Corporate Governance

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Corporate Governance
Paul Capener and Matthew Butcher,
PricewaterhouseCoopers
CIPFA in the Midlands, 18 October 2002
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Introduction

• Why is corporate governance important?
• A case study in poor governance
• Conclusions drawn

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Why is governance so important?

• Why has the agenda changed in the private sector?
• A lack of confidence in the audit profession
• A lack of understanding of the audit process and
  the resulting assurances
• Conflicts of interest
• Increasing expectations from all stakeholders
• Corporate liability
• Public disclosure requirements on all risks

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Why is governance so important?

• Senior Executives who permitted or encouraged
  misleading accounting treatment.
• An Audit Committee that signed off misleading
  accounts.
• A Board that was ineffective in supervising
  managers actions.
• Whistleblowers complaints that were ignored or
  whitewashed.
• Individuals enriched by transactions with the
  company that employed them.

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Why is governance so important?
The group's shares dropped 75 per cent in
after-hours trading after the company confirmed 
that Scott Sullivan, chief financial officer, had
stepped down and it had accepted the resignation
of David Myers, senior vice president and
controller.WorldCom confirmed that it was
investigating whether about 3.8bn of operating
expenses were recorded as capital spending over
the last five quarters, boosting cash-flow and
margins. If confirmed it would be one of the
biggest corporate frauds in history.
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Why is governance so important?

• and what about the public sector? Example
  Health sector the NHS context
• The cost of clinical negligence
• Public expectations
• Board accountability for clinical effectiveness
• Wide disclosure requirements for all risks
• Limited scope of traditional audit assurance
• Variable risk management and governance
  practices

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Why is governance so important?
Harold Shipman

• Family GP Harold Shipman had become the focus of
  Europe's biggest ever murder investigation
• Convicted of 15 murders, he is suspected of
  killing more than 297 patients over 24 years.

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Why is governance so important?

• In the period from 1991 to 1995 between 30 and 35
  more children under 1 died after open-heart
  surgery in the Bristol unit than might be
  expected had the unit been typical of other
  similar units in England at the time.
• Whistleblower was systematically ignored

Bristol Royal Infirmary
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A case study in poor governance
Who killed the Chief Executive? A special
investigation
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A case study in poor governance

• The scenario
• FE College with an underlying deficit greater
  than 10 of turnover
• Very poor initial OFSTED and ALI reports and
  follow-up identified for intervention or merger
• Franchising activities have been deemed unlawful
  and not fundable
• .. And the Chief Executive has been found
  dead in the Boardroom with a knife in his back!!

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Who Killed the Chief Executive?
The suspects
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Investigators report interviews with the
suspects (1)
COLONEL MUSTARD I really dont understand what
could have gone wrong. Every meeting was fully
minuted we always had a quorum and we kept to
standing orders. Besides, the Chief Executive
was a good sound man he would have stood by his
team no matter what.
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Investigators report interviews with the
suspects (2)
MISS SCARLET The Chief Executive had some really
exciting ideas for taking this organisation
forward. We needed a bit of vision on this board
we didnt need to have our heads buried in the
detail. If we took risks it was with the aim of
reaching our goals, and I dont think we should
apologise for that.
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Investigators report interviews with the
suspects (3)
PROFESSOR PLUM To be honest, my concern was with
the principles behind what the College was up to,
with the overall strategic thrust, and with how
this tied in with my theories on the development
of the community and the area. I left the rest
of it to my colleagues on the Board I felt that
they were more than capable.
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Investigators report interviews with the
suspects (4)
MRS PEACOCK Look, I saw my function on this
board as a facilitator. I kept things running
smoothly and I communicated with the outside
world. It was hard work and sometimes I didnt
feel that I was given all the information I
needed. I dont think Board members appreciated
how complicated my position was. I certainly
could have been given more support.
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Investigators report interviews with the
suspects (5)
REVEREND GREEN The main thing about the College,
as I saw it, was that we were doing good for the
community. Perhaps there was the odd area of
concern where I wasnt too sure about the
detailed implications of what was under
discussion. But I feel we shouldnt lose sight
of the main point we were doing a good job and
helping local people.
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Investigators report interviews with the
suspects (6)
MRS WHITE My role on the board was to represent
the employees of the College. I think its
unfair - the College is getting all this
criticism, but nobody understands the
difficulties that we were working under. To be
frank, I was fighting our corner the whole time,
and if people had listened to the workforce
rather than pursuing strange schemes they might
not be in this position now.
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Investigators report continued
Codes of Corporate Governance
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Investigators report continued
The Board were asked whether they were aware of
the various Codes of Corporate governance in
place. Here were some of their replies
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Investigators report continued

• PROFESSOR PLUM
• Ive made something of a study of the Hampel
  report. It dealt with
• the role of non-executive directors
• certain decisions being reserved for the board
• annual reviews of the effectiveness of internal
  control
• reviews of the relevance, quality and timeliness
  of information received from the Board
• among other things.
• It was good stuff but I dont think we were
  ready to implement it yet.

