Why Governance Needs Policies, Systems and Support by Adrian Jolliffe
Corporate governance is a set of rules that constructs barriers against vested interest and mechanisms to head off the worst acts of deception and corruption. However, even the most eloquent rules are meaningless unless you also have a culture and structure that supports transparency. This is particularly important in government.
Culture and Structure
In my experience of working as a public financial management consultant in mainly developing countries, governance in publicly owned enterprises fails to gain traction for two main reasons: firstly, the political establishment usually dislikes transparency (i.e. the culture is wrong) and, secondly, the framework that could support improved governance is poorly drafted or implemented (i.e. there is no supporting structure).
Cultures can be changed but that requires political will and getting the right people into positions of power is beyond my expertise. Getting the structures right is a far easier matter and indeed, a bullet- proof system in many ways eliminates the damage that corrupt cultures can inflict.
There are three main areas where best-practice frameworks can work to the benefit of publicly owned organizations, not only commercial or social enterprises, but also ministries, their agencies and other public bodies. These areas are policy, processes and support.
The theory of good corporate governance is based around the principle of independent and objective oversight by an experienced and competent board of directors. This board is ideally supported by specialist committees comprised of directors and outside experts. For example, the audit committee is a staple of good corporate governance in developed economies.
For the sake of good governance, governments are urged to appoint a single centralized ‘ownership entity’ to represent the public interest in state-owned enterprises without government interfering in their day-to-day running. An ‘ownership policy’ should be drafted to set out the boundaries of state involvement. Such a document can reassure potential outside investors that their control over an investee company will not suddenly be usurped by government diktat.
Thus, proper governance has the potential to stimulate investment-led growth. Yet many governments in developing countries have chosen not to trust in the integrity of its processes. They have paid lip service to its importance while at the same time strangling it by making politically motivated appointments to key board positions and suppressing transparent disclosure.
The best governance frameworks are capable of maintaining their fundamental shape and purpose while adapting to local legal structures or cultural practices. In other words, they are flexible enough for governments to work with them, not suppress them for fear of losing control.
PFM Systems / Processes
A key principle of good governance, as has already been mentioned, is transparency. Potential investors, but also taxpayers and other interested parties, have a right to know how effectively public money is being used. To this end, high quality financial management information systems should be made operational as the sine qua non of good financial reporting and disclosure. Financial management, reporting and audit should all be based on international quality standards. These days, the capacity of systems to process data and produce key information in arresting graphical formats is at an unprecedented level. There is no excuse, therefore, not to be transparent and by now the most progressive countries in the world expect nothing less than full disclosure.
To assist in the transmission of vital information about publicly owned entities, key publications covering any aspect of their activities can be made freely available on transparency portals. These are simple but effective websites designed to make searching for and finding documents as easy as possible for the general public.
In my experience, the technical components of governance implementations often overlap, at least they should do, with change management initiatives. There is often a whole change of culture to usher in and it must be recognized that this will be a long, and sometimes bumpy, journey.
New boards of directors are frequently in need of instruction about how to act according to best practice. Even if some board members are experienced in the ways of good corporate governance, effective induction programs for new recruits are nevertheless required. You may be asking the directors to sign up to a code of practice that is at odds with the prevailing culture and it should be assumed that the transition to this new role may not be easy for them.
Directors also have to understand that when it comes to risk management, ethical standards and, of course, operational performance, the buck stops with them. For that reason they need to be empowered with sufficient legal authority and the tools to direct the operation. Meetings should be formal occasions for holding senior managers to account through their reports directly to the main board or the relevant committees.
Ideally, a board charter should be drawn up to formalize the role, activities and required composition of the board. It should also define its relationship with the ownership entity and public bodies such as Parliament, as well as the regulator, senior management, employees, auditors and other stakeholders. The board should also be helped to develop a corporate strategic plan setting out the key corporate goals and objectives, consistent with ownership entity’s vision for the entity.
Good governance underpins healthy economies and successful democracy. As the world starts transitioning to a post-pandemic reality now is the time for the donors who will be funding this recovery to ensure that the right people with the right systems are in place. Good governance can be achieved, it just requires political power brokers to realize that it is not their enemy. Used in the way it was intended, governance can shine a light on successful economic administration as well as deliver better performance. Let the professional cadres play a bigger role in stimulating environmentally conscious economic growth for the benefit of all.
Adrian Jolliffe is an independent public financial management (PFM) consultant with 25 years of experience in working with developing countries to implement PFM reform projects at both the national and sub-national level.