Good Governance in the Public and Private Sector

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Good Governance in the Public and Private Sector

• 14 July 2009
• Shirley Machaba

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Objective and outline of session

• Objective
• To equip you with an understanding of good
  governance practices in the public sector

• Outline
• Setting the scene
• Introduction to corporate governance
• Constitution and operation of the Board and its
  committees
• Performance evaluation and remuneration
• Risk management and internal controls
• Internal audit
• Accounting and auditing
• Sustainability
• Ethics and organisational integrity
• Disclosure practices
• Getting it right
• Conclusion

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Setting the scene

• Common threats in recent common failures
• New or dynamic corporate cultures
• Industries presenting extraordinary growth
  opportunities
• Complex industries
• Tone at the top
• Weak or non existent controls
• Individual pressure to perform (PMS)
• Little or no emphasis on ethical behaviour
• Huge losses
• Frauds
• Failure to understand risks faced

• What did shareholders/stakeholders see?
• Greed
• Override of controls
• Dysfuntional reward systems
• Accounting lost its concept
• Failures after receiving assurances
• Risk management processes not effective
• What do stakeholders/shareholders want to see
• Trust
• Corporate culture
• Ethics ( values and intergrity )
• Effective accounting models
• Controls
• Effective assurance funtions and ERM frameworks

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The importance of stakeholders

• Stakeholders either impact, or are impacted by,
  an organisation. As such, they have a vested
  interest in it and a major influence on its
  ability to achieve strategic objectives.
• funders
• beneficiaries
• employees/volunteers
• partners
• society at large
• There is therefore value in managing your
  relationship - and so your reputation - with
  stakeholders, both individually and collectively,
  on an integrated basis.

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Why does governance matter?

• The capital markets say it does

If a country does not have a reputation for
strong corporate governance practices, capital
will flow elsewhere. Arthur Levitt Ex-Chairman,
SEC

• Society says it does

The proper governance of companies will become
as crucial to the world economy as the proper
governing of countries. James Wolfensohn Presiden
t of the World Bank
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Definition of governance

• Corporate governance is concerned with holding
  the balance between economic and social goals and
  between individual and communal goals . the aim
  is to align as nearly as possible the interests
  of individuals, corporations, and society.
• Sir Adrian Cadbury

• Corporate governance is about successfully
  managing the three Rs risk, return and
  reputation it is long hand for good,
  commonsense commercial management.
• Nobby Clarke
• Former Chairman, Fosters

Essentially, corporate governance is the means of
ensuring due and adequate control over the
strategy and direction of an organisation and the
stewardship, use and disposition of its assets -
both financial and non-financial - in achieving
its key objectives.
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King II - The context

• Local
• New RSA constitution
• Legislation on public interest issues
• Employment equity
• Access to information
• Skills development
• The environment
• Focus on corporate citizenship
• Corporate scandals/failures
• Fraud and corruption
• Financial related Acts ( Companies Bill, PFMA,
  MFMA, PPPFA, T.R etc )
• Preference for self-regulation
• King II/Batho Pele
• Departmental policies

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King II - Key themes

• Primary characteristics
• Discipline
• Transparency
• Independence
• Accountability
• Responsibility
• Fairness
• Social responsibility
• Good governance starts in the boardroom and ends
  in the boardroom
• Balance between performance and conformance
• Forward-looking - proactive governance approach
• Stakeholder-inclusive approach
• Importance of meaningful corporate disclosure
• Stakeholders to determine what represents good
  governance practice

It is the submission of the King Committee
that it would be in the enlightened self-interest
of every enterprise to take careful cognisance of
the recommendations outlined in this Report and
to adhere to these to the extent practicable and
applicable. King Report 2002
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The role of the Board

• Leadership and direction
• vision, mission, values
• organisational integrity
• goals, strategy and policy
• appoint CEO/AO/executive management
• Risk management and control
• identify and monitor key business risk areas
• effective system of internal control
• review status as going concern
• compliance with law and regulation
• monitor, evaluate and reward management
  performance
• ensure executive management succession planning
• Disclosure and reporting
• accountability for stewardship of assets,
  liabilities etc
• effective communication with stakeholders (annual
  report, performance information )

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A. The Board

• The board should be able to exercise objective
  judgment on the corporate affairs of the business
  enterprise, independent from management but with
  sufficient management information to enable a
  proper and objective assessment to be made by the
  directors collectively. The board should guide
  and set the pace of the companys current
  operations and future developments.
• King Report 2002

• Does the Board comprise a sufficient number of
  individuals with the appropriate mix of
  credibility, skills, experience and demographic
  diversity to lead and direct the organisation and
  to retain full and effective control over it in
  the pursuit of its objectives?
• Is the Board satisfied that it has taken all
  appropriate steps, including the appointment of
  focused committees, to ensure that it discharges
  its responsibilities for good governance in the
  organisation?

