Part I - Red Flags in Board Governance

1. Part I - Red Flags in Board Governance Presentation to the Saskatchewan School Boards Association 2012 Trustee Academy Bonnie Lysyk, Provincial Auditor Kelly Deis, Deputy Provincial Auditor Friday, June 15, 2012

2. Outline Part I – Bonnie Lysyk, Provincial Auditor • Office of the Provincial Auditor • What is a Special Duty of Care • What is Governance • Towards Leading Practices – Four Pillars • Red Flags of Board Governance Problems • Headlines • Governance Difficulties and Their Causes • Examples for OAG/PA Reports • Questions

3. Outline Part II – Bonnie Lysyk, Provincial Auditor • Chapter 2 - Grade 12 Graduation Rates • Audit Objective • Overall Conclusion • Findings • Recommendations • Questions Part III – Kelly Deis, Deputy Provincial Auditor • Chapter 1 – School Divisions • Audit Involvement • Audit Conclusions • Findings • Recommendations • Questions • Involvement in School Division Audits

4. The Provincial Auditor • An Independent Officer of the Legislative Assembly created under The Provincial Auditor Act (2001) • The Standing Committee on Public Accounts unanimously recommends the Provincial Auditor for appointment by the Legislative Assembly for a 10-year term – Must be a C.A. • Provincial Auditor and staff confirm their independence and objectivity

5. Our Office – Organization Chart

6. Our Office – Our Mission • To serve the Members of the Legislative Assembly and the people of Saskatchewan, we provide independent assurance and advice on the management, governance, and effective use of public resources

7. Our Office - Vision • A valued and independent legislative audit office, inspiring and advancing excellence in public sector performance, accountability, and sustainability

8. Approach to Vision and Mission When public monies are involved, there is a: “Special Duty of Care” owed to citizens

9. What is a “Special Duty of Care”? • Accountability for public monies • Setting appropriate policies/legislation and following them • Monitoring • Reasonableness • Transparency • – Lack of Transparency places accountability at risk • Ethical Leadership

10. What is Governance? Corporate governance is the system by which organizations are directed and controlled.Cadbury Committee (UK) • Requires clarity of roles, responsibilities and relationships • Four pillars of good governance are important in the public sector

11. Four Pillars of Governance • Leadership • Setting the long-term strategic direction and empowering management • Stewardship • Shepherding resources belonging to others • Responsibility • Evaluating organizational performance and holding management accountable • Accountability • Reporting to stakeholders

12. DIRECTION Leadership Stewardship Governance Owners/Funders Stakeholders/Gov’t CONTROL Accountability (Reporting) Responsibility (Monitoring) BOARD Management & Organization Source: Adapted from Brown Governance

13. Headlines Ontario moves to tighten control over province’s troubled air-ambulance service, Ornge In late 2011 it was revealed founder and former CEO Chris Mazza was earning $1.4-million a year, effectively making him the province’s highest-paid civil servant. By January, Ms. Matthews had dissolved the entire board of directors at the agency, which receives $140-million annually in public funding. Earlier this month, its for-profit arm, Ornge Global, was also dissolved amid suspicions it was funneled taxpayer money from the ambulance agency. Final settlements reached in lawsuit against Crocus Investment Fund The defendants in the case included the Manitoba government, the Manitoba Securities Commission, brokerage firm BMO Nesbitt Burns, Crocus's directors and officers, its former lead underwriter Wellington West Capital, and its former auditors PricewaterhouseCoopers. Auditor slams 'mismanagement' of native housing agency "We believe that the board and management did not address important issues, did not produce or provide appropriate information when requested, did not have appropriate human resources in place and when provided with the opportunity to address identified problem areas, Aiyawin did not have the appropriate follow-through."

