Cg Final Df

Corporate Governance
In Arms-Length Agencies –
An International Overview
July 2009

EFFICIENCY UNIT
VISION AND MISSION

Vision Statement

To be the preferred consulting partner for all government bureaux and departments and to advance
the delivery of world-class public services to the people of Hong Kong.

Mission Statement

To provide strategic and implementable solutions to all our clients as they seek to deliver people-
based government services. We do this by combining our extensive understanding of policies, our
specialised knowledge and our broad contacts and linkages throughout the Government and the
private sector. In doing this, we join our clients in contributing to the advancement of the community i
while also providing a fulfilling career for all members of our team.

This brief was researched and authored by the Research Division, Institute of Public Administration,
Ireland (www.ipa.ie/research). The Research Division provides applied research services for policy
makers in a wide range of public service organisations, drawing on an extensive network of contacts
and experience gained over more than thirty years.

Other Efficiency Unit Documents

The Efficiency Unit has produced a number of guides on good practice on a wide range of areas,
including outsourcing and contract management. These may be found on the Efficiency Unit website
at www.eu.gov.hk.

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Corporate Governance in Arms-Length Agencies – An International Overview

Foreword

Corporate governance means different things to different people. Whilst it is an evolving concept in
the public sector as much as in the private sector, it is not a strict science. It is more than financial
accountability, yet it is not the same as ‘Governance’; the latter has a much broader scope.

In Hong Kong, unlike many other jurisdictions, most government departments still follow the traditional
vote-funded model and are subject to a comprehensive regime of controls and accountability that
has been built up over many years.

On the other hand, concerns have arisen over the corporate governance of non-government bodies.
We have, therefore, devoted this issue of our public sector reform series to an overview of the
challenges faced in other countries concerning corporate governance in arms-length agencies.

We hope the overseas experiences related here will contribute to the debate on the most appropriate
way forward in Hong Kong.

ii Head, Efficiency Unit

July 2009

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Contents

Executive Summary 1

1. Corporate governance in the public sector: definitions and developments 5
What does corporate governance mean?
Why has corporate governance come to prominence?
Particular challenges for corporate governance in the public sector
What does corporate governance encompass?

2. Standards of behaviour 13
Corporate governance codes of good practice
Codes of conduct
Leadership developments

3. Organisational structures and processes: governing body 19
Board size
Board committees
Board appointments
Board tenure iii
Board development
Board performance
Board composition
Board remuneration

4. Control 27
Risk management
Audit

5. External reporting 31
The need for transparency
Balancing transparency with confidentiality

6. Conclusions 33

References 34



Executive Summary
The importance of corporate governance lies in Corporate governance can be more challenging
its contribution to accountability. The issue of in a public sector environment than in the private
corporate governance has grown in prominence sector. The challenges include: policy is set by the
in recent years, largely in response to a number government; board members may be selected by
of financial scandals in the private sector such as ministers; ministerial directions can countermand
the Enron collapse in the United States of America the wishes of the board at any time; and chief
(USA). More recently, the collapse of Lehman executive officers may be formally employed by
Brothers Holdings plc, which has precipitated the minister, creating accountability problems
and contributed to financial downturns globally, for the board.
has drawn attention to the consequences of
weak controls. The focus of this report is on the corporate
governance of organisations at arms length
There has also been increased international public from government, i.e. those bodies outside of
concern over the governance and accountability government departments or ministries, such
of public sector organisations arising from cases as statutory agencies and publicly funded
of fraud or mismanagement, or concerns over the non-governmental organisations (NGOs). In
perceived absence of accountability of agencies. particular, the focus is on the functioning of the
The public outrage at the abuse of the expenses governing board of the organisation. Even where
1 regime for parliamentarians at Westminister, while a board may not exist, there is usually a governing
not a failure of corporate governance as such, body responsible for leadership and reporting on
highlights the issue of standards of behaviour which stewardship.
is of central concern to corporate governance.
Failure to adhere to good standards of behaviour There are a number of common problems that
can lead to failures in corporate governance can lead to corporate governance failures.
such as misuse of public assets or resources Figure 1 shows seven warning signs of service
for personal or political purposes or failure to failure. Governing body members and relevant
exercise reasonable stewardship over public staff in sponsoring departments need to give
assets or resources. particular attention to these signs.

A good definition of corporate governance in the What does corporate governance cover?
public sector states that: The International Federation of Accountants’
(IFAC) guidance that has been adopted in many
Broadly speaking, corporate governance countries identifies four main dimensions of
generally refers to the processes by which the corporate governance of public sector
organisations are directed, controlled and organisations (Figure 2).
held to account. It encompasses authority,
accountability, stewardship, leadership, direction
and control exercised in the organisation.
(Australian National Audit Office, 1999)


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Figure 1
The seven warning signs of service failure
Analysis of public inquiries shows these common problems
contributed to serious service failures.

Source: Audit Commission of the United Kingdom
2

Figure 2
Dimensions of good corporate governance

Organisational
Standards of
Structures and
Behaviour
Processes

• codes of good practice
• board dynamics
• codes of conduct
• leadership developments

Good Corporate
Governance

External
Control
Reporting

• need for transparency
• risk management
• balancing transparency
• audit Full Version Simplified Version
with confidentiality