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A. The Board

• The board is the focal point of the corporate
  governance system. It is ultimately accountable
  and responsible for the performance and affairs
  of the company. Delegating authority to board
  committees or management does not in any way
  mitigate or dissipate the discharge by the board
  and its directors of their duties and
  responsibilities.
• King Code 2002

• Appropriate skills/demographics gender, race
  etc.
• Balance of executive and non-executive directors
• majority of non-executives
• sufficient independent directors Unitary board
  favoured
• Executive management committee
• Separation of Chairperson/CEO roles
• Staggered rotation periodic change
• Succession planning CEO/AO
• Board charter
• Code on conflict of interests

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A. The Board

• Formal orientation/ongoing briefing
• Background check on new directors
• Use of a Nomination Committee
• Formal adverts on newspapers

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B. Operation of the Board

• Accountability and responsibility of the Board
• Code of Conduct/Ethical decision-making (See next
  slide)
• Definition of materiality ( materiality framework
  )
• Regular meetings
• Delegation of Authority
• Unrestricted access of non-executives
• Key performance indicators
• Going concern viability of the business
• Attention to substance vs. form
• Company secretarys guidance

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B. Operation of the Board - A framework for
ethical decision- making

• Recognise the event/decision/issue
• Think before you act
• Decide on a course of action
• Test your decision
• Proceed with confidence

• Is it legal?
• Does it feel right?
• Will it reflect negatively on you or your
  organisation?
• Who else could be impacted by this?
• Would you be embarrassed if others knew you took
  this course of action?
• Is there an alternative action that does not pose
  an ethical conflict?
• Is it against your organisations professional
  standards?
• What would a reasonable person think?
• How would it look in the newspapers?
• Can you sleep easily at night?

"If it is not right do not do it, if it is not
true do not say it." Marcus Aurelius Emperor of
Rome 161-180 AD
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B. Operation of the Board - Board Meetings (1)

• The board should meet regularly, at least once a
  quarter if not more frequently as circumstances
  require, and should disclose in the annual report
  the number of board and committee meetings held
  in the year and the details of attendance if each
  director (as applicable).
• King Code 2002

• Written notice of meetings
• Clear, manageable agenda, e.g.
• progress to strategic and business plans
• financial and operational performance
• risk issues
• major human resources issues
• report of committees
• Timely distribution of documentation
• Advance briefings on issues under review

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B. Operation of the Board - Board Meetings (2)

• The board should meet regularly, at least once a
  quarter if not more frequently as circumstances
  require, and should disclose in the annual report
  the number of board and committee meetings held
  in the year and the details of attendance if each
  director (as applicable).
• King Code 2002

• Consistent attendance (or removal)
• Quorum
• Disclosure of conflicts of interest
• Open and constructive debate
• Minutes and resolutions
• Meetings records
• signed attendance register
• record of resolutions
• keeping and approval of minutes
• right of access to minutes

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C. Board committees

• Board committees are an aid to assist the board
  and its directors in discharging their duties and
  responsibilities, and boards cannot shield behind
  these committees.
• King Code 2002

• Required committees Audit and Remuneration
• Optional committees Nomination, Risk, Health
  and Safety, Finance
• Independent non-executive Chairpersons
• Regular evaluation
• Documented terms of reference
• Transparency/disclosure on activities in annual
  report
• Transparent appointment process
• Primarily non-executive directors
• Regular feedback to Board/Executing Authority
• Access to independent professional advice

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D. Audit Committee

• Comprised of a majority of non-executive
  directors
• Financial literacy of members
• Chairman/CEO/AO may be invitees
• Election and independence of chairperson
• Considerations
• Internal control systems
• Internal audit function
• Risk areas for audit coverage
• Financial information relevance and reliability
• Accounting and auditing issues identified

• The appointment of an audit committee gives the
  board a means to monitor an effective internal
  control system. In addition, the audit committee
  reinforces both the internal control system and
  the internal audit function.
• King Report 2002

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D. Audit Committee

• Compliance with laws and regulations
• Results and cost effectiveness of external audit
• Appointment and determination of fees of external
  audit
• Decision as to audit of interim results
• Principles for provision of non-audit services by
  external auditors

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E. Remuneration Committee

• Comprised of a majority of non-executive
  directors
• Chairperson to be non-executive
• Consider the adequacy of disclosure and
  composition of directors remuneration in the AFS.

