Understanding governance

Julia Rudrum reports on the findings of a recent research project by ACCA in collaboration with the UK’s Department of Health

Good governance is something that effective organisations in both public and private sectors strive for.

Corporate governance was defined by the Cadbury Committee as: 'The system by which an organisation is directed and controlled, at its most senior levels, in order to achieve its objectives and meet the necessary standards of accountability and probity.' (Cadbury Report, 1992.)

It is clear from this definition that corporate governance is not solely about introducing systems of control, it is fundamentally linked to directing the organisation in order to achieve objectives. This is critical to the success of the organisation and is a central part of the role of the board.

In the private sector, research by McKinsey & Company has shown that, while there are variances by country, over 80% of investors are willing to pay a premium for shares in a well governed company (three surveys undertaken in 1999 and 2000, and published in the McKinsey Quarterly, 2000, Special Edition). In another article, investors in emerging markets claim to be willing to pay up to 30% more for shares in well governed companies (McKinsey Quarterly, 2002, number 2). Well governed companies will have good internal controls that mitigate risk and enhance the prospects for corporate success, thus making the investment more attractive.

The National Health Service (NHS) is the third largest employer in the world, and a budget of £104bn for 2007/08 has been allocated to health spending (HM Treasury analysis for 2007 Budget). Health is also an important market for ACCA, with nearly 3,000 members, affiliates and students working in the sector in the UK and over 5,000 worldwide. In recognition of this, there is an active members' network in the UK sector with an elected network panel that works to support members, develop understanding and influence policymakers.

With this size, and with the added complexity of hundreds of separate legal entities commissioning and providing healthcare within this overarching service, it is essential that good governance arrangements are in place. Considerable effort and investment has gone into establishing and continuing to develop governance arrangements in NHS organisations, to ensure that effective services are delivered and public finances protected, but has it been effective?

A research project was developed by ACCA, in collaboration with the relevant government department (the Department of Health), as part of the strategy agreed by the Health Service Network Panel during 2007. The aim of the project was to identify current understanding of governance in the NHS, using a survey to board members (as the key stakeholders), at a time when the focus was not only on the continuous improvement of services, but also on sound financial management to bring the overall NHS financial position back into balance.

By repeating the process in the following two years, the project also seeks to identify trends and then to provide feedback on the effectiveness of the latest initiatives. The outputs from the survey will be published annually and should provide useful reference for NHS organisations, as well as support the work of policymakers at the Department of Health. The full report relating to the first survey will be launched shortly. This article gives a summary of the key findings and recommendations that provide useful themes for consideration in other sectors.

Survey findings

A summary of the results of the first survey that was conducted in May 2007, and which are discussed in more detail in the full report, is shown below:

• importance - those responsible for governance in NHS bodies, i.e. board members, take their responsibilities seriously and recognise the need for good governance. It was also encouraging that we had a significant number of responses from board members, showing their interest in this subject
• understanding - from the broad range of possible terms and phrases associated with governance that were provided for selection in the survey, there was a strong congruence of understanding about what governance is. This understanding is very much focused on 'control' rather than 'direction', and there is a strong association with the Cadbury definition of corporate governance, with accountability being the term most associated with respondents' understanding of corporate governance. There is also a clear understanding that high ethical standards are a key part of corporate governance and, therefore, that behavioural aspects are important, as well as systems and processes. These 'people' elements do not always get the same level of focus and are essential components of good governance
• role of non-executive directors (NEDs) - boards in NHS organisations are made up of executive and NEDs, who jointly direct and control the organisation through whole board working, as well as having specific roles and responsibilities.

There is a positive view of the role of NEDs in establishing effective corporate governance practice; however, there was a clear indication that NEDs have insufficient time to properly fulfil their role (the Appointments Commission, which selects candidates for the roles, recommends two-and-a-half days per month for the role).

A significant minority were also concerned that NEDs do not have the necessary financial or business skills to undertake the role effectively, and there were a number of requests for more training in the feedback received.

The issues highlighted relating to NEDs reinforces the recommendations made in ACCA's Health Sector Manifesto, launched in December 2006. Governance and board capability was one of the five key areas where specific recommendations were made.

A review of board composition
For effective scrutiny, ability to meet increased demands and in the interest of early identification of risk, ACCA believes that all boards should include one qualified legal and one qualified finance expert among their NEDs.

• Guidance - there is positive confirmation that the level of guidance is about right and that boards do not want a checklist approach which is prescriptive; however, there are still some gaps in knowledge and, particularly from the specific comments received, a certain level of confusion remaining. There is still a need for a consolidated guide that is helpful to all users, but that recognises organisational variations.

ACCA's conclusions

ACCA recognises the importance of effective corporate governance in the health as well as all other sectors. This was clearly reflected in ACCA's Health Sector Manifesto, which included specific recommendations on governance.

The survey has built on this view. It has confirmed a strong understanding of corporate governance among leaders in NHS organisations, which is a very positive starting point. But a number of areas were identified for further development.

Feedback also broadly supported the guidance issued to date to provide a framework for developing governance, but we do consider that the guidance does need to be consolidated to minimise confusion.

The role of NEDs in establishing effective corporate governance practice was also clearly valued by all board members, but there is clearly a need to enhance board level skills and competencies, particularly relating to the availability of financial and business skills among NEDs. We have recommended that induction and ongoing training available to board members should be evaluated to ensure that it is co-ordinated and effective, and there are training opportunities provided by ACCA to assist with this.

We will continue to seek board members' views in follow-up surveys for the next two years in order to monitor progress and to assess the impact of changes made within the health sector on the effectiveness of the governance arrangements.

Julia Rudrum FCCA is deputy director of South Coast Audit and a member of ACCA's Health Service Network Panel.