Standards of behaviour openness, independence, good faith, and
Standards of behaviour are important to corporate service to the public, which underpin most
governance as they establish how the leadership corporate governance codes of practice.
operates, the values that drive the organisation,
and the culture that prevails. As such, standards of Audits and inspections become a normal
behaviour deal largely with what has been termed part of life in public organisations. An issue of
the ‘soft’ attributes of corporate governance. concern for the governing body of many public
Governments internationally have adapted private organisations is the choice of external auditors
sector codes of practice and codes of conduct and the need to ensure auditor independence. In
to provide guidance for board members and that context, auditor rotation is becoming more
executives on these issues. common. Another feature of good corporate
governance is the use of audit committees by
Leadership is another crucial principle from a public organisations to provide an oversight of
corporate governance perspective. There are two audit arrangements.
key leadership roles that the governing bodies
of public organisations need to pay attention External reporting
to: the establishment of sound governance Transparency is a fundamental element of good
structures and processes, and supporting good corporate governance. Public sector organisations
governance through their own performance and rely on the continuing support and confidence of
behaviours. their stakeholders who in turn need to be assured
of the quality and ethical standards of public bodies
3 Organisational structures and processes with which they deal. Transparency in relation to
There are eight issues to be addressed by governing matters such as procurement, remuneration and
bodies and their sponsoring departments if they disclosure must be exemplary.
are to deliver good corporate governance in
terms of effective responsibility and accountability In practical terms, transparency in relation to
(Table 1). reporting on performance and on future intentions
and plans is achieved in a number of ways,
Control including public and timely production of plans
For public organisations, other than financial and reports. Sponsoring departments need to
risk, their work is also subject to a much ensure that they have the skills and competencies
broader category of risks, including policy risk required to critically evaluate such plans and
and reputational risk. Risk management means reports.
addressing these factors. What is now required by
many codes of practice of corporate governance There are challenges in terms of discharging duties
is to ensure that risk is explicitly stated and a in a transparent manner whilst simultaneously
consensus on addressing risks formulated. protecting business or organisation sensitive
information. The need for codes and practices to
A particular dimension of risk management directly acknowledge the tension between confidentiality
applicable to the governing bodies of public and transparency and to strike a balance between
organisations is the management of conflicts these competing tensions requires constant
of interest, which can significantly impact on scrutiny. It is important that governing bodies
reputational risk. There is no prescriptive set periodically scrutinise their organisation’s guidance
of rules specifying what constitutes ethical and practice with regard to striking a balance
Simplified Version behaviour. Decision-making should be guided
Options of Red between transparency and confidentiality.
by the principles of integrity, honesty, transparency,

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Table 1
The eight key issues on board structures and processes

Board size Six to nine members is considered a reasonable size in the private
sector. Up to twelve is not uncommon in the public sector, to
meet representational and balance requirements.

Board committees Commonly used for detailed oversight and supervision of areas
of special risk critical to success.

Board appointments Board selection and composition are vital elements in securing
effective boards. Identifying competencies needed, pro-active
search for candidates and attention to personal attributes are
amongst the items that must be given attention.

Board tenure There is no set term limit for boards, though three years is a
common time in a number of countries. Appointments may be
renewed for a second term, subject to satisfactory performance.
Staggering of replacement appointments is important. 4

Board development There is a need for board induction and continued review of
training needs, and also to ensure that those involved in the
appointment of board members are fully trained.

Board performance Best practice suggests that formal annual assessment of board
performance between the minister, sponsoring department
and the chair of the board should take place to review board
performance.

Board composition Best practice guidance suggests that the majority of board
members should be independent and that the chair and chief
executive positions should be separate. There is a growing view
that departmental staff should not be members of the board.

Board remuneration Practice varies significantly. Many smaller public bodies tend
to pay only out-of-pocket expenses. Others pay a set amount,
based either on a daily rate or an estimated time commitment
per month or per year. In general, remuneration is relatively
modest.

Source: adapted from Uhrig (2003)


1 Corporate governance in the public sector:
definitions and developments
What does corporate governance in the public sector by reference to the Australian
mean? National Audit Office, which states that:
Corporate governance is a concept that has been
very much to the fore in public sector reform in Broadly speaking, corporate governance
recent years. Understanding how to ensure and generally refers to the processes by which
achieve best practice in corporate governance organisations are directed, controlled and
presents significant challenges for public sector held to account. It encompasses authority,
organisations internationally. But what does the accountability, stewardship, leadership, direction
term corporate governance mean? and control exercised in the organisation.
(Australian National Audit Office, 1999: 1
Corporate governance has its origins in the http://www.anao.gov.au/uploads/documents/
marketplace and emerged to describe the way Corporate_Governance_in_Commonwealth_
in which suppliers of finance to corporations Authorities_and_Companies.pdf)
could assure themselves of getting a return on
their investment. In this sense it is about ensuring Within private sector organisations, corporate
that the management of private organisations governance is often viewed as being primarily
operate and run their businesses in a manner concerned with the functioning of the board of
5 consistent with the wishes of the shareholders, the organisation. In the different parts of the public
and that mechanisms for identifying and arresting sector, the equivalent of the group that fulfils the
malpractice are in place and effective (Bovaird role of the board of a company in the private
and Löffler, 2009: 9). sector is at times not so easy to identify.

Within the public sector, when corporate But as the IFAC (IFAC, 2001, para. .019,
governance is discussed the main focus, and http://www.ifac.org/Members/DownLoads/
the focus of this report, is often on the corporate Study_13_Governance.pdf) notes:
governance of organisations at arms length In whatever way it is configured, constituted
from government, i.e. those bodies outside of or described, all bodies need to have at their
government departments or ministries (which are head a group which is responsible for giving
usually well regulated by specific rules and statutes) leadership and strategic direction, defining
such as statutory agencies and publicly funded control mechanisms and supervising the overall
NGOs. In this context corporate governance has management of the entity’s activities, and
become associated not only with financial reporting reporting on stewardship and performance.
and controls, but also with standards of behaviour
and organisational structures and processes. In
this report, we understand corporate governance


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It is this leadership or government grouping,
referred to in this report either as the governing
body or the board, which is the main focus for
corporate governance in the public sector. For
some public organisations, the governing body
is relatively obvious, as with the board of an
agency or a two-tier board structure where a
non-executive supervisory board oversees an
executive management board. But for other
public sector organisations the role played by the
governing body in corporate governance may not
be clear, as the case study of Canada’s National
Research Council governing council shows.

Case study
Role of governing council is unclear

As part of a review of the National Research Council Canada in 2003, the Office of the
6
Auditor General examined the role of the National Research Council governing council. Its
findings revealed a lack of clarity among governing council members about the role of the
governing council: whether it was simply advisory in nature to the president or whether it
included the obligation to direct and control the work of the corporation through the president.
The governing council was found to be operating primarily as an advisory body. The Auditor
General was concerned about this apparent lack of clarity, and believed that it has led to the
absence of key governing council governance initiatives and structures.

