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Good Governance Performance

© Larry. N. Mitchell 2007. Good Governance Performance. © Larry. N. Mitchell 2007. PRESENTER Larry. N. Mitchell Finance & Policy Analyst (Local Government) www.kauriglen.co.nz. Prescription for the Presentation. As described in the brochure …

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Good Governance Performance

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  1. ©Larry. N. Mitchell 2007 Good Governance Performance

  2. ©Larry. N. Mitchell 2007 PRESENTER Larry. N. MitchellFinance & Policy Analyst(Local Government)www.kauriglen.co.nz

  3. Prescription for the Presentation • As described in the brochure … • ‘Governance versus management in the public sector - driving improved performance through 'Excellence' in governance’ • As presented … • ‘Governance and best management practice in the public sector – driving improved performance through 'Excellence' in governance’

  4. Prescription … details for the Presentation • Focusing on strategy and value creation and assisting with risk management decisions • Linking good organisational governance with performance management • Reporting and disclosure frameworks and examining the issues of transparency and accountability • Achieving superior performance by effective governance and the quadruple bottom line non-financial performance.

  5. Prescription … details for the Presentation • The issues relating to governance are: • ‘difficult’… involving human behavioral factors … • ‘intractable’ taking place within and subject to often deficient legislative and monitoring regimes • … ‘unfashionable’ within a climate of public opinion disinterested in accountability and cost-effectiveness • lacking in quality research … ‘just words’ • Result: a significant challenge for the public sector finance professional.

  6. Prescription … details for the Presentation • The issues relating to governance within this presentation are treated in a practical policysense … • Governance is treated not just as rules … but as behavioral issues … it involves ethics and professionalism • Evidence research issues … some evidence is merely based on ‘my observations’ … not anecdotal however • One person’s views … as an observer of human nature … concentrating on a public sector (largely a NZ local government) ‘view of the world’.

  7. Prescription … details for the Presentation • Given the focus of this presentation … that is … at the level of the professional public sector finance practitioner we need to deal with issues of governance acted out within the prevailing environment … the ‘climate’ (the cultural, legislative and ethical practices) as they are currently present in New Zealand. • There is no doubt that the ‘climate’ of New Zealand’s public sector for finance people … is never easy but it can improve … it is not corrupt - evidence?

  8. Transparency - Corruption Index • Perceived corruption… We are ‘tops’ by these criteria • ‘The perceived level of corruption – defined as "the abuse of public office for private gain" – among New Zealand politicians and public officials, on a scale of 0 (highly corrupt) to 10 (highly clean). A country’s score in the Corruption Perceptions Index is derived by Transparency International from a number of different surveys of business people and country analysts.’ • Reference Year: 2005 • Data source: Transparency International (2005) • Corruption Perceptions Index 2005

  9. Ethics not corruption • Finance people have to contend with a large number of both positive but often negative influences, the stimuli and pressures … particularly for the group I regularly deal with and observe … within the NZ local government sector … and to which most of the case study content of this presentation relates. • New Zealand is not a corrupt society … so what is it?

  10. NZ Society ‘mores’ • The New Zealand environment as it affects public sector ‘governance’ practice merely reflects the prevailing socio-economic and political climate and more’s of ‘NZ Inc’ … both good and ‘other’ • ‘Good’… we have low relative levels of graft … we are well educated and professionally trained to high standards … within an ethical law abiding framework …

  11. A politicised environment • ‘Other’ …not so good … a politicised ‘lets move on’ environment … lacking in serious audit oversight … suspect ‘independence’ of advice … a burgeoning bureaucracy … suspect accountability mechanisms … little heed to waste and value for money • Fair? Your call …

  12. Some of the issues … to cover • How does this (NZ Inc) environment affect ‘us’? … that is in dealing as professionals with our governance performance • How are our public sector governance processes impacted by this climate? • What is to be done? • Independence … is it a myth? • How can we do better as finance ‘pros’? • Take the Minister’s advice?