14. Headlines Auditor releases scathing report into Workers Compensation Board Firing trustees? Only precedent is the Morris Macdonald School Division To prevent similar circumstances in the future, Singleton recommended the province develop legislation to protect "whistle-blowers" in the public sector. The report also notes that the WCB is in a "good financial position" and has maintained an overall surplus for a number of years, which at December 31, 2004 was $70.5 million. However, the report says, "even a financially sound organization can experience governance and management issues." 'Whistle-blower' legislation promised Labour Minister Nancy Allan responded to Singleton's report and recommendations shortly after their release, saying the government has already taken steps to implement some of the nine changes the auditor recommended specifically to the government. She said the government has already taken steps to make the WCB board more accountable, including implementing staggered terms for board members. On Nov. 9, 2001, then NDP Education, Training and Youth Minister Drew Caldwell dissolved the board of trustees of the Morris-Macdonald School Division and appointed a single official trustee, Alex Krawec, to manage the affairs of the division until the election of a new board of the newly merged Morris-Macdonald and Red River school divisions in October 2002. And in words that may or may not echo here, Caldwell, in signing the order to dissolve the Morris-Macdonald School Division board, noted that “despite being the elected officials responsible for the division, the members of the board have chosen to communicate through their superintendent rather than directly to the minister and the public.” "Clearly the board has not recognized the seriousness of this situation and has failed to take appropriate action," said Caldwell. "Members of the public, especially the parents and taxpayers in the Morris-Macdonald School Division, have a right to expect that their division is managed effectively. Unfortunately, under the existing board, this does not appear to be the case." Oyate House for teens riddled with problems: auditor In his report, Wendel focused on financial and administrative concerns and said the Oyate board of directors failed to give proper direction to staff and management at the facility. "As a result, management and staff there did not receive clear guidance on how to address the needs of children in their care," the report said.

15. Governance Difficulties – Provincial Auditor/Auditor General Experience 1. Almost always occur because the Board stops focusing on either direction or control: • Sometimes failure due to Board’s lack of involvement in setting strategic direction • Mostgovernance failures result from lack of control/monitoring

16. Governance Difficulties – Provincial Auditor/Auditor General Experience 2.Effective governance requires more than just good structure or process….. • Relationships and human behavior are most critical component of governance • This is why a Board can meet common governance guidelines / structural requirements, yet nothave good governance

17. Governance Difficulties – Provincial Auditor/Auditor General Experience 3. Board members not usually aware of financial issues/problems • Board members usually caring, community-oriented people, who are providing a public service, and trying their best • Little financial gain from being a public sector board member • Board members not usually able to answer specific, detailed questions about financial matters / audit issues

18. Governance Difficulties – Provincial Auditor/Auditor General Experience • Weaknesses in governance are at the root of many problem issues highlighted in Provincial Auditor/Auditor General reports • Most problem issues could have been prevented if the Board had provided vigorous and competent oversight

19. Red Flags of Board Governance Problems • Lack of Board Role Clarity • Unclear Direction • Misunderstood/Unmonitored Initiatives • Ineffective Quantity/Quality of Board Information • A Passive Board

20. Organizations That Had Governance Problems 1. Lack of Board Clarity • Le College de Saint-Boniface 2. Unclear Direction • RM of St. Clements • Carlton Trail Regional College • E-Health Ontario • OyateatayaWakanyejaOwicaKiyapi (Oyate) 3. Misunderstood/Unmonitored Initiatives • Morris-McDonald School Division 4.Ineffective Quantity/Quality of Board Information • Crocus Investment Fund 5. A Passive Board • Lions Housing Centres • Workers Compensation Board • Aiyawin Corporation • ORNGE Ambulence

21. 1. Lack of Board Role Clarity • Board has three roles: • ADVOCATE • CONSTRUCTIVE CRITIC • ULTIMATE AUTHORITY • If Board members only see their role as being a “cheerleader” for the organization… • If they view CEO as “The Professional” and hesitate to challenge assumptions or provide constructive feedback….

22. Le Collège de Saint-Boniface(Office of the Auditor General – Manitoba, August 2003) • A post secondary institution – province is the main source of revenue • Governance by a Board of Governors appointed through Order in Council – 7 nominated as representatives from various community organizations and 4 were self-selected by the Board (CEO is also a voting board member) – no funding representatives • Requested by the Deputy Minister of Advanced Education to investigation allegations around human resources, expenditures and use the of IT equipment – financial information not public

23. GOVERNANCE WEAKNESS No Strategic Plan No Policies; Relationships with related parties Lack of complete financial picture No public information available PILLAR Leadership Responsibility Stewardship Accountability Le Collège de Saint-Boniface(Office of the Auditor General – Manitoba, March 2006)

24. 2. Unclear Direction • Lack of Involvement in Strategic Planning • No time set aside to deal specifically with strategic issues (e.g. Board retreats) • No substantive input into strategic plan by Board • Management only brings final document for approval; rarely seeks input as plans being developed • Lack of Involvement in Risk Management • Often occurs as part of strategic planning • Board should identify scope and frequency of risk reports required from management • Often delegated to Audit Committee