In a follow-up review in 2007, the Office of the Auditor General noted satisfactory progress on
this issue, as the council had given itself a stronger role to meet the assigned responsibilities
under the National Research Council Act. It had also established two new standing committees:
the audit, evaluation and risk management committee and the human resources committee.

Source: Office of the Auditor General of Canada, 2007, http://www.oag-bvg.gc.ca/internet/English/
att_20070203xe03_e_17507.html



Why has corporate governance come and identified three fundamental principles of
to prominence? corporate governance – openness, integrity and
Interest in corporate governance has been driven accountability. A ‘combined code’ was developed
primarily by a growing list of corporate scandals in 1998 which harmonised the key issues from
in the private sector, such as the Enron collapse Cadbury with a number of subsequent reports. The
in the USA. The problems have to do with the ‘combined code’ was binding on all companies
pursuit of private interests (excessive compensation quoted on the London Stock Exchange. It has
of top executives, overly generous benefits), been revised on a number of occasions. The most
duplicity (failure to observe accepted standards recent version of the Code is available at: http://
of accounting, the disguising of transactions), www.frc.org.uk/documents/pagemanager/frc/
conflict of interest (accounting firms too close Combined%20Code%20June%202006.pdf.
to client corporations) and corruption in various
other forms. These issues have focused interest The OECD has also been active in relation to
on a number of corporate governance issues promoting good corporate governance and
such as the role of the board of directors, the published a series of Principles of Corporate
independence of the board’s membership Governance in 1999. Following a comprehensive
from management, the responsibilities of the survey of how member countries addressed the
board chair, the chair’s relationship to the chief different corporate governance challenges they
executive, and the transparency and accuracy faced, the Principles were revised in 2004: see
of financial reporting (Plumptre, 2004, pp. 2–3). http://www.oecd.org/dataoecd/32/18/31557724.
More recently, the collapse of Lehman Brothers pdf.
7
Holdings plc in the USA, which has precipitated
In the USA, following the widely reported
and contributed to financial downturns globally,
accounting scandals at energy company Enron
has drawn attention to the consequences of weak
and telecommunications company WorldCom,
controls. In a public sector setting, the public
the federal government sought to pass laws
outrage at the abuse of the expenses regime for
which would prevent in future the fraudulent
parliamentarians at Westminister, while not a failure
reporting of accounts in private companies. The
of corporate governance as such, has highlighted
Sarbanes-Oxley Act of 2002 extended boards’
the issue of standards of behaviour which is of
financial oversight responsibilities and imposed
central concern to corporate governance.
new financial disclosure requirements. In particular,
Three sources for new practices and codes of it requires that management prepare a report on
corporate governance are dominant internationally the internal control structures and procedures for
in response to these scandals – the United financial reporting in their organisation, as well as
Kingdom (UK), Organisation for Economic a report by external auditors on that assessment:
Cooperation and Development (OECD) and the see http://www.soxlaw.com/.
USA. In the UK, following a number of private
While private sector examples of corporate
sector corporate governance scandals, the
governance failure have been driving improvement
Committee on the Financial Aspects of Corporate
initiatives at an international level, there have also
Governance (the Cadbury Committee) was formed
been an increasing number of such failures within
in 1991 to investigate. The resultant Cadbury report
the public sphere which have prompted reviews of
developed an innovative ‘Code of Best Practice’
corporate governance practices and procedures


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in the public sector. Public sector scandals identifies, boards of public sector bodies carry
have been a driving force for the increasing considerable responsibilities for the management
focus on corporate governance in the public of public funds and must ensure they have the
sector. So too has the increasing complexity ability to fully pursue matters they deem to be of
of stakeholder relationships and expectations concern. Similarly, the Royal United Hospital Bath
regarding performance and transparency, leading case study shows how boards can be misled
to demands internationally for more effective by executive management unless they have the
corporate governance arrangements in the public necessary competencies and skills to rigorously
sector to help agencies steer their way through scrutinise performance.
complex stakeholder demands. Also, changing
trends in the way the public sector conducts its Corporate governance failures can result in
business and in particular regulatory and standard- wasted public money or poor service experience,
setting practices are increasingly requiring public and in some cases, may even result in serious
organisations to adopt best corporate governance tragedies. The UK Audit Commission analysed
standards. a number of inquiries into failures to see what
contribution governance arrangements made
The use and stewardship of public funds is an to organisational failure, as the case study on
essential feature of corporate governance in the page 11 identifies.
public sector. As the ‘Fast Ferry Fiasco’ case study

8
Case study
Royal United Hospital Bath corporate governance failures

Professor Robert Tinston was appointed by the trust in 2003 to hold an inquiry after two
external reviews identified concerns about deliberate manipulation of waiting lists and serious
deterioration in finances at the trust. The Tinston report describes ‘a trust in the grip of a powerful
self-delusion about its real performance and the desire to continue to support this leading to
a culture of misrepresentation’.

In particular, the report noted major corporate governance failures. The inquiry noted that the
former executive team appears to have adopted a policy of marginalising the trust board or,
at the very least, presenting important information at board meetings in an unduly optimistic
and favourable way. The report says the trust’s weak control and accountability arrangements
combined to undermine fundamentally the performance of the hospital. Boards must be in a
position to challenge constructively the financial and operational information they receive. This
means they must understand the information presented to them and its implications for the
organisation. They must also be able to identify risks to their corporate objectives, recognise the
financial consequences and assess and monitor how effectively they are being addressed.

Source: http://www.hsj.co.uk/ruh-bath-was-delude-claims-probe/19369.article



Case study
Board failure: the example of the ‘Fast Ferry Fiasco’

In British Columbia (BC), the ‘Fast Ferry Fiasco’ is an example of how the role of boards can
have major impacts on organisational performance. The facts of the Fast Ferry Project are
fully documented in the BC Auditor General’s 1999 report: A Review of the Fast Ferry Project:
Governance and Risk Management.