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F. Risk Management

• The board is responsible for the total process
  of risk management, as well as for forming its
  own opinion on the effectiveness of the process.
  Management is accountable to the board for
  designing, implementing and monitoring the
  process of risk management and integrating it
  into the day-to-day activities of the company.
• King Code 2002

• Does the organisation have an effective system
  for the identification, evaluation, monitoring
  and measurement of all risks impacting its
  ability to achieve its objectives?
• Does the organisation comply with all legal and
  regulatory requirements to which it is subject?

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F. Risk Management

• The board is responsible for the total process
  of risk management, as well as for forming its
  own opinion on the effectiveness of the process.
  Management is accountable to the board for
  designing, implementing and monitoring the
  process of risk management and integrating it
  into the day-to-day activities of the company.
• King Code 2002

• Board to set risk strategy and policy
• Board to establish appetite for risk
• Confidential reporting process whistle-blowing
  for fraud and similar risks
• Continuous business risk assessment (formally,
  once a year)
• Financial and non-financial risks
• Comprehensive system of internal control
• Contribution to robust business operations
• Importance of management reporting
• Risk statement in annual report
• Use of Risk Committee

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F. Risk Management The Risk Management Cycle
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F. Risk Management - The benefits of implementing
the EWRMF
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G. Internal Audit

• Internal audit is an independent, objective
  assurance and consulting activity to add value
  and improve a companys operations. It should
  assist the directors and management to maintain
  effective controls by evaluating those controls
  to determine their efficiency and effectiveness,
  and by developing recommendations for enhancement
  or improvement.
• King Code 2002

• Does the organisation have an effective internal
  audit function?
• Internal Audit Charter
• Definition of function within the organisation
  consistent with that of IIA.
• Reporting to CEO/AO
• Ready and regular access to
• Chairperson of Board
• Chairperson of Audit Committee
• Report at each Audit Committee
• Audit Committee role in hiring and dismissal of
  Head of Internal Audit
• Independence and objectivity
• Is assurance and value offered?

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G. Internal Audit

• Internal audit is an independent, objective
  assurance and consulting activity to add value
  and improve a companys operations. It should
  assist the directors and management to maintain
  effective controls by evaluating those controls
  to determine their efficiency and effectiveness,
  and by developing recommendations for enhancement
  or improvement.
• King Code 2002

• Vetting of information supplied to the Board
• Risk-based internal audit planning
• Co-ordination with external audit and other
  assurance functions
• Respect and co-operation of Board and management
• Educate audit committee and board
• Participate in audit committees
• Audit corporate governance processes
• Assess management s ERM compliance efforts
• Assist in self assessments (management, board and
  its committees)

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H. Integrated Sustainability Reporting

• In a corporate context, sustainability means
  that each enterprise must balance the need for
  long-term viability and prosperity - of the
  enterprise itself and the societies and
  environment upon which it relies for its ability
  to generate economic value - with the requirement
  for short-term competitiveness and financial
  gain.
• King Report 2002

• To be considered at three levels
• Level 1 State business principles and code of
  practice
• Level 2 Implementation of practices and steps
  taken to encourage adherence (with documentary
  evidence)
• Level 3 Investigation and demonstration of
  changes and benefits resulting from the adoption
  of practices

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H. Integrated Sustainability Reporting

• Has the organisation adopted social and
  environmental management practices that allow it
  to measure its impact on the communities within
  which it operates, by means of established
  performance indicators?
• Social, transformation, ethical, environmental
  policy and practices
• Distinction, in terms of stewardship
• accountability to members
• responsibility to stakeholders

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H. Integrated Sustainability Reporting

• In a corporate context, sustainability means
  that each enterprise must balance the need for
  long-term viability and prosperity - of the
  enterprise itself and the societies and
  environment upon which it relies for its ability
  to generate economic value - with the requirement
  for short-term competitiveness and financial
  gain.
• King Report 2002

• Non-financial value drivers
• Specific Southern African priorities
• HIV/AIDS
• Black economic empowerment
• Procurement practices
• Employment equity
• Gender issues
• Human capital

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H. Integrated Sustainability Reporting - Ethics

• What is out in the open may not always be
  ethical.
• What is concealed is almost certain not to be.
• Sir Adrian Cadbury
• Ethics is what we do when no-one else is
  looking.
• Anon
• You cant make people good by Act of
  Parliament.
• Oscar Wilde

• Has the organisation adopted and communicated to
  internal and external stakeholders clear
  guidelines and standards for organisational
  integrity, against which organisational and
  individual activities are measured?

