Good governance in the public sector – international framework

Comments from ACCA to the International Federation of Accountants, 13 September 2013.

 

SUMMARY

In a period of austerity for many countries we believe that the proposed governance framework is very timely. High profile scandals, such as the demise of some banks and the catalogue of both business and the public sector failures in recent years mean that it is an appropriate time to rethink a framework for governance. We are aware that to date few codes have benefitted from a fundamental rethink. 

As stated in our earlier responses on the draft framework, ACCA is supportive of the initiative to promote good governance and agrees with the principle-based approach taken.

However, we believe that the inclusion of clear introductory paragraphs outlining how it can be practically applied by public bodies would further strengthen the governance framework. Also, it could be further enhanced by stating up front the key benefits of implementing good governance, such as improved performance and service outcomes, reduced potential risk of fraud and corruption and greater public confidence and trust. Without a more explicit starting point, we believe it will be difficult to incentivise public bodies to use the framework to promote and embed good governance. 

Also, the good governance standard can be improved by recognising that the existence of an ethical code will not on its own prevent future governance failures. The standard fails to explain how to create, embed and sustain an ethical culture beyond the introduction of an ethical code. An ethical code that is not supported by a strong ethical culture will result in a ‘tick box’ approach to governance. 

The governance framework can be further strengthened by recognising the value of diversity to both the leadership and boards, as well as highlighting lessons that can be drawn from comparing the approach taken in Islamic governance to the more compartmentalised principle based approach as set out in the framework.

In terms of the process for developing the good governance framework, we are disappointed that representatives from public bodies themselves were under-represented on the reference group. This is an unfortunate omission given that they are the main audience for the framework. In relation to future initiatives of this type we suggest that project reference groups are made as inclusive as possible.

SPECIFIC COMMENTS

1. Do you support the proposed definition of governance, including how it is applied to define good governance in the public sector? If not, how do you think it could be improved? 

The definitions of governance as outlined in Appendix (B) are relatively comprehensive and reflect the established literature. Any one of those definitions could be used to support the governance framework. 

However, in terms of the choice of definition we would prefer it to reflect ‘ethical responsibilities’. This is for two reasons, firstly, in the vast majority of cases in both the public and private sectors failures have occurred because of poor ethical behaviour and cultures. ACCA believes that although organisations ticked a number of governance arrangements boxes they were not well governed. Organisations failed to manage risks, boards failed to govern and the governance frameworks were better at shielding individuals than adding value to an organisation. ACCA will shortly be issuing a consultation on this issue, in particular, we will be asking for views on how governance can create value. 

Secondly, the key components of Islamic governance are ethical values and rules. Given these sets of circumstances we would advocate using either the IMF or the Office for Public Management (OPM) definition to underpin the framework as they take account of both the ‘soft factors’ ethics and ethical culture, as well as the ‘hard factors’ of systems, procedures and controls. 

2. Are the definitions used for other terms in Appendix C suitable for this International Framework? If not, how do you think they could be improved? Should additional terms be included? 

The definitions of governance as outlined in Appendix B appear to be comprehensive. 

3. Do the principles cover all the fundamental areas of good governance for the public sector? If not, how do you think they could be improved? 

We agree that the framework for good governance should be principle based and we find the seven principles outlined in Figure (1) very useful for underpinning the components of good governance. In particular, we support the emphasis placed on sustainable outcomes and ethical values.  We are hoping that the principles outlined in Figure (1) will provide some clarity in this area, as it is often the case that because corporate governance has developed piecemeal it is confusing and misunderstood by those who govern and are governed by it. 

However, whilst the framework highlights the importance of public entities having ethical codes it is relatively silent on how to create and embed strong ethical cultures. In our view the existence of an ethical code on its own will not prevent a future crisis, such as highlighted in recent Francis Inquiry (a catastrophic failure of governance that led to more than a decade of patient mistreatment and deaths at Mid Staffordshire hospital trust in the UK). The good governance standard should be strengthened by providing examples of how organisations can create and promote strong organisational cultures. 

In relation to the core principle (E) page 12, we believe that this could be further enhanced by explicitly including ‘diversity’ alongside capacity and capability development. There is a significant amount of academic research to show that both boards and the leadership can benefit, for example, from increasing the representation of women on boards, as well as under represented groups such as those from minority backgrounds or the disabled. If a country is to remain economically sustainable it is important that public bodies have access to the widest talent pool and gain an improved understanding of the needs of the public and communities they serve. 

4. Is the commentary for each principle and sub-principle adequate to promote best practice? If not how could they be improved? Can you suggest further examples that could be included?

The commentaries for each principle are adequately explained. However as stated above there needs to be a section that explains how governing boards and the leadership can benefit from diversity. This has been a long-standing issue in both the public and private sectors and the governance framework would benefit from being more explicit about the value of diversity. 

5. Do the examples provided help explain how to apply the principles in practice? If not how could they be improved? Can you suggest further examples that could be included? 

The examples are helpful in explaining how to apply the principles. However, the governance framework could be further improved if there were introductory paragraphs setting out how the framework should be applied/used in practice.

Also, it could be enhanced by outlining upfront the key benefits of implementing good governance, such as improved performance and service outcomes, reduced potential risk of fraud and corruption and greater public confidence and trust. Public bodies are less likely to implement and embed good governance, if they don’t know what the benefits are.

As set out above, further attention needs to be given to how a public entity can embed an ethical culture. The emphasis is on the ethical code which alone will not prevent a future crisis. As stated above, we know from previous failures that organisations ticked the right boxes for governance arrangements, but the fatal weaknesses related to implementation. There needs to be clearer links between how boards govern and how they contribute to performance and are made accountable. 

6. Do the evaluation questions for each principle help assess its application in practice? If not, how could they be improved? 

Yes, as above.

7. Do you have any other suggestions or recommendations for further improvement of this international framework? 

There are some subtle differences between the conventional principles of corporate governance in the West and those in Islamic countries. Academics have written about this as corporate governance having a broader dimension in Islamic jurisdictions that cannot be compartmentalised under, for example, the OECD principles on which this framework is based. The governance framework assumes that responsibility for good governance is with the leadership, whereas, in Islam, governance is the responsibility of all stakeholders involved in or related to the business. They are bound by moral ethics. Also, accountability takes on a different meaning and governs a wider scope impacting on every aspect of life – not just business. The governance framework would benefit from at least recognising these subtle differences and its limitations in respect of other cultures so that it is well informed and can be easily understood by a range of users.

8. Are there any important resources missing from Appendix D?

We consider that Appendix D is relatively comprehensive.