The government decided to purchase three high-speed aluminium catamaran car ferries at an
initial estimated cost of $210 million. The initial board appointed to oversee the construction
included three independent directors from the private sector with relevant skills and experience
in marine construction. Over the first ten months of its operations, the board:

• asked repeatedly for a full budget
• asked to receive regular reporting against an approved budget, showing both forecast costs
to complete, and variances
• asked for a construction schedule
• pointed out that the original budget was for a different type of ferry, and questioned both
that budget and the latest changes to it
9 • stressed the need for a risk analysis of the current scope of the project
• noted that forecast costs continued to rise, and that the scope of the programme had
increased without an increase in budget.

Its requests were consistently ignored or only partly met, with the result that the board resigned.
A new board was appointed. The governance systems put in place to oversee the project were
inadequate. Two years later, it was determined that the project was significantly over budget
(the final cost was more than $450 million) and the ferries were not suitable for their intended
use. Eventually, the ferries were shrink-wrapped in plastic and stored under wraps for several
years until they were sold by auction for $18 million. The net loss to the taxpayers of BC was
$430 million, not including the cost of all of the reports and lost productivity in responding to
public outrage at the debacle. The fiasco became a lightening rod for discussions on the lack
of appropriate governance.

Source: Watson, 2004, pp. 3–4
http://www.iveybusinessjournal.com/view_article.asp?intArticle_ID=473


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Particular challenges for corporate The remainder of this report looks at how such
governance in the public sector challenges can be managed. In brief, a review of
The Auditor General of Western Australia provides good practice by Barker (2004) suggests that the
a useful summary of the particular constraints governing body and the sponsoring department
acting on public sector boards with regard to need to be clear about the organisation’s remit
corporate governance (Office of the Auditor and position, and in particular that:
General Western Australia, 1998). He notes that • the organisation has a clear remit and set of
in the private sector, the board sets the strategic strategic priorities
direction, management gives effect to that direction, • the organisation’s position within the delivery
and shareholders provide support through their network is clearly understood
investment and operate as a general check on • changes in strategies/priorities are rapidly
the performance of the organisation. While there communicated between the sponsor
can be grey areas between the various roles, department and the organisation
particularly between the board and management,
• consultation between the organisation,
the relationships are not as complex as in the
sponsor department and key stakeholders
public sector.
takes place, as appropriate, prior to any
significant policy change
In the public sector, the government is responsible
for the setting of policy and usually has wide • effective communications between the
powers to intervene. Management is responsible organisation, sponsor department and key
for the day-to-day running to provide effective and stakeholders are in place
• regular review of the organisation occurs to 10
efficient services in the pursuit of government policy.
The ultimate ‘shareholders’ are the electorate ensure that governance is effective and that
who have infrequent opportunities to vote and remits and relationships evolve in line with
no direct authority over the affairs of any single organisational and policy change.
agency. The public sector board often finds itself
balancing between managing an agency and What does corporate governance
setting strategic direction. Similarly, management encompass?
finds itself balancing between a board that is The IFAC (IFAC, 2001, para. .066, http://www.ifac.
responsible for the agency’s performance, and org/Members/DownLoads/Study_13_Governance.
a minister responsible for the portfolio. These all pdf) identifies four main dimensions of the corporate
make corporate governance more challenging governance of public sector organisations:
in a public sector environment. The challenges
• standards of behaviour – how the
include:
management of the organisation exercises
• policy is set by the government leadership in determining the values and
• board members may be selected by standards of the organisation, which define
ministers the culture of the organisation and the
• ministerial directions can countermand the behaviour of everyone within it
wishes of the board at any time
• organisational structures and processes –
• chief executive officers may be formally
how the board and top management within
employed by the minister, which creates
organisations are appointed and organised,
accountability problems for the board
how their responsibilities are defined, and
• the board, as the accountable authority,
carries the legal responsibility for the how they are held accountable
performance of the agency.


• control – the network of various controls Elements of what is encompassed by these
established by the top management of the aspects of corporate governance, where there
organisation to support it in achieving the have been notable developments in recent years,
organisation’s objectives, and compliance are outlined in more detail in Figure 3.
with applicable laws and regulations and
internal policies These four dimensions of corporate governance
form the basis for the structuring of the rest of this
• external reporting – how the top management
report. Significant developments and examples
of the organisation demonstrates its financial
of international best practice in each of the four
accountability for the stewardship of public
areas are discussed further in the following
money and its performance in the use of
chapters.
resources.

Case study
Identifying corporate governance lessons from failures

Each of the national inquiry reports identified that poor governance arrangements set the framework
within which organisational systems and processes failed to detect or anticipate serious service
failures. There was never a single failure or shortcoming in corporate governance that was solely
11 responsible for service failure. Rather, where there were serious and tragic outcomes, it was
due to a combination of factors and an accumulation of governance failures.

A number of common themes were brought to light by each inquiry:

• the poor quality or absence of leadership

• poor decision-making and decision-making processes

• inadequate systems and processes, such as performance management

• lack of clarity in roles, responsibilities and activities, creating poor accountability

• poor working relationships and dysfunctional behaviours

• an insular organisational culture and poor focus on community and user needs

• inadequate contingency plans or risk-management strategies to deal with
worst-case scenarios.

Some combination of these factors was present at each failing organisation.