  13. ‘Fine Words’ • Annette King February 2007 …. ‘fine words’ … • Governance in the Public Service is a little more straightforward.The State Services Commissioner appoints departmental chief executives and reviews their performance. Departmental chief executives are responsible to their Ministers for the function, duties and management of their departments. As a Minister with relationships with many departments, I expect advice that reflects the direction of the government of the day. I expect a range of options. And, above all, I expect advice that is readable, succinct, timely and accurate. I also expect honesty, integrity and courage, and I am proud and grateful as a New Zealander, as well as a Minister, that that is what I generally get.

  14. More ‘Fine Words’ … • Annette King February 2007 …. ‘fine words’ …(continued) • If we are to deliver on the overall Development Goal of a “system of world class professional State Services, serving the government of the day and meeting the needs of New Zealanders,” then we need to get the governance right.And to return yet again to my first analogy - we need to tinker regularly with the engine, to send it in for tune-ups and constantly monitor its performance. • The indications are that we are doing a pretty good job, but as the global environment in which we live and work changes we need to ensure that we continue to improve.

  15. Ironies … • Spot the ironies of the Minister’s statement given the current crop of governance failures … involving headlines …Police … Corrections … the AHB … leaky buildings … • But lets not be too critical. We, for the moment remain outside of the clutches of widespread graft, corruption and stand over tactics … our Kiwi culture may at times be careless … but it is seldom nakedly corrupt. • Are we just ‘sloppy’? … have accountability (lower) and waste (higher) gone in opposite directions? … where is the accountability in your organisation? … your call.

  16. Private-Public sector governance failures … distinguishing features • What are the comparisons of our environment with the private sector in the field of governance issues? • Private sector firm failures … their financial demise are ‘sometimes’ accompanied by poor (or worse) governance performance associated with financialrisk … Public sector entities failures are ‘always’ accompanied by poor (or worse) governance performance invariably those associated with political risk.

  17. Private public governance risks • It may not be too far from reality to state (due largely to absent fiscal risk within the public sector) that … ‘the greatest risk of failure for a public sector entity is from governance failures’ … andthe evidence to support this contention is …

  18. Private public governance risks • Self evident … ‘Evidence’ … the nature of the public sector … politics before profit • But governance is difficult to ‘measure’ • Research has turned up numerous instances of governance driven failures, from both private and public sectors but little comparative ‘metrics’

  19. Private public governance risks • Private sector firm governance failures are complex … case studies abound … Enron (USA) … Equiticorp (NZ) and HIH (Aust) … financial collapse … heads roll … well documented-huge losses • Public sector entities are cases of simple governance failures … Cave Creek … the Aotea Centre … the AHB fiasco … they hold another enquiry?

  20. Complex Private sector governance risks • Complex! governance failures • Enron’s version of capitalism: You have two cows. You sell three of them to your publicly listed company using letters of credit opened by your brother in law at the bank, then execute a debt equity swap with an option so that you get all four cows back, with a tax exemption for five cows. The milk rights of the six cows are transferred to a Cayman Island intermediary secretly owned by the majority shareholder who sells his rights to the seven cows back to the listed company. The Company’s annual report lists amongst its assets eight cows with an option on one more …

  21. Simple Public sector governance risks • Simple obvious governance failures • As the sole stakeholder (the ‘Minister’) of a public entity you approve the appointment of a Chairman/CEO who prefers ‘form over substance’ advice … and the ‘convenient’ opinions of both auditors and legal advisors. The board’s collective view sees no conflicts of interest arising when tendering a large and sensitive contract … the Court strongly demurs …

  22. Private Public sector governance risks • Observation … There is a recurring pattern to public sector governance failures. They usually arise from uncomplicated (simple) often human failings. Invariably such failures occur in spite of (apparently) good governance risk management systems … these are either ignored, over-ridden or discredited by senior management. A ‘risky’ governance culture develops …

  23. Private public governance risks … ‘rules are broken’ culture is nurtured • Governance process is covered by rules which include … insider trading, fraud, breach of … trust, ethics, code of conduct, conflict of interest rules, accounting rules, audit practices but … rules are useless without ‘attitude’ • Governance failures are not dealt with/covered by rules … People (leadership mainly) organisational culture are at issue … ‘attitudes’.