25. R.M. of St. Clements(Office of the Auditor General – Manitoba, Sept 2002) • Allegations of unreliable and non-transparent financial information; non-compliance with the Municipal Act for approval; non-compliance with by-laws • Governance by elected Councilors • The RM acted in non-compliance with numerous sections of The Municipal • Act and The Municipal Council Conflict of Interest Act between 1997 and 2001, incurred deficits, and did not provide open and transparent financial reporting

26. GOVERNANCE WEAKNESS Lack of strategic plan for capital projects Poor financial management practices. Municipal statements not prepared according to GAAP Lack of compliance with Municipal Act Incomplete and inaccurate information regarding capital projects provided to public PILLAR Leadership Responsibility Stewardship Accountability R.M. of St. Clements (Office of the Auditor General – Manitoba, Sept 2002)

27. Carlton Trail Regional College(Office of the Provincial Auditor-Saskatchewan, December 2011) Governance by appointed Board – Order in Council Carlton Trail and St. Peter’s College operated as one entity throughout 2010 (despite lack of approval from the Ministry of Advanced Education, Employment and Immigration to do so) Boards met jointly and did not follow appropriate governance practices Carlton Trail Board appointed the CEO of St. Peter’s as CEO for Carlton Trail (without Ministry approval as required by The Regional Colleges Act)

28. Carleton Trail Regional College (Office of the Provincial Auditor-Saskatchewan, December 2011) PILLARS GOVERNANCE WEAKNESS Joint Board for Carlton Trail and St. Peter’s; shared CEO Key issues discussed strictly in camera; no documented support for decisions in minutes Lack of support for funding provided to St. Peter’s Lack of compliance with The Regional Colleges Act Leadership Stewardship Responsibility Accountability

29. E-Health Ontario(Auditor General of Ontario, October 2009) Governance by appointed Board – Order in Council Mandate was to have an electronic medical records system for Ontario in place by 2015 Controversy around awarding millions of dollars in untendered contracts to consultants – CEO and Board Chair resigned Audit had commenced as a value for money audit and later the Minister of Health and Long-term Care requested the issuance of the report as soon as possible

30. E-Health Ontario (Auditor General of Ontario, October 2009) PILLARS GOVERNANCE WEAKNESS First strategic plan completed in 2009 still not sufficient – no link between infrastructure development and application development and use planning Issued untendered business to consultants - $1 billion spent to date with minimal achievement of progress (Board had assumed proper procurement practices were being used) Did not properly track project development progress – CEO in control – confusion over Ministry and E-Health roles and responsibilities Poor relationship with the Ministry of Health – Discontent in medical community Leadership Stewardship Responsibility Accountability

31. OyateatayaWaKanyejaOwicaKiyapi Inc. (Oyate) (Provincial Auditor of Saskatchewan, June 2006) • Safe house for children 12 to 15 years of age who were victims of sexual exploitation or were at imminent risk of sexual abuse • Governed by 7 member board, elected by the member First Nations

32. Oyate(Provincial Auditor of Saskatchewan, June 2006) • Our investigation found for the period March 26, 2003 to March 31, 2006: • The Oyate Board of Directors did not have adequate processes to oversee the operations of Oyate • Oyate’s management did not have adequate processes to safeguard the money it received from the Department of Community Resources (DCR) and to ensure it was used for the purposes intended by DCR • Oyate did not adequately comply with governing legislation, the service agreements with DCR, or policies of the Board of Directors and DCR

33. Oyate(Provincial Auditor of Saskatchewan, June 2006) • Lack of approved strategic plan • Board member involved in day-to-day operations • Lack of policies and procedures; inadequate monitoring of performance; unclear roles • lack of oversight; unmet service agreement requirements PILLARS GOVERNANCE WEAKNESS Leadership Stewardship Responsibility Accountability

34. 3. Misunderstood/Unmonitored Initiatives • New initiatives = Increased Risk • Board must ensure it understands • Implications of new initiatives – and link to strategic direction • Closely monitor implementation and costs of new initiatives “Noses in, Fingers out”

35. Morris-Macdonald School Division (Office of the Auditor General – Manitoba, Sept 2001) • Governance by School Board Trustees • Request to investigate from Minister of Education, Training & Youth • Allegations of monies received for non-existent students • MMSD partnered with a for-profit entity to provide adult learning through 8 locations • No policy framework for adult learner program

36. GOVERNANCE WEAKNESS Uncontrolled/Questionable growth; Driven by Superintendent Lack of monitoring the Adult Learning Centres(600 ghost students) Absence of effective control processes Repayment of $$ to government PILLAR Leadership Responsibility Stewardship Accountability Morris-Macdonald School Division (Office of the Auditor General – Manitoba, Sept 2001)

