The ins and outs of good governance of public sector boards

No one doubts the importance of public sector boards having impeccable governance procedures, but what does this really involve?

The Victorian Ombudsman's recent report on the Review of the Governance of Public Sector Boards in Victoria (Report) provides a helpful guide.

It identifies two dimensions to governance arrangements of public sector boards:

• External governance, being the entity's relationship with Parliament, the responsible Minister and the relevant government department.
• Internal governance, being an entity's organisational structure, internal procedures and financial practices and policies.

External governance

External governance arrangements are generally set by the entity's enabling legislation and, depending on the form of the entity, public sector governance legislation such as the Public Administration Act 2004 (PAA); Financial Management Act 1994; Audit Act 1994; Information Privacy Act 2000; Independent Broad-based Anti-Corruption Commission Act 2011 and so forth.

Compliance with public sector governance legislation requires the public entity, the department and the responsible Minister to collaborate. This is because the legislation, although applying separately to the public entity and the Minister, imposes obligations on each.

The board of a public entity is accountable under the PAA to the responsible Minister who in turn is responsible to Parliament. Ministers need to be kept informed of the performance and operations of public entities within their portfolio and will rely on their departments for ready access to such information.

Unless stated in the enabling legislation, departments do not currently have an automatic role in the accountability framework for public entity boards. Departments assist at the Ministers' direction.

The Public Administration Amendment (Public Sector Improvement) Bill 2013 currently before Parliament gives statutory recognition to the role of departments. The bill proposes that a department head is responsible for advising the Minister on matters relating to a public entity, including the discharge of responsibilities by the entity. The department head is also entrusted with the task of providing guidance to each relevant public entity on matters relating to public administration and governance.

The key to ensuring that each party - the entity, the Minister and the relevant department head is able to discharge their particular statutory responsibilities is to put in place workable governance arrangements that are understood and accepted by all.

Internal governance

The principal internal governance concern identified in the Report is the relationship between a public entity board and its CEO. An effective board-CEO relationship is essential for the operational governance of an entity. Separation between the roles of the CEO and the board assists the effective governance of boards. Insufficient accountability dilutes responsibility and poses a risk to good governance.

The Report highlights a number of accountability mechanisms which may regulate the relationship between the board and the CEO, and discusses ways in which conflicts of interest may be avoided.

Board Design

The composition of a board is crucial to its ability to govern effectively. The board member appointment process is a key area of governance risk.

The particular functions of an entity should determine the design of its board. Generally, a board should have a combination of generalist skills and skills specific to the sector in which the entity operates. An entity's enabling legislation may specify that the board must include members with particular skills and expertise.

The Report notes that it is desirable for the Chair of the board to be involved in the appointment process, as the Chair can assist in identifying the skills and experience required, and the mix of personalities most likely to make for a cohesive board. .

The Report also identifies the size of the board as a critical aspect of good governance. Large boards can be inefficient and unwieldy.. But on the other hand, a board's ability to effectively govern could be impaired if it is too small or is operating at a reduced capacity due to delays in vacancies being filled. The Report recommends that boards with more than nine members should be avoided unless the circumstances require a higher number of appointments.

Drawing from many years of practical experience, the VGSO's experts in corporate governance can assist you in establishing and implementing governance processes and support you to conduct the business of government consistently with public sector governance legislation. If you are in the Victorian Government and seek advice on corporate governance issues, please contact:

Udara Jayasinghe
Principal Solicitor
t 9947 1445
udara.jayasinghe@vgso.vic.gov.au

Carolyn Doyle
Principal Solicitor
t 9947 1403
carolyn.doyle@vgso.vic.gov.au