Source: Audit Commission, 2003, p. 28
http://www.audit-commission.gov.uk/nationalstudies/localgov/Pages/
improvementtrustpublicservices.aspx


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Figure 3
Dimensions of corporate governance

Dimension Recommendations on governance

1. Standards of behaviour • Codes of good practice
• Leadership
• Codes of conduct

2. Organisational structures • Accountability for public money
and processes
• Roles and responsibilities:
• Governing body
• Chairperson
• Executive management
• Sponsoring department

3. Control • Risk management, including management 12
of conflicts of interest
• Audit
• Internal control

4. External reporting • Transparency
• Confidentiality

Source: adapted from IFAC, 2001, p. 14
http://www.ifac.org/Members/DownLoads/Study_13_Governance.pdf



2 Standards of behaviour
Standards of behaviour are important to corporate Corporate governance codes of good
governance as they establish how the leadership practice
of the organisation operates, the values that drive As new corporate governance codes extended
the organisation, and the culture that prevails, all throughout the private sector, commercial
of which influence the behaviour of all staff. As state-owned enterprises sought guidance from
such, standards of behaviour deal largely with governments about equivalent standards. In
the development of codes of practice and what response, governments internationally adapted
has been termed the ‘soft’ attributes of corporate private sector codes to provide guidance for
governance, which have been receiving more board members and executives on commercial
prominence in recent years, drawing on best and non-commercial state bodies and agencies.
practice in the private sector (see case study). These codes set the parameters for standards of
behaviour required for good corporate governance
of public organisations.

Case study
Addressing the ‘soft’ attributes of corporate governance:
lessons from private sector practice
13

Research on corporate governance in the private sector has indicated that ‘hard’ attributes of
governance, such as board independence, are necessary but not sufficient. There is a need
to pay attention to the ‘soft’ side of governance, focusing on behavioural dynamics. Some
of the ‘soft’ governance factors that appear to be important for performance in the private
sector include:

• A clarity in roles, responsibilities, and relationships between: chief executive officer (CEO)
and chair; directors and management; directors and shareholders/stakeholders
• Healthy chair/CEO interface
• Directors working as a team
• Culture, trust and open dissent
• Right skills, competencies and characteristics, including ‘industry/business knowledge’
• A good induction process and ongoing access to training
• Leadership skills of the chair
• Information flows
• Regular evaluation of board performance.

Source: Edwards and Clough, 2005, p. 12
http://www.canberra.edu.au/corpgov-aps/pub/IssuesPaperNo.1_GovernancePerformanceIssues.pdf


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For example, in Australia, the government An example of the type of issue covered by codes
developed its Governance Arrangements of good practice is given for building the relationship
for Australian Government Bodies in 2005: between the board and chief executive in the case
http://www.finance.gov.au/financial-framework/ study taken from the Canadian code.
governance/docs/Governance-Arrangements-
for-Australian-Government-Bodies.pdf. What all of these corporate governance codes
and guidelines have in common is a commitment
Similarly, in Canada, the Treasury Board of to ensuring there is:
Canada Secretariat has produced guidelines for
‘Corporate Governance in Crown Corporations • clarity over the roles and responsibilities of
and Other Public Enterprises’: http://www.tbs-sct. government, boards of state bodies, CEOs
gc.ca/gov-gouv/entreprise/entreprise02-eng. and external auditing bodies, as well as the
asp. relationship between them
• clarity over the public policy objectives
In Ireland, the Department of Finance also expected of state bodies
published in 2009 a revised and updated ‘Code
• adequate financial reporting and internal
of Practice for the Governance of State Bodies’:
controls
h t t p : / / w w w. f i n a n c e . g o v. i e / v i e w d o c .
• standards of behaviour that reflect values
asp?DocID=5824.
of integrity, honesty and probity and that all
actions taken within state bodies are in the
best interests of that organisation. 14

Case study
Canadian code of good practice guidance on building
a relationship

In a Crown corporation, the nature of the relationship between the CEO and the board is often
critical. The board must work with the CEO to build a relationship of openness and trust.
Position descriptions can assist greatly in the smooth functioning of these relations. The board
of directors, the chair, and the CEO should develop position descriptions for the board, the
chair and the CEO.

Boards of directors, in conjunction with the CEO, should periodically review the allocation of
responsibilities between the board and management. This review should focus on defining
and describing both the board’s principal responsibilities and the limits to management’s
authority.

Source: http://www.tbs-sct.gc.ca/gov-gouv/entreprise/entreprise02-eng.asp



Codes of conduct Particularly with regard to standards of behaviour,
An important emerging feature of good corporate such codes of conduct are expected to
governance practice internationally is the reflect the practice of the highest standards
development of written, formal codes of conduct in public life. In the UK, the Nolan Committee
by organisations that set out their obligations with (http://www.archive.official-documents.co.uk/
regard to corporate governance. Like corporate document/parlment/nolan/nolan.htm) inquired
governance codes, codes of conduct have into standards of public life and established seven
proliferated in recent years. They identify the principles of public life that have been widely
behaviour expected of those to whom they adopted internationally:
apply by articulating a coherent set of values
and a means of addressing maladministration • Selflessness. Holders of public office should
where it occurs (see Transport for London (TfL) take decisions solely in terms of the public
case study). interest. They should not do so in order to
gain financial or other material benefits for
The Public Audit Forum (2001) sets out important themselves, their family, or their friends.
elements which it is expected most codes of • Integrity. Holders of public office should
conduct will address: not place themselves under any financial
or other obligation to outside individuals or
• outlines of expected professional and
organisations that might influence them in
personal behaviour
the performance of their official duties.
• defined restrictions on business and political
15 • Objectivity. In carrying out public business,
activities (where appropriate)
including making public appointments,
• criteria and procedures for declarations of awarding contracts, or recommending
interests, both business and political individuals for rewards and benefits, holders
• definitions of conflicts of interest of public office should make choices on
• a statement of the aims and values of the merit.
body • Accountability. Holders of public office are
• statements of the obligations of the body accountable for their decisions and actions
towards its customers, staff, community and to the public and must submit themselves
other interested parties to whatever scrutiny is appropriate to their
office.
• information about the body’s approach to
openness, and arrangements for acquiring • Openness. Holders of public office should be
information about its activities as open as possible about all the decisions
and actions that they take. They should
• procedures for raising complaints with an
give reasons for their decisions and restrict
independent body
information only when the wider public
• definition of the dividing line between the role
interest clearly demands.
and responsibilities of the governing body
and those of the executive staff.
Source: Public Audit Forum (2001), http://www.
public-audit-forum.gov.uk/propriety.pdf


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• Honesty. Holders of public office have a duty Failure to adhere to such standards can lead to
to declare any private interests relating to their the failures in corporate governance noted earlier
public duties and to take steps to resolve any and in particular to:
conflicts arising in a way that protects the
public interest. • failures of principles of fairness, in the
treatment of staff, suppliers or contractors,
• Leadership. Holders of public office should
whether due to conflicts of interest or other
promote and support these principles by
reason
leadership and example.
• misuse of public assets or resources for
personal or political purposes
• failure to exercise reasonable stewardship
over public assets or resources.

