Changes ahead

What does 2016 have in store for the public sector? Christopher Niesche considers the top seven governance trends likely to create an impact.

Australia’s public sector bodies are facing a raft of challenges. Governments across the country are asking them to do more while simultaneously squeezing their budgets. Similarly, just as with the private sector, the digital economy is offering new opportunities and challenges; and public-sector bodies are increasingly being asked to work with other public and private organisations to deliver their services.

The public sector is also Australia’s largest employer, with the Australian Bureau of Statistics estimating that Commonwealth, state and local governments employ 1.9 million people. Despite government attempts to limit public expenditure, the number of employees has risen from 1.75 million in 2007–08.

Below are seven trends that are likely to affect the governance of public sector entities including government departments, statutory bodies and government owned corporations (GOCs) in 2016.

1. Innovation

Innovation has become a buzzword over the past few years, but Elizabeth Montano FAICD, governance consultant, former chairman of Centrelink and board member of the Australian Institute of Marine Science, says it will become more important on public sector boards.

“In the public sector, people are being asked to think about totally reimagining how they might deliver services or whatever it is they do as part of government’s contribution to society.”

Part of the rationale for innovation is that governments want to drive down the cost of delivering public services at the same time as they increase the effectiveness of those services. Montano says this has been done with some “blunt” instruments in the past such as efficiency dividends, which require government departments and agencies to trim their budgets by a prescribed amount every year.

The efficiency dividends – effectively budget cuts – have already pushed boards into finding more innovative ways of operating and this will become more of a focus, says Montano.

“Public sector boards will have to look at how they innovate. Do they use pilot programs, like the National Disability Insurance Scheme has done? To ensure uninterrupted service delivery, do you have the learning experiences in controlled environments and then move out into the mainstream? Apart from cost savings, how can we use new technologies and business models to deliver more and better services?” she says. “There’ll be a whole lot of challenges as to how they achieve a pretty fast-moving game while still ensuring that they’re delivering what the government and the community want them to deliver.”

Andrea Staines FAICD has served on the boards of the Australian Rail Track Corporation and the Gladstone Ports Corporation, and was recently appointed to the board of Queensland Investment Corporation. She says innovation on government boards presents its own set of difficulties.

“There’s a different pressure on GOCs compared to public companies because the politicians are saying, ‘I don’t want to be on the front page of the local paper for the wrong reasons’,” says Staines.

In the private sector, for instance, it might be accepted that of 10 different “experiments” with innovation, only one will be successful. “It’s difficult for a GOC to do that because of the political constraints involved with the local paper picking up, out of context, the nine out of ten that were unsuccessful,” says Staines.

2. Risk

Montano says the focus on innovation will in turn prompt conversations that many public sector boards haven’t previously had, with a strong focus on risk, particularly where step changes in business models are involved.

“By definition, when you seek to innovate, you are doing something untried and, therefore, you have to think about the business case for doing something new. What are the risks?” says Montano.

“It will really test their understanding of their risk appetite and their risk tolerances and it will also test their ability to fully appreciate the organisation’s ability to identify, treat, and manage risk.”

Boards will also need to engage strategically with government around their innovative agenda, outlining the risks and making sure they align with the government’s own risk appetite.

“Traditionally, that’s not been a conversation that’s been had in the public sector,” she says.

3. Diversity

As public sector boards try to innovate their service delivery models, they will also seek board members with private sector experience.

“I think more and more public sector boards are going to be asked to take the best of both environments and make something quite new,” says Montano. “There are lots of great innovations and expertise in the private sector, which you can see in application in the public sector. But, equally, the challenge to those boards will be to remember that they’re operating in a public sector context, so you really need people around who also have an understanding of how things work in government.”

The consequences of hundreds of thousands of people not receiving their social security payments on time, for instance, would outweigh what’s at stake in many start-ups.

Dale Budd FAICD, a former chief of staff to former Prime Minister, Malcolm Fraser, has served on numerous public sector boards. Budd agrees there is an increased emphasis on diversity, particularly on the inclusion of younger people and more women on boards. Smaller agencies will take the opportunity of appointing people in their twenties and thirties to their boards to give them some public sector experience. “They often tend to bring a different and fresh perspective,” he says.