37. 4. Ineffective Quantity/Quality of Board Information • Board has a duty to demand and expect the information needed for decision-making Governance Information ≠ Management Information • Often get too much information: • Too detailed; Not understandable / useful. • Always good news; Only hear bad news after the fact

38. 4. Ineffective Quantity/Quality of Board Information • Board should control the agenda / information flow: • Identify strategic decisions to be made…then, what information required to make those decisions • Ensure all questions are answered to everyone’s satisfaction • Follow-up on unanswered questions, or delayed reporting of information

39. Crocus Investment Fund (Office of the Auditor General – Manitoba, May 2005) • Governance of an Investment Fund • The Manitoba Federation of Labour (MFL), under The Crocus Investment Fund Act, is able to appoint the majority of the Board of Directors. • The Crocus Investment Fund Act, gave the Fund the privilege to issue tax credits to investors • Citizens complaints received – started review- then Minister of Finance request to expand review • Investors were informed between December 2005 and April 2006, that their investments declined by 47.8% or $61.1 million

40. GOVERNANCE WEAKNESS Lack of knowledge/expertise Investment procedures lacking Lack of monitoring (at all levels) Lack of strategic planning; Not addressing operating losses Overstated valuations Lack of transparency to shareholders PILLAR Leadership Responsibility Stewardship Accountability Crocus Investment Fund(Office of the Auditor General – Manitoba, May 2005)

41. 5. A Passive Board vs. MICE Board LION Management CEO – powerful, visionary BOARD – passive, loyal

42. 5. Passive Board • KEY Red Flag! • Evident in all OAG governance reviews • Long-term CEO (Chair) who symbolizes organization: “visionary” “entrepreneurial” “charismatic” • Often a “rubber-stamping” Board • Meetings routine; orchestrated

43. 5. Passive Board • Board must actively monitor CEO and organizational performance • “Trust” is not synonymous with accountability • Often an over-reliance on verbal reporting • Hesitate to challenge / provide constructive feedback as view CEO as “the professional” • CEO expenses not approved by Board

44. 5. Passive Board • Board = Ultimate Authority • Board ultimately responsible for actions of the organization • Board responsible for “Sober Second Thought”

45. Lions Housing Centres(Office of the Auditor General – Manitoba, March 2001) • Governance by a not-for-profit Board • Requested by the Minister of Finance to review the Lions Club of Winnipeg Housing Centres to assess financial well-being and appropriateness of financial transactions over the prior three years • Mismanagement of public monies; set up for-profit entities – set up to “keep government at bay”

46. GOVERNANCE WEAKNESS Board member conflicts of interest Co-mingling of funds; Poor accounting system Public monies used to fund risky ventures; for-profit co. Numerous breaches of Funding Agreements PILLAR Leadership Responsibility Stewardship Accountability Lions Housing Centres(Office of the Auditor General – Manitoba, March 2001)

47. Workers Compensation Board(Office of the Auditor General – Manitoba, January 2006) • Governance by a ten member employee (3)/employer (3)/public interest (3) represented Board and a chair – All appointed by Order in Council • Review undertaken in response to a number of concerns which were brought to our attention, regarding issues of: Board Governance; Human Resources; and Investment Management. • Resulted in the creation of “whistleblower” legislation in Manitoba • Board Chair involved in day-to-day operations

48. GOVERNANCE WEAKNESS HR practices must ensure respectful workplace in public sector Some Board Committees not providing oversight function “Whistleblower”- Serious concerns should be appropriately addressed Appointment process requires review; Board governance practices require review PILLAR Leadership Responsibility Stewardship Accountability Workers Compensation Board(Office of the Auditor General – Manitoba, January 2006)

49. Aiyawin Corporation(Office of the Auditor General – Manitoba, March 2006) • Governance by a not-for-profit Board • Mandate was to improve social housing conditions of low income Aboriginal peoples through efficient and effective management of its housing units • Three operating agreements with Canada Mortgage and Housing Corporation (CMHC); two operating agreements with Manitoba Housing and Renewal Corporation (MHRC) • Operating agreements were terminated as a result of breaches of the operating agreements

50. Aiyawin Corporation(Office of the Auditor General – Manitoba, March 2006) PILLARS GOVERNANCE WEAKNESS Lack of financial expertise; controlled by one individual Conflict of interest; inappropriate payments Lack of policies; non-compliance with policies Numerous breaches of operating agreements Leadership Stewardship Responsibility Accountability