  24. Private public governance risks … simple behavioral rules are ‘broken’ • Notice that the following set of governance principles include many qualitative … people-related and organisation cultural issues … in short ethical behaviours … these are the subtle often intangible attributes most at risk within public entities.

  25. Principles for Corporate/Council Governance • Directors/Councilors should observe and foster high ethical standards… • There should be a balance ofindependence,skills, knowledge, experience, andperspectivesamong directors so that the board works effectively. • The board should use committees where this would enhance its effectiveness in key areas while retaining board responsibility. • The board/council should demand integrity both in financial reporting and in the timeliness and balance of disclosures on entity affairs.

  26. Principles for Corporate/Council Governance • The remuneration of directors and executives should be transparent, fair, and reasonable. • The board should regularly verify that the entity has appropriate processes that identify and manage potential and relevant risks. • The board/council should ensure the quality and independence of the external audit process. • The board should foster constructive relationships with shareholders that encourage them to engage with the entity. • The board should respect the interests of stakeholders within the context of the entity's ownership type and its fundamental purpose.

  27. Principles verses practice … of Governance Performance • In short … these governance principles are sometimes in stark contrast to what we read everyday in the NZ press … • Public sector CEO salary packages outstrip those of the private sector for the first time… • Minister expresses (or refuses to express) confidence in Chairman and Chief Executive… • A culture of arrogance says whistleblower… • Public enquiry finds … • Judicial review finds …

  28. Principles verses practice … of Governance Performance • Were the finance professionals players involved in these scenarios? • Generally not … behind the scenes? • So much for the intangibles … professionalism in practice goes further than just principles. • Take the keygood governance principle … as it affects finance professionals.

  29. Principles verses practice … of Governance Performance • ‘The board should demand integrity both in financial reporting and in the timeliness and balance of disclosures on entity affairs’. • Performance measurement and 'Excellence' improvements should most! attach to this principle … in practice … • So what are ‘say’ four or five things that we as professionals can do in order to achieve these aims? … in practice ‘say’ in local government

  30. Principles verses practice …of Local Govt Governance ‘Performance’ … and 'Excellence' • ‘Integrity’ issues (and judgments) of financial reporting examples … from the 2002 Local Government Act … • S 77(1) (a) ‘Decisions’ … all reasonably practicable options • S 79 (2)( c) Compliance … consider a range of options • S 82 (1) (a) Consultation … relevant information …appropriate to the needs • S 101 (3)(a)(v) Cost benefits assessed • Big calls affecting community budgets … use of (political) influence … same for ‘rates’ issues • In short … places where professional judgments are called for!

  31. Principles verses practice …of Local Govt Governance ‘Performance’ • Is your organisational ‘attitude’ characterised by some of the following?… ‘What would you like the answer to be’ … financial actions typified as ‘responding to political pressure’ … second guessing the answer … ‘moving the goalposts’ … avoiding the difficult … minimal or incomplete disclosure … comparatives obfuscation … in short misinformation… and BTW where are the auditors in all of this? • Or do you? … Respond to good leadership within a supportive environment … which encourages professionalism with use of valued independent input to professional judgments?

  32. Principles verses practice … of Governance Performance • Accountants and financial professionals act within their profession’s code of conduct and ethical guidelines in addition to their job related responsibilities (sometimes spelt out in Council SOP’s). • Add to these standards of behavior, the FRS standards set, the conceptual framework and audit oversight … this climate/environment should! be enough to ensure the appropriate responses from finance professionals … and it usually is.

  33. Principles verses practice … of Governance Performance • Add to this a rules driven scene … the fact that legislatively mandated GAAP must be followed … • plus all of the other LGA 02 accounting rules and judgments needing to be followed … so ‘the bar is set very high’. • So where is the problem …?

  34. Principles verses practice … of Governance Performance • Is there a problem due to pressures of a political environment … acculturation of the individual … bureaucratic capture … lack of collegial support … absence of audit coverage and/or genuine critical independent (peer) review … the rates-debt-community expectations squeeze … from public consultations … and the neighbors over your fence … all of the above?

