Corporate governance is the way in which organisations are directed, controlled and led. It defines relationships and the distribution of rights and responsibilities among those who work with, and in, the public body, determines the rules and procedures through which objectives are set, and provides the means of attaining those objectives and monitoring performance. Importantly, it defines where accountability lies throughout the public body.
Corporate governance has been a high-profile topic in recent years, principally because of concern about ensuring control at the top of, and within, organisations. There is a perception that, in certain cases, senior managers appear to have been able to act without restraint and that inadequately designed systems have failed to prevent fraudulent, inefficient or inappropriate behaviour. The results of poor corporate governance cannot be underestimated. The international financial crisis was partially attributed to failures in governance within the Boards of major financial institutions.
Key Developments in the Private Sector
A number of key corporate governance reports in the private sector have contributed to the development of the UK Corporate Governance Code:
Reports that shaped corporate governance in the UK
The UK Corporate Code - impact on the public sector
Although there are elements of the UK Corporate Code which are relevant to Board members of public bodies, it applies primarily to companies listed on the London Stock Exchange.
While there are a number of similarities between the public and private sectors in terms of corporate governance principles, Board members should be aware that it will not always be possible to draw a direct parallel between the two. Whilst public bodies face many similar challenges as private organisations, they cannot be considered to be exactly the same.
Effective strategic engagement between the Scottish Government and the public body is essential in order that they work together as effectively as possible to maintain and improve public services and deliver improved outcomes. There is greater accountability, with control over public services handed in greater measure to those who use them, while Scottish Ministers take strategic policy decisions. The varying size and nature of 'arm's length bodies' and the range of functions they carry out means that there is no one absolute template for how the relationship between Scottish Government Directorates and the public body operates. Further consideration on the relationship between Scottish Government Directorates and public bodies is examined in Guidance Note 3.
Findings from the Financial crisis report - lack of diversity and groupthink
Although the Walker Report specifically related to the collapse of banks and financial institutions its findings had significant ramifications for the Boards of all types of bodies. A key finding of the review was that 'groupthink', attributable in turn to a lack of diversity, had been a major contributory factor to the governance failures of the relevant Boards.
Many subsequent studies have identified that companies with Boards that are apparently more diverse, such as in relation to gender, age and industry background, perform better than those companies with less diverse Boards. The different perspectives that different types of Board members bring mean that they are more likely to be able to constructively challenge proposals. If Board members are too similar to the executives, a Board's decision-making risks being narrow and blinkered.
It is important to understand that a Board made up of people who are 'visibly diverse' will not necessarily be immune to groupthink. Visible diversity is simply an indicator but no guarantee that the Board's members have the diversity of skills, knowledge, experience and perspectives needed to make it effective. Having said that, a lack of diversity on the Boards of Scotland's public bodies, which can be evidenced in relation to factors ranging from gender to BME status, employment sector and income, is an indicator that our Boards are not yet sufficiently diverse.
The impact for Scottish Public Bodies
Scottish Ministers are committed to redressing this imbalance with gender parity being a particular area of focus. Boards themselves should give consideration to establishing a committee to consider matters such as planning for succession and Board performance as this should lead to more diversity at Board level. The aim should be to have 50:50 gender balance by 2020.
Key Developments in the Public Sector
There have been a number of high-profile reports and inquiries in Scotland highlighting inadequacies in the governance of public bodies. In one report, a Parliamentary Committee concluded that the governance arrangements in a public body did not identify or prevent a crisis which it should have done. Although not the primary factor, the Committee believed that the Board failed sufficiently to challenge the Chief Executive over a significant operational development that ultimately failed.
In another report, the Scottish Parliament's Public Audit Committee concluded that, on the evidence received, members of the Board of a public body had acted with probity throughout a very difficult period but could not escape criticism for not being aware of problems of which they should have been aware.
As in the private sector, there have been a number of developments aimed at improving corporate governance in the public sector:
In 1995, the Committee on Standards in Public Life (the Nolan Committee) identified seven principles of conduct underpinning public life and recommended that public bodies should draw up Codes of Conduct incorporating these principles.
Nolan Committee 1995
Public bodies should draw up Codes of Conduct incorporating seven Nolan Principles of:
The then Scottish Executive took the Nolan Committee recommendations one step further with the introduction of the Ethical Standards in Public Life etc. (Scotland) Act 2000 which brought in a statutory Code of Conduct for Board Members of Devolved Public Bodies and set up a Standards Commission for Scotland to oversee the ethical standards framework.
The Scottish Executive also identified nine key principles underpinning public life in Scotland, which incorporated the seven Nolan principles and introduced two further principles, Duty (Public Service) and Respect. These nine principles and their practical implications for Boards and Board members are explored in Guidance Note 5.
Ethical Standards in Public Life etc. (Scotland) Act 2000
Conduct for Board
- Statutory Code of Conduct for Board Members of Devolved Public Bodies;
- Appointment of a Chief Investigating Officer to investigate and report to the Standards Commission for Scotland (the Standards Commission;)
- Standards Commission to oversee ethical standards framework; and
- Seven Nolan Principles plus two further principles of Duty (Public Service) and Respect.
International Framework: Good Governance in the Public Sector
In 2014 the Chartered Institute of Public Finance and Accountancy and the International Federation of Accountants produced an updated International Framework: Good Governance in the Public Sector.
The 2014 Framework defines and describes one interpretation of the principles that should underpin good governance.
Good Governance in the Public Sector
- Behave with integrity, demonstrating strong commitment to ethical values, and respect the rule of law;
- Ensure openness and comprehensive stakeholder engagement;
- Define outcomes in terms of sustainable economic, social and environmental benefits;
- Determine the interventions necessary to optimise the achievement of the intended outcomes;
- Develop the entity's capacity, including the capability of its leadership and the individuals within it;
- Manage risks and performance through robust internal control and strong public financial management; and
- Implement good practices in transparency, reporting and audit to deliver effective accountability.