A Governance Agenda for the Rudd government

1. A Governance Agenda for the Rudd government Stephen Bartos Director Allen Consulting Group 15 February 2008

2. 2 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

3. 3 What is governance? Not easily answered Numerous competing and overlapping perspectives Some definitions include:

4. 4 �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)

5. 5 The processes whereby decisions important to the future of an organisation are taken, communicated, monitored and assessed� (Bartos 2004)

6. 6 �Corporate governance involves a set of relationships between a company�s 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)

7. 7 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)

8. 8 Political governance How a country is run Institutions of the state and civil society A key concern for World Bank (see Kaufmann�s governance indicators) And other multilateral agencies

9. 9 World Bank Governance indicators Voice and Accountability Political Stability & Absence of Violence Government Effectiveness Regulatory Quality Rule of Law Control of Corruption

10. 10 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

11. 11 Many specialised uses of �governance� Used in increasingly many other fields: IT governance Medical governance Project governance University governance Judicial governance�

12. 12 Implications Lack of consensus on definition creates potential miscommunication Discipline barriers in academe mean different strands of governance rarely come together

13. 13

14. 14 Today�s 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

15. 15 �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)

16. 16 �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

17. 17 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

18. 18 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

19. 19 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

20. 20 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

21. 21 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

22. 22 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

23. 23 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

24. 24 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

25. 25 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 PM�s speech

26. 26 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

27. 27 Risk and governance fundamental � not an add on Shared responsibility with management Boards don�t 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

28. 28 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

29. 29 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

30. 30 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

31. 31 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

32. 32 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

33. 33 Questions and comment