However, Budd notes that some public sector boards don’t have a choice as to their own membership. “Some public sector boards have less control over who gets on to the board and some have more. For a lot of public sector boards, the board and the chairman still don’t have much say in who is appointed to the board. Decisions on appointments still tend to be fairly political,” he says.

A change of government can bring progressive – or quick – change of some boards with the appointment of new members who are in some way aligned with the new government.

On occasions, the chair will be able to talk to the minister or the head of the relevant government department to try to ensure that an appropriate person is appointed.

4. Audit committees

Budd expects to see more use of audit committees on public sector boards as they seek to improve their performance. When Budd served on the board of the Australian Rail Track Corporation, which manages Australia’s interstate rail network, the board had an audit and compliance subcommittee between 2001 and 2007, which was unusual at that time. However, it is now becoming more prevalent.

“Audit committees are becoming more common and there is a growing view that the audit committee should have some independent people on it. In other words, not just be a subset of the main board but to have some independent people drawn from outside the main board, looking for stronger accounting or finance experience, typically,” he says.

An audit committee with expertise in finance and compliance will not only improve the quality of financial decision-making, but help in areas such as contracting. For instance, if an agency or GOC is considering a new IT system, few of the organisation’s board members would know all of the risks involved, says Budd. However, as a repository of finance and compliance experience and expertise, an audit committee will be able to ensure the risks are identified and addressed.

5. Collaboration

Public sector organisations and boards will have to collaborate more in the coming years as service delivery crosses state and federal boundaries and may also involve the private sector and not-for-profit (NFP) organisations.

Responsibility for delivery of health and education services, for instance, is shared between federal and state agencies, which also rely on private-sector health and education providers, as well as charities and other NFP organisations. The welfare sector in particular involves a lot of large NFPs.

“The board is not going to be at the coalface. It’s going to be management who’s making the collaboration happen but I think boards must be across it,” says Budd. “At the governance level, boards need to understand it. They must encourage it and do the work at the strategic governance level that boards need to do.

“A board will need to play its proper role in encouraging and ensuring, at a governance level, that its organisation plays its part in this collaboration. The pressures for more collaboration, I believe, are going to come from high up in government, so boards will need to be responsive to ministers,” he says.

6. Privatisation and accountability

“With government budgets remaining stretched, privatisations will need to remain on the agenda and the boards of GOCs will need to respond or at least be ready,” says Staines.

“All GOCs should work with, in the back of their minds, the concept that they may be sold, that the government may need to recycle capital,” she says. “And so, I think that they should be ensuring that they operate to the standards provided by the Corporations Act and, more importantly, operate to the commercial standards seen in the commercial sector.”

One role of the board in a GOC, or a state-owned corporation in New South Wales or government business enterprise in the federal sphere, says Staines, is to ensure that the entity is as effective as possible and meets the integrity standards of the Corporations Act.

Staines adds that when she was on the boards of the Australian Rail Track Corporation and the Gladstone Ports Corporation their governance structures and processes were already up to scratch because the government of the day was prepared to put resources into governance and required clear and detailed reporting.

7. Higher levels of governance

The introduction of changes to the Public Administration Act in Victoria will encourage higher standards of governance and accountability, says Tony Nippard GAICD, a director of Melbourne Polytechnic and a former executive director, knowledge management and governance, at the Victorian Public Sector Commission.

Nippard says the changes make clear that department secretaries are required to provide assistance to public sector entities on matters relating to public administration and governance.

The change to Section 13A of the Act makes the secretary of a public service department responsible for advising the minister on matters relating to each public entity, including the discharge of its responsibilities under the various acts that establish and govern it.

The Act also states that a public entity must (unless prohibited by law) provide the secretary with any information that he or she requires to comply with his or her obligations under Section 13A.

Nippard says the changes further formalise the accountability and governance arrangements between public entity boards and the department, which in the past, for instance, the Ombudsman argued were not clear.

For example, public entity boards were already required to inform the department about any major risks they are facing and what they are doing about them, and Section 13A now makes this type of responsibility more explicit.

“It’s often a lack of adequate understanding of roles – what exact business they’re in, what powers they do have, what powers they don’t have, what powers they have to do jointly, how they should keep ministers and department of secretaries appropriately informed or senior officers appropriately informed,” Nippard says.

Also, two recent high-profile corruption events in the Victorian public sector will mean greater focus on integrity issues in public sector governance and management.