Case study
Transport for London (TfL) code of conduct

TfL’s corporate governance code of conduct addresses the main principles of good corporate
governance by setting out a series of undertakings that TfL has committed itself to deliver
16
under five main headings:

• Public focus
• Structures and processes
• Risk management and internal control
• Service delivery arrangements
• Standards of conduct

For example, under risk management and internal control, TfL, amongst other things, commits
that its annual report will contain an objective and understandable statement and assessment
of its risk-management system, including systems of internal control and internal audit and
their effectiveness in practice.

Source: http://www.tfl.gov.uk/corporate/about-tfl/2876.aspx#PublicFocus



Leadership developments In terms of developing board members’ leadership
Leadership is a crucial principle from a corporate skills, knowledge and aptitude, mentoring of board
governance perspective. There are two key members has been of growing prominence in
leadership roles the governing body of public recent years (see case studies).
organisations needs to pay attention to: the
establishment of sound governance structures A particular leadership challenge for the chair is
and processes, and supporting good governance managing the relationship with the chief executive.
through its own performance and behaviours. Chief executives are professionals with specific
training in their job. Chairs often come to the
A range of commentators such as Kalokerinos role with no or limited experience of chairing.
(2007) note the central role of the chair of the The chair and chief executive may experience a
governing body in the leadership of public sector culture clash between a management approach
organisations. This includes the traditional duty to a question and a layperson’s approach. They
of ensuring the proper functioning of the board may be talking about the same problem using
and its meetings, but also covers maintaining a very different vocabularies and terms of reference.
close relationship with the chief executive and Chief executives and chairs may also have different
representing the authority to outside stakeholders. definitions of success and consequently may
A study undertaken for the UK Public Services end up working towards different goals. The
Productivity Panel (Barker, 2004) states that the development of a good working relationship with
chair should: an agreed common vision as to the organisation’s
purpose is the key to effective leadership of the
17 • act as board team leader, with an organisation.
understanding of what skills, knowledge and
aptitudes the board needs
• regularly carry out skills, knowledge and
aptitude audits, which may be relatively
low key and informal, to help understand
the current board composition and provide
board members with further clarity about
their individual roles
• act as board ‘conductor’, fostering an
environment where dissenting voices can
be heard without damaging collective
responsibility
• act as the interface between the board and
its executive team, and the organisation and
its sponsor department.


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Case study
Mentoring support for a young chair

Jamie Dear became chair of newly established charity Jacari in the UK in 2005 at the age
of twenty-three. He availed of the opportunity provided by government-funded support for
mentoring of chairs to provide him with guidance on his new role. He met with his mentor
three times over a couple of months. ‘Of all the development opportunities I’ve experienced
this has made the most impact on me,’ said Jamie, ‘I couldn’t recommend it highly enough.’
The mentoring provided reassurance that the issues facing Jamie and the board were faced by
others. The mentor also provided invaluable technical input on governance and management
issues. It helped clarify roles and functions.

Source: http://www.ncvo-vol.org.uk/governanceandleadership/?id=9474&terms=chairing

Case study
Mentoring and board development
18
In a national development agency in the USA every new board member is assigned two
mentors – a veteran board mentor and a staff mentor. Mentoring partners meet in person and/
or virtually before and after each board meeting for the first year of board service. The board
mentor introduces the new member to the issues and workings of the board. The staff mentor
introduces the new board member to the organisational issues around current and future
operations. The mentoring programme enables new board members to familiarise themselves
with standards of behaviour and practice in the organisation.

Source: http://www.communitydevelopmentworks.org/Portals/12/word_docs/Board%20Articles/
Mentor%20Your%20Way%20to%20Board%20Development.pdf



3 Organisational structures and processes:
governing body
With regard to corporate governance issues around of the owners or members of the corporation,
organisational structures and processes, the main essentially as their proxies and representatives,
issues focus on the roles and responsibilities board size can be somewhat larger, often up to
of governing bodies and their accountability twelve, to meet representational and balance
processes. A government-commissioned review requirements (http://www.browngovernance.
of corporate governance of statutory authorities com/asktheexperts/4.htm).
and office holders in Australia (Uhrig, 2003)
identified six issues to be addressed in governing Board committees
bodies if they are to deliver in terms of effective Board committees are a commonly used mechanism
responsibility and accountability: board size, for boards to enhance their effectiveness through
committees, appointments, tenure, development further detailed oversight and supervision of areas
and performance. To these can be added board of special risk critical to success. Uhrig (2003) notes
composition and board remuneration. that to assist in the efficiency of operations and
for reasons of accountability committees should
Board size operate with a clear written mandate from the full
Public sector boards tend to be large in size. The board. The operations of committees should also
Uhrig report (Uhrig, 2003) suggests that based be agreed, including how committees will report
19 on current thinking on best practice in the private to the board and how committees will interact with
sector a board of between six and nine members management and other relevant parties. This will
(including a managing director if there is one) clarify whether a committee has the power to make
represents a reasonable size. Boards with less decisions and approve management proposals
than six members may have difficulty in meeting or report to and make recommendations to the
their statutory responsibilities due to workload board. A director should be appointed to chair
pressures and the potential lack of breadth of each committee, and should be responsible for
views. This situation is likely to be exacerbated its operations, reporting back to the full board.
in periods where vacancies exist. There is also It is considered good practice that the chairman
the risk that smaller boards may find it easier to of the full board should not be the chairman of
become involved in management decisions rather all committees.
than overseeing them.
Board appointments
Uhrig also notes, however, that there are Board selection and composition are vital elements
circumstances where a larger board may be in securing effective boards that can deliver on
warranted. For example, when management of their accountability requirements. The case study
the risks of the organisation is such that a number from BC addresses the issue of best international
of board committees are required, larger board practice with regard to board selection.
membership may be appropriate. Particularly in
the public sector where boards act in the interests


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Case study
Best practice in board selection

In Canada, the premier of BC in 2001 established the Board Resourcing and Development Office
(BRDO) (http://www.fin.gov.bc.ca/brdo/). After reviewing best practices in director recruitment
and selection in the private and public sectors around the world, the BRDO put in place the
following key elements of board selection:

Competency matrix. All corporations are required to think strategically about the issues facing
the corporation and, from that, to identify a matrix of competencies that sets out the required
skill set for the board of directors as a whole.