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Investigators report continued
COLONEL MUSTARD I remember the Greenbury report!
All about disclosure. Weve always been very
open and weve never held information back from
the public. How do I know? The Chief Executive
told me so. MISS SCARLET The Turnbull Report
that was all about risk management, risk
registers and so forth, wasnt it? Well, we went
through the motions of compliance, but you cant
really set down the workings of an organisation
like ours in those formal terms, can you? It was
just more bureaucracy.
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Investigators report continued
MRS WHITE No, I havent read about Cadbury,
Hampel or Turnbull. These ideas were drawn up
for the private sector. Dont you realise weve
got enough to deal with in the public sector with
bureaucratic requirements coming from the
government? We dont need to try to copy the
private sector as well.
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Interlude
Havent you got enough to do already?
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Current initiatives in corporate governance
local government

• Local Government Act 2000
• Standards Committee
• Codes of Conduct for Members
• Corporate Performance Assessment
• Addresses corporate governance arrangements over
  internal control, legality and standards
• Best Value Performance Plan
• Top-down account of how objectives to be met

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Current initiatives in corporate governance the
NHS

• Statement of Internal Control
• NHS requirements for internal audit, audit
  committee, non-executive directors Assurance
  agenda
• Management under threat if performance ratings
  poor an incentive for good corporate governance

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Current initiatives in corporate governance
Education

• LSC requirements for committee structures
• Requirement to implement recommendations of
  Turnbull report, and disclose progress against
  this

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Interlude concluded

• So
• It would be hard to argue that corporate
  governance did not have prominence in the public
  sector
• The public sector is evolving its own methods of
  applying principles developed in the private
  sector, and adding structures of its own
• But
• Failures of corporate governance are regularly
  exposed
• As regulation and inspection continues we may see
  more

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Investigators report First conclusion
The Board of the College did not act corporately
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Investigators report First conclusion
The Board did not govern corporately - even if it
met its regulatory requirements
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What were the skills of the Board
Colonel Mustard Regulation Miss
Scarlet Vision Professor Plum Theory Mr
s Peacock.. Facilitation Reverend
Green. Ethics Mrs White.. Commitment
and knowledge
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Failure to govern corporately examples from the
public sector

• A local authority where budgetary reports are
  provided on inconsistent bases and where
  departments are working to diverging agendas
• - Members combining knowledge could detect this
  and take corrective action
• An NHS Trust where weaknesses in clinical
  governance are hidden from the Board due to
  internal politics
• - Directors combining skills might have requested
  more information

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Governing corporately in the public sector the
role of officers

• Are officers actions contributing to achieving
  corporate objectives?
• If not
• Is it because they are working to their own
  agenda?
• Or is it because the corporate objectives do not
  fit reality?
• Either way, what can be done?

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Investigators reportSecond conclusion

• The Board did not have the information to
  exercise good corporate governance
• The Board did not seek the information to
  exercise governance

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(No Transcript)
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Failures of information in corporate governance
examples from the public sector

• The activity data presented to the Board of an
  NHS Trust is out of date this is known to
  employees, but the Board are not informed.
  Overspends result.
• A local authority reports statutory performance
  indicators in services which it has plans to
  transform. However, little care is taken to
  ensure that they are robust and they are not
  considered by members.
• A College Corporation receive results of user
  satisfaction surveys, but these are not fed back
  to departments.

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Information in corporate governance the role of
officers

• Filling in the information gaps
• Reporting to allow those charged with governance
  to govern
• Expecting to be challenged
• Analysing and challenging information provided,
  where it matters to the governance of the
  organisation

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Investigators report third conclusion

• Focus on procedure rather than needs of the
  organisation
• Insufficient knowledge of activity within the
  organisation
• Insufficient sharing of information within the
  organisation
• Reluctance to question the information provided
• Lack of consultation and internal communication
• Defensive culture of blame

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Investigators report what normally goes wrong?
A consistent conclusion of public inquiries is
that systems are to blame. Communication, record
keeping, monitoring of policy implementation,
training, leadership are all examples of commonly
cited system failures. Responsibility for the
effectiveness of systems rests unequivocally at
the Board table. Usually someone in the
organisation knew that a problem existed but did
not feel able to raise their concerns..
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Some questions

• Should corporate governance be imposed by
  government and regulators?
• Should organisations be judged on their outputs
  and be left to achieve these as they see fit?
• What is the right balance between top-down
  control and bottom-up devolved responsibility?
• Are there models of corporate governance that
  have not been considered?

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Investigators report overall conclusion
Corporate governance is still in its early and
formative stages in the public sector
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Who killed the Chief Executive? The investigation
concludes
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The verdict was CORPORATE MANSLAUGHTER
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None of the Board had intended to kill the Chief
Executive
But all were found to be equally culpable!!
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