the government is the only, or a major shareholder, are referred to as either: government-owned enterprises (GOCs), State-owned enterprises (SOCs) or as government business enterprises (GBEs). Each operates under different legal structures ranging from statutory corporations to companies in which the government is the main shareholder. Public sector boards must abide by a raft of laws ranging from the Public Service Act, the Financial Management and Accountability Act and Freedom of Information legislation. They are also open to review and investigation by various Auditors General and state and federal ombudsmen.

Challenges

“The particular challenges faced in public sector governance is the level of scrutiny, the requirements for record keeping that go with that, and the fact that you inevitably work in an environment of political contest,” says Shergold. “Unlike the private sector, effectively you have a board which is the government of the day. You will also have always an alternative, or shadow ‘board’ and that of course means inevitably you are being scrutinised within that environment of political contest. This places particular pressures on you, just as the fact you work in the public sector means you have particular obligations.”

Nonetheless, the purpose of the board in the public sector remains generally consistent – to operate within the policy framework stipulated by the incumbent government. In addition, the board may be expected to respond to various social and environmental obligations, as well as financial and strategic imperatives. Board members are chosen by ministerial appointment or are appointed specifically to represent the government in the board room. However, the way in which public sector boards are selected can lead to governance problems.

“In circumstances where the board functions under the influence of the known views of a small number of owners, it cannot operate with the same entrepreneurial freedom and power to act as a public company board,” concluded John Uhrig in his 2002 Review of the Corporate Governance of Statutory Authorities and Officer Holders for the Federal Government.

“In this context, it is unlikely that good governance will prevail due to the board’s limited ability to act. The board may also have difficulty in defining its role and fully applying objectivity, wisdom, authority and judgment.”

Says Shergold: “I always say that whilst a CEO in the public sector can learn a great deal from his or her colleagues in the private sector, we are in a real sense serving citizens, not customers, in that most CEOs in the public sector are delivering entitlements and obligations, rights and responsibilities not just government programs, government services, and government regulations.”

Different masters

The cornerstone of public sector governance is balancing the concept of the ‘three masters’. These masters are: ministers and their advisors; management; and stakeholders. This three-pronged framework of accountability for public sector boards is further complicated by the expectations of stakeholders and the community in general.

“We have literally thousands of organisations ranging from departments of State and agencies under those departments, to statutory authorities to government business enterprises,” says Shergold. “Each of them is working under different legislation and with different degrees of control by a minister; some working with very considerable independence and autonomy.

“There is also a very broad range of what are called boards and which have the responsibilities of boards. What we call boards in the public sector are of various sorts; on occasion there are boards that have the authority to appoint and dismiss chief executives. But often what we call boards are groups of private and public sector experts who effectively act as advisory councils. One of the concerns expressed by John Uhrig was that in his view many of the groups that were claimed to be boards in the public sector did not have the full powers or responsibilities of a board.”

Julie Garland McLellan, the author of All Above Board: Great Governance in the Government Sector says one of the key issues for refining accountability frameworks in the public sector is firstly defining the structure of the organisation and which governance mechanism is best suited to that structure.

“For example, if you were a board member of Medicare, which is a direct administrative control structure, you would have a completely different system of oversight, management and guidance to being, for example, on a hospital board,” says Garland McClellan. “While you’re still working in health care, now you’ve got an independent board structure between yourself and the minister.

“The most significant difference between the public sector boards is who is responsible for the strategy? Although all government-owned organisations must in some way be supporting the government policy platform, the degree of responsibility, and therefore accountability, for the strategy varies across each of these different structures.”

Political interference

Managing political interference is an inevitable consequence of public sector governance. The degree of interference will depend on the structure of the board, the government of the day, and the management style of individual ministers. “As a general rule, the services provided by statutory authorities remain the same regardless of the government of the day,” according to a report on public sector boards by the Auditor General of Western Australia. “Some degree of influence from direct government control is considered desirable, such as the case with regulatory bodies. Some authorities operate as businesses in which case government control is perceived to be minimal, operating as reserve power.”

“There are varying levels of influence,” says Shergold. “If you are a head of a Department of State, then quite clearly you are responsible for that business under the minister. In other organisations, however, you have statutory independence, which means that the ability of a minister to direct you is limited. Of course, that is important when it comes to regulatory authorities which you would not want subject to political direction. You are government by legislation –?often particular legislation with respect to that agency –?so the framework of your actions is set. But you are not at the political direction of the minister.”

Dealing with this in practice, while still retaining the principles of transparency, responsibility and integrity, can be difficult, especially when not one, but two, ministers are involved. “Often boards will be accountable to the ‘portfolio minister’ who is the minister responsible for the policy and the outcomes in that particular area,” says Garland McLellan. “Then you also have the ‘treasury minister’ who sometimes is referred to as the ‘shareholder minister’. This person is usually not at all interested in policy issues but rather the financial results and will very often get involved in strategic planning. This is where accountability issues can become slightly muddied.

“The minister can very often have a lot of influence and it’s always wise for the board to be very careful that they never wind up in a conflict between two ministers – that’s the most dangerous place on earth. The area gets very murky where you get ministers and in particular ministers’ aides and department secretaries who suggest, ‘the minister would be pleased if….’. Suddenly you’re in this area of trying to balance conflicting requirements for making use of your assets.”

Adding to the complexity are stakeholder groups. The management of water is a classic example. The groups which will rightly be interested in maintaining water quality will be health services, agriculture and water users in general such as those representing recreational interests. Those concerned with providing water to the most needy in society are also involved. “The government expects that the boards of these organisations will take the lead and be proactive in finding an appropriate balance in the organisation between the needs of all these different stakeholders,” says Garland McLellan.

Consistency

Achieving consistency in governance frameworks for public sector organisations is also complex. While some government departments have dedicated units to promoting good governance practices, others have no written documentation, least of all a director, charged with the task. “One of the problems that these organisations have is ‘guideline fatigue’ and being able to find an appropriate set of guidelines to manage their business to, and that can be quite complex because very often there are areas of overlap between the different systems,” says Garland McLellan.

The ASX Principles of Good Corporate Governance, while being non-mandatory guidelines for listed companies, are being applied to some government organisations. Garland McLellan says: “I would suggest that the governance processes and procedures in a medium-sized and upwards government–owned organisation are probably more rigorous than in the small ASX-listed companies.”

As the federal and state governments digest the implications of the Cole Commission for public sector governance, it is clear that issues such as transparency, responsibility, accountability, integrity and honesty will be priorities. “One of the things that stands out in that report is that the sheer volume of information which comes into government agencies today has increased enormously,” says Shergold. “The task in any organisation is to turn that mass of information into knowledge. In our case, this knowledge is at the disposal of the government of the day. There is a real challenge in managing that sheer volume of documentation because when something goes wrong with any of those documents, anywhere in the system, it can become a slither of evidence of negligence. It is a real challenge to think how to manage that system effectively.”


Ann-Maree Moodie, FAICD, is the managing director of The Boardroom Consulting Group Pty Ltd.