Personal attributes. In the recruitment process, close attention is paid to the behaviour and
personal attributes of potential directors. Importance is also placed on a candidate’s commitment
to corporate governance and his or her understanding of the responsibilities of directors today.
As part of due diligence, directors of crown corporations are asked to commit to a Charter of
Expectations.

Work with the chair/board. If a new board is being created, the chair is identified first. The
BRDO then works with that chair to establish the competency matrix and to recruit and evaluate
potential board members. If the recruitment is for a vacancy on a board, the BRDO works with
20
the chair and/or governance committee to identify and evaluate potential candidates.

Pro-active search for candidates. Candidates are identified from a variety of sources and
any person who is interested in serving on a board may make his or her interest known by
submitting a résumé and expression of interest to the BRDO. For specific vacancies, boards are
encouraged to identify potential candidates. In addition, the BRDO retains a national executive
search consultant to provide ongoing search and referencing services.

Due diligence. The due diligence process for each candidate includes a review of the candidate’s
probity, identification of potential conflicts of interest, and a declaration by the candidate
accepting his or her fiduciary and other responsibilities to the corporation. All candidates who
wish to be considered for a position on a public sector corporation must complete a written
Candidate Profile and Declaration. The formal due diligence process has been particularly
helpful in identifying potential conflicts of interest.

Diversity. There is a feeling that the membership of public sector boards should reflect the
cultural and geographical makeup of the population. The challenge is to make sure that token
or unqualified appointments are not made. The BRDO undertakes a search process, including
searching in non-traditional places, to ensure that qualified candidates are identified from many
diverse communities.



Building the talent pool. Boards are normally structured with a mixture of seasoned board
directors and others who are very senior and skilled in their professions but may not have had
extensive board experience. The intention is to build the talent pool for the next generation of
private and public sector directors for BC and elsewhere.

Transparency. The BRDO publishes the names, terms and full biographies of all appointees
to all public sector boards on the BRDO website. Members of the public and other interested
parties can review and assess whether the board members appear to have the requisite skills
and experience for the positions they hold.

Quality control. During the recruitment and evaluation process, the BRDO works with ministers
and boards to identify and recruit candidates. Because the BRDO has expertise in the area of
corporate governance and board building, it is able to bring this expertise to the process and
to provide advice in this area, regardless of the ministry involved. Also, after the recruitment
and evaluation process is complete, the BRDO is required to endorse the appropriateness
of every candidate before the appointment instrument is presented to the appointing body
for final approval.

Commitment to best practices. In addition to appointments, the BRDO encourages and
supports public sector organisations to adopt best practices in corporate governance. These
21 include things such as: position descriptions for the board, chair, individual directors and
committees and written documents that outline the board’s process and structure; board
composition and succession plans; appropriate orientation and ongoing director education;
board, chair, committee and individual director evaluation processes; separation of the chair and
CEO except in exceptional circumstances; and a board plan for evaluating and compensating
the CEO, and for CEO succession.

Source: Watson, 2004
http://www.iveybusinessjournal.com/view_article.asp?intArticle_ID=473

Board tenure Terms of appointment can be for any period
The length of tenure on a board and the associated between one and five years. Appointments
issue of staggering of replacement of board may be renewed for a second term, subject
members are important issues to be addressed, to satisfactory performance. Members may
as the case study from Canada suggests. be re-appointed to the same position only
once without open competition. A member
There is no set term limit for boards, though three who has served an initial term and has been
years is a common time in a number of countries. re-appointed may, however, choose to apply for
The experience of the Scottish government a third re-appointment or subsequent term with
regarding length of board appointments would the same public body. He or she must apply in
not be untypical: open competition for each new term. (http://
www.scotland.gov.uk/Topics/Government/
public-bodies/faq-pa#a14)

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Case study
Board appointments and staggering of terms

A review carried out by the Office of the Auditor General of Canada (2005) found that in 2004
over one-third of directors of the fifteen largest Crown corporations were still sitting on boards
after their term had expired, in several cases for over six months. It also found that appointments
were not staggered evenly, with one Crown corporation being in the process of replacing eight
of its twelve directors during 2004. This increased the risk that continuity of expertise and
corporate memory will be lost.

Source: http://www.oag-bvg.gc.ca/internet/docs/20050207ce.pdf, paras 7.30–7.32

Board development With regard to the continuing development needs
There is a need for board induction and continued of board members, board mentoring has been
review of training needs, and also to ensure discussed in Chapter 2. Board self-evaluation
that those involved in the appointment of board (see section on board performance below) can
members are fully trained. Many board members also be used to identify competency and skills
come from the private sector, and may be unfamiliar limitations where development is needed.
with the challenges and opportunities associated 22
with working in a public sector environment. The case study of training provided by Canada’s
Induction is important in these circumstances Privy Council Office and the Cabinet Office in
to enable board members to settle into their the UK shows examples of training for board
roles. The Auditor General of Western Australia members and for public servants involved in
(1998) has further identified several areas where board appointments.
individual and collective training needs of board
Board performance
members should be regularly reviewed:
As the Auditor General of Western Australia
• specific skills such as the ability to understand (1998) notes:
financial statements and non-financial
There is a tendency to equate the performance
performance information
of a governing board with the performance of the
• changes to legislation that will affect the agency, thus excusing the board from separate
agency’s operations or obligations scrutiny. However, boards have numerous
• significant public sector trends choices on all aspects of how they conduct
• emerging issues of general significance, such themselves. A poorly run board may waste
as electronic commerce and the potential time, spend disproportionate effort on minor
uses and impacts of new technology. matters, fail to provide strategic leadership
and have inadequate methods for monitoring
agency performance. All boards should make
appraisals of how they conduct themselves.



