A Governance Agenda for the Rudd government Stephen Bartos

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A Governance Agenda for the Rudd government

• Stephen Bartos
• Director
• Allen Consulting Group
• 15 February 2008

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This presentation

• Introduction
• The evolving importance of governance
• Principles and foundations
• International trends
• Restoring standards of ethics, probity, and
  accountability in public and corporate life
• Risk - the new paradigm for everything
• Practical steps

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What is governance?

• Not easily answered
• Numerous competing and overlapping perspectives
• Some definitions include

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• the framework of rules, relationships systems
  and processes within and by which authority is
  exercised and controlled in corporations. It
  encompasses the mechanisms by which companies,
  and those in control, are held to account (ASX
  Corporate Governance Council August 2007)

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• The processes whereby decisions important to the
  future of an organisation are taken,
  communicated, monitored and assessed
  (Bartos 2004)

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• Corporate governance involves a set of
  relationships between a companys management, its
  board, its shareholders and other stakeholders.
  Corporate governance also provides the structure
  through which the objectives of the company are
  set, and the means of attaining those objectives
  and monitoring performance are determined
  (OECD 1999)

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• Public sector governance
• the processes by which organisations are
  directed, controlled and held to account. It
  encompasses authority, accountability,
  stewardship, leadership direction and control
  exercised in the organisation (ANAO,
  2003)

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Political governance

• How a country is run
• Institutions of the state and civil society
• A key concern for World Bank (see Kaufmanns
  governance indicators)
• And other multilateral agencies

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World Bank Governance indicators

• Voice and Accountability
• Political Stability Absence of Violence
• Government Effectiveness
• Regulatory Quality
• Rule of Law
• Control of Corruption

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Other meanings of governance

• Public administration (the sense in which it is
  often used in the USA)
• Management
• many writers do not make a distinction between
  governance and management

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Many specialised uses of governance

• Used in increasingly many other fields
• IT governance
• Medical governance
• Project governance
• University governance
• Judicial governance

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Implications

• Lack of consensus on definition creates potential
  miscommunication
• Discipline barriers in academe mean different
  strands of governance rarely come together

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Todays focus corporate governance

• Basis in the anglo-american model
• OECD Principles of Corporate Governance
• Australian Stock Exchange principles
• Although a divide has emerged between the Ango
  and the American sides

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Anglo (British, Australian, New Zealand)

• Origins in Cadbury (1992)
• integrity, openness and accountability
• ASX Principles of Good Corporate Governance
  (2003)
• Corporate Governance Principles and
  Recommendations (2007)
• Corporate Governance in New Zealand Principles
  and Guidelines (Securities Commission 2004)

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American model

• Sarbanes-Oxley Act 2002
• Including s.404 internal controls on financial
  reporting
• Imposes an onerous compliance regime
• Has created a large SOX industry
• As well as SOX, highly detailed and prescriptive
  audit and accounting standards

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Regulation Principles vs. rules

• In the 1980s-1990s, a move to principles based
  legislation/regulation
• Accompanied by calls for deregulation
• Reflected a realisation that principles provide
  more certainty over outcomes than do rules

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The return of rules

• More emphasis now on process
• Including from governance experts who think it
  is just about compliance
• International regulatory pressures
• SOX becoming a global default standard
• International financial reporting standards

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Convergence?

• Some aspects of SOX could be valuable here
• Eg stricter separation of audit and non-audit
  services
• Some questioning in the US of whether SOX has
  gone too far down the prescriptive route

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Theoretical foundations

• Agency problem
• Dating from Coase, 1937
• Imbalance in information held by parties
• Legal issues what is a corporation? Why does it
  exist?
• Transactions costs approaches
• Limitations of contracts

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Is corporate governance important?

• Little statistically reliable empirical evidence
  linking what is commonly described as good
  governance to good results
• Good performance determined by many factors
• BUT, lack of evidence does not disprove a
  hypothesis
• Generally, directors and CEOs think there is
  something to be said for good governance
• And there are many observed links between poor
  governance and poor results

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The need for a new governance agenda

• Decline in public sector standards nationally
• Compliance burden on business
• But at the same time, increased vulnerability of
  consumers and small investors
• International competition

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Public sector

• Being addressed
• Political advertising
• Spendthrift culture
• Poor program performance
• Ministerial staff
• Still needs attention
• Ministerial employment post Parliament
• Legacy of poor ethical decisions in public sector
  
• Growth of unnecessary internal regulation

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Corporations

• Role of ASIC, APRA, other regulators
• Does the ASX if not, why not? approach work?
• Complexity of corporate legislation and
  regulation (despite successive CLERPs)
• Complexity of Tax Acts

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Indigenous governance

• Sorry as a first step
• Attention now on service delivery
• Underpinning governance problems
• Inappropriate structures
• Mismatch between delivery and governance
• What is an indigenous community?
• Need to move away from one size fits all
• Recognised in 13 February PMs speech

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Not for profit governance

• A large sector 15 of GDP (Mark Lyons)
• Not all small and poor
• Includes Australian Rugby League, Australian
  Cricket Board, the churches, World Vision, ACTU,
  etc.
• But suffers from governance legislation that is
• Inconsistent between States
• Often inconsistent with corporate governance
• Poorly explained and enforced

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Risk and governance

• fundamental not an add on
• Shared responsibility with management
• Boards dont manage day to day risks
• But do look at those that affect the whole future
  of the organisation
• And must put in place processes to ensure risk
  management is done

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What is risk?

• the chance of something happening that will have
  an impact on objectives
• (AS/NZS 4360, 3rd ed. 2004)
• meant to encompass both potential gains and
  losses
• In reality most risk management focuses on
• events outside normal business
• Those with a negative impact

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Usefulness of risk management standards

• ANZS 4360
• A guide, not a rulebook
• But many public sector bodies treat it as the
  latter
• Compliance rather than performance approach

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Risk as the governance paradigm

• Risk management of everything
• Power, M, Demos 2004 (cc)
• Ubiquity of risk
• Danger of too much risk management at expense of
  other values

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So how does this all come together as a
governance agenda?

• Federalism once in a century opportunity to
  sort it out
• Regulation move from rhetoric to reduction
• Simplifying tax would be a good first step
• Could be done by reducing the number of tax
  expenditures - link to government fiscal agenda
• Reduce internal regulation in public sector
• Better understanding of risk (rather than risk
  aversion) in both corporate and public sector
  governance standards

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Transparency

• Transparency openness to public and any other
  external scrutiny
• Online, on paper, orally
• Transparency enhances accountability, ethics,
  performance
• And minimises risks
• Government and corporate transparency can go hand
  in hand
• Part of Federalism and national competition

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Questions and comment