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H. Integrated Sustainability Reporting Ethics

• What is out in the open may not always be
  ethical.
• What is concealed is almost certain not to be.
• Sir Adrian Cadbury
• Ethics is what we do when no-one else is
  looking.
• Anon
• You cant make people good by Act of
  Parliament.
• Oscar Wilde

• Stakeholder involvement in determining standards
  of behaviour
• Codification of standards
• Ethics programme
• systems and procedures
• executive oversight
• recruitment/promotion process
• delegation of authority
• communication and training
• whistleblowing channels
• consistency in discipline
• response to offences
• Public disclosure of adherence
• Review of relationship with those not espousing
  standards

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King II - The Chairperson

• The chairpersons primary function is to preside
  over meetings of directors and to ensure the
  smooth functioning of the board in the interests
  of good governance.
• King Report 2002

• Firm and objective leadership
• Preferably independent non-executive
• Direction to the Board
• Primary liaison with executive
• Advice and guidance to directors
• Preside over meetings
• Smooth functioning of the Board
• Ensure directors are informed

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King II - Company Secretary

• The company secretary, through the board, has a
  pivotal role to play in the corporate governance
  of a company.
• King Code 2002

• Statutory duties (public companies)
• Support to Chairperson and CEO/AO
• Guidance on discharge of directors duties and
  responsibilities
• Leading role in directors induction
• Advice to Board on ethics and governance
• Subject to fit and proper test

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The Board and executive management
BOARD
AUDIT COMMITTEE
INTERNAL AUDIT
EXECUTIVE MANAGEMENT
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King II - Performance evaluation and remuneration

• Companies should establish a formal and
  transparent procedure for developing a policy on
  executive and director remuneration which should
  be supported by a Statement of Remuneration
  Philosophy in the annual report.
• King Code 2002

• Does the Board operate transparent processes of
  performance measurement, evaluation and related
  reward for directors and members of executive
  management?

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King II - Performance evaluation and remuneration

• Companies should establish a formal and
  transparent procedure for developing a policy on
  executive and director remuneration which should
  be supported by a Statement of Remuneration
  Philosophy in the annual report.
• King Code 2002

• Annual evaluation of Chairperson, Board, CEO/AO,
  Individual directors, Committees
• Market-based remuneration
• Emphasis on performance
• Individual disclosure in annual report
• Non-standard fee for non-executives
• Executive directors service contracts limited to
  3 years
• Use of Remuneration Committee

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King II - Accounting and auditing

• The external audit provides an independent and
  objective check on the way in which the financial
  statements have been prepared and presented by
  the directors when exercising their stewardship
  to the stakeholders. An annual audit is an
  essential part of the checks and balances
  required, and is one of the cornerstones of
  corporate governance.
• King Report 2002

• Is the Board satisfied that the external auditor
  enjoys unimpaired independence and objectivity in
  the execution of the external audit mandate?

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King II - Accounting and auditing

• The external audit provides an independent and
  objective check on the way in which the financial
  statements have been prepared and presented by
  the directors when exercising their stewardship
  to the stakeholders. An annual audit is an
  essential part of the checks and balances
  required, and is one of the cornerstones of
  corporate governance.
• King Report 2002

• Audit Committee
• Unimpaired independence of external auditor
• Consultation/liaison between external and
  internal auditor
• Principles for recommending use of external
  auditor for non-audit services
• Record of facts/assumptions underlying going
  concern assessment
• Separate disclosure of fees paid to external
  auditors
• audit services
• non-audit services (including detailed
  description)

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King II - Disclosure practices

• The quality of the information must be based on
  the guidelines of openness and substance over
  form. Reporting should address material matters
  of significant interest and concern to all
  stakeholders Reports should present a
  comprehensive and objective assessment of the
  activities of the company providing a full,
  fair and honest account of its performance.
• King Code 2002

• Does the organisation make regular and full
  disclosure in meaningful, understandable and
  balanced terms on all financial and non-financial
  issues of relevance and interest to shareowners
  and other stakeholders?

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Conclusion - getting it right

• Plan to be successful
• Prepare a core team
• Obtain executive sponsorship
• Develop an implementation plan
• Use a systematic approach to achieve
  intergration
• Conduct a current state of assessment
• Understand current capabilities
• Identify opportunities to improve
• Monitor
• Focus on the value that corporate governance
  will deliver to the organisation
• Draw on key enablers to facilitate successful
  implementation

• Realise the benefits of effective corporate
  governance
• Link growth, risk and returns
• Rationalise resources
• Exploit opportunities
• Reduce operational suprises and losses
• Report with greater confidence
• Satisfy legal and regulatory requirements
• Greater management comfort in decision making
• Know the risks you take and be able to control
  your risks
• Creating trust and credibility
• Focus on real issues

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A final thought ...

• With governance, as with anything else, you reap
  what you sow
• Many who plan to seek God at the eleventh hour
  die at 1030.
• Sign above entrance to border control post
• Kasungula, Zambia

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