Case study
Training provision

A 2000 review of practice by the Office of the Auditor General in Canada found that while new
directors of Crown corporations were given orientation training, they were not briefed adequately
on their duties and responsibilities, the corporation’s relationship to government, policies on the
compensation of Crown corporation executives and boardroom procedures. In response, the
Privy Council Office established a new orientation course specifically addressing these issues.
Most Crown corporations have participated in the training programme.

In the UK, following recommendations from the Public Administration Select Committee that
senior officials should receive training in public appointments, the Cabinet Office worked in
partnership with the National Health Service Appointments Commission to develop a short
briefing event for members of the senior civil service. The aims of the event were to: provide
an overview of the public appointment process and the role of senior officials in that process;
and to enable participants to undertake a fair appointments process that is fully compliant with
both the Code of Practice and equality legislation.

Sources:
http://www.oag-bvg.gc.ca/internet/docs/20050207ce.pdf;
23 http://www.cabinetoffice.gov.uk/media/cabinetoffice/corp/assets/publications/reports/public_
bodies/2006/co_pa_plan_2006.pdf

However, it is not that common for board • using frameworks for board member appraisal
performance to be assessed. Best practice based on the Office of the Commissioner for
suggests that formal annual assessment of Public Appointments Code of Practice and
board performance between the minister and the Cabinet Office guidance
chair of the board should take place to review • using evaluations and appraisals to identify
board performance (Uhrig, 2003). Barker (2004) areas for future development to drive through
suggests that a comprehensive board evaluation performance improvements.
in a UK setting for non-departmental public bodies
should include:
For this process to be effective, the board members
• subjecting the board collectively to annual themselves must evaluate their own performance
evaluation against performance plan or alongside a departmental assessment. Barker
overarching list of objectives, which may be (2004) suggests a performance evaluation
externally facilitated framework that board members, its executive
• senior responsible officers in the sponsor team and members of the sponsoring department
department appraising the chair’s can use to collaboratively assess performance
performance annually (see case study).
• board members being assessed individually
for their performance against personal
objectives

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Case study
Illustrative example of board performance rating

Rating Description Headline action

Highly performing The board and sponsor • Produce timeline for future
department are clear about reviews
the organisation’s aim and its • Ensure that processes
position within the department’s for two-way strategy
strategy communication continue to
be as effective as possible

Performing Both the board and the department • Ensure that the department
are quite clear about what they and the board meet regularly
want from the organisation but this so that both understand the
is not communicated effectively agreed strategies and their
between them implications

Developing The board understands aspects of • Arrange high-level meetings 24
the sponsor department’s strategy of the chair and the senior
but does not see how it can be responsible officer in the
married with the current direction department or the minister
of the organisation • Ensure agreed alignment of
priorities is sustainable and
able to be implemented

Under performing The board does not see how the • Carry out review of the
organisation fits into the role of the organisation to agree its
department and the department position within the department’s
feels that the organisation’s landscape
objectives are at odds with the • Clarify the independent nature
department’s priorities and needs of the body
• Clarify the requirements of the
department

Source: Barker (2004), p. 9
http://www.hm-treasury.gov.uk/pspp_buliding_effective_boards.htm



Board composition Uhrig (2003) similarly notes that care should be
Guidance from the Office of the Auditor General exercised when appointing public servants to
of Canada (2005) draws on international best boards. He states:
practice to suggest that the majority of board
members should be independent, that the In circumstances where a departmental staff
independent members hold regular meetings member is appointed on the basis of representing
without management in attendance, and that the the government’s interests or having a ‘quasi’
board chair be an independent director (that is, supervision approach, conflicts of interest may
the chair and chief executive positions should be arise and poor governance is likely. Through
separate). The Auditor General notes that these participation in decision-making, either directly
best practices are not always adopted in Crown or implied, the departmental representative may
corporations in Canada, where the practice of become an advocate for the organisation rather
holding board meetings without management in than contributing critical comment. This also has
attendance is uneven. Further, in a few Crown the potential to create an incentive for the other
corporations, the same individual acts as chair members of the board to meet to discuss and
and chief executive. agree on important issues separately from formal
meetings, without involving the departmental
A further issue of debate is whether departmental representative, thereby removing the formal
staff should represent government departments board meeting as the main decision-making
on boards for which they have responsibility. While forum of governance. Membership of the board
practice here varies, the trend internationally is by the related departmental representative is
25
tending towards the position that departmental unwise unless there are specific circumstances
staff should not serve on boards. The Office which require it. The above points do not
of the Auditor General of Canada (2005) has mean that departmental representatives should
raised concerns about the role played by senior not attend board meetings as agreed by the
public servants appointed to the boards of some chairman. No objections are raised to either staff
Crown corporations. In their view, departmental of the entity or other public servants attending
representatives can too easily be viewed as specific parts of a meeting to discuss or clarify
having a ‘super voice’ and thereby unduly affect issues with the board.
the direction of the board. For departmental
representatives themselves, having the fiduciary The selective attendance of government
responsibility to act in the best interest of the representatives at board meetings, as outlined
corporation and owing loyalty to their minister can above, is one of the ways in which sponsoring
place them in difficult situations. At times boards departments may exercise effective control over
require access to public sector decision-makers public bodies in the absence of a board member
but not necessarily as members of the board. from a sponsoring department. Also, regular formal
and informal communications with the board,
primarily the chair, are vital to control. So too is
the effective scrutiny and use of performance
plans and reports.


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