  35. Common beefs • What have the public … as represented by elected members said that relates to governance (accountability) performance …? as reported in a recent OAG report. • The following comments reflect some of the concerns that elected members had about the timeliness of advice to the council and the quality of that advice:

  36. Common beefs • Too often management have to be requested to brief council on a particular issue, there is no strong culture of being proactive in providing briefings to council on sensitive or complicated issues. • We have had some concerns over timely advice lacking when it was required prior to council's public comments. • More scope for options need to be presented. • It appears sometimes as though issues haven't been fully discussed by management and a fragmented view is given to council.

  37. Common beefs • Competenceof staff varies from department to department which reflects on the advice given and the results achieved. • I think the advice could occasionally come earlier, information needs can sometimes be anticipated. • Information often seems to reflect preconceived ideas, assistance sometimes seems reluctant. • Sometimes I feel there is not enough warning so I can do my homework.

  38. Common beefs • And from another source … • If you want some comments to quote here are those of a 30 month elected member who is still trying to get to grips with LTP's and annual plans. • I don't think 30% of elected members understand the financial documents that they are presented with. • Depreciation! … For me, the hard parts are depreciation of vested assets, capex funded from renewals, interest and depreciation being included into Opex expenditure the following year.

  39. Common beefs • Another major confusion is forecasting capex but never actually achieving it so that there are carry over's so it is always a moving target. • Average rate increases … another deception is the quoting of average rating impact as one percentage but when actual proposed figures for actual properties are presented they almost all exceed the "average“.

  40. Common beefs • For example the average rate rise for the urban areas in the Annual Plan is 6.5%. 3 properties are over 1% above that figure. The only property that is under that figure (on page 13) is a$110,000 section of which there must be only one! • I think the LTP is a great document for putting some discipline into ongoing budgeting but I'm dismayed that in Kiwi DC we will blow out for 2007/08 when we only approved the LTP in July last year.

  41. Common beefs … resolved or getting better? • And finally an encouraging case study where a hard bitten ‘professional Council CFO … recruited from commerce is insisting upon a full disclosure basis of accounting for price and volume variances and timeliness of reporting for capital projects … • In the past it apparently ‘was good enough’ to report ‘on budget’ when it was clear that by the completion date of the project it would be anything but ‘on budget’ • A case of misinformation? … replaced with reliable … ‘good’ information.

  42. What is a public sector accountants rolein governance performance • Professionalism and a contribution to culture and the attitude of your organisation … using • ‘Good’ and understandable financial reporting • Strong, committed, consulted-upon budget approval process and an understandable exception reporting basis • Audit and performance committee servicing • Substance over form and use of independent advice • An 'Excellence' framework to measure governance performance …

  43. What is a public sector accountants rolein governance performance • Summary … • Performance of good Governance comes down not just to systems but to … PEOPLE …coupled with constant vigilance and ethical behavior. • Professionalism is the best risk management strategy in this vexed area… So what is to be done … Two final suggestions … • ‘Use’ fearless independent governance assessments and • Embark upon a Performance (governance) 'Excellence' improvement programme.

  44. 'Excellence' framework health check An 'Excellence' Framework - including ‘Governance criteria!’

  45. 'Excellence' framework health check • NoteTLA’s

  46. 'Excellence' framework health check Improve Governance performance - and measure it!

  47. Summary • Good performance of governance in the public sector does not depend on systems, rules and principles as on attitude and professionalism. • Our ‘Kiwi’ way is not generally corrupt but failures of public entities when they occur are invariably governance failures. • We need to apply ‘Excellence’ performance and measurement to the practice of governance

  48. References • Democracy and Performance:a manifesto for local government …Local Government Forum Feb 2007 • Power Failure The Rise & Fall of Enron … Mimi Swartz 2003 • Principles for Corporate Governance … McKinlay Douglas 2003 • How the Chief Executive Interacts with Elected Members on a Daily Basis Managing the Relationship Between a Local Authority's Elected Members and its Chief Executive …Office of the Auditor General 2002 report • 'Excellence' … Lloyd Evans E-cubed • Hon Annette King 20/02/2007 Corporate Governance in the Public Sector

  49. End of Presentation Objectives met? …Questions … Review …

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