The economic crisis has called further attention to public entities as governments considered their impact on budgets and financial sector stability. Even where public entity performance is good or equivalent to the private sector, governments should seek better performance by further adjusting governance practices.
Public entity boards are to be made increasingly responsible for the public entity’s performance. The key strategy is to provide them with greater powers and the autonomy to exercise these powers. Much attention should be paid to the composition of the board so that it has the necessary skills to achieve these goals. Attention should be given to the independence of board members, board structures, incentives and performance evaluations. A crucial step in creating these boards should be to shield them from political or politicised intervention or, at a minimum, to properly channel such intervention.
We have seen that those countries that have pursued a best practice model, report a heightened quality of board discourse, more professional boards, and improved public entity performance. Furthermore, better boards seem to protect governments from operational missteps, political fallout and allow them to better gauge and manage the risks involved. Expectations of public entity boards continue to grow and these expectations emanate from governments, the public, the media, financial markets and, in some particular cases, from the European Union.
The most visible manifestation of the expectations of the board is the increase in the workload and time commitment that board members face. Board members, judging by international practices, can now expect to work from 12 to 30 days per year, and non-executive board chairs can work from 40 to 100 days per year.
The increased workload is a reflection of both the number and complexity of issues that the modern board needs to consider. Whereas many “old style boards” limit their work to an examination of the annual budget and financial statements, today’s boards must consider increasingly difficult technical issues including risk management, financial instruments, financial reporting, systems of control and other matters. Furthermore, boards are expected to look to the future and anticipate events. Taken together, this represents a great change that requires better and broader thinking.
It is almost uniform practice for governments to seek to improve performance by emulating private sector practices. This practice has been shown to work in many countries. New Zealand, for example, has gone far in emulating private sector practices. Public entities are instructed by the administration to model their governance as closely to listed company standards as possible.
On the other hand, Norway and other Nordic countries have decided that the best way to emulate private sector practice is to make public entities, where possible, partly private. The evidence suggests that even very modest share listings can significantly alter the quality and nature of governance. Listings force public entities to comply with listing standards, disclosure requirements, securities regulation, and governance codes. Ad hoc political intervention is thus significantly limited. Above all, it provides boards with powers, and forces all decision making to actually go through the board.
A number of countries including Australia, New Zealand, Nordic countries and the United Kingdom have had considerable success with their models. The influence of government is measured, transparent and bounded by clear procedures. Boards have no civil servant or government officials or Members of Parliament. Boards have the needed authorities and operate autonomously. There is little if any government intervention, and very little to distinguish public entities from private sector companies.
The above examples should not be taken to imply that all countries have similar practices or that they are uniformly successful. Governance practices vary dramatically from country to country and there are often visible differences between public entity boards and their private sector counterparts.
Often one points to differences in decision making rights such as, for example, the right of the board to appoint the chief executive officer. This involves the manner in which the government influences the course of the public entities it controls. Under best practices, such influence is informed and considered, takes into account the public entity’s objectives, goes through the proper channels (including the board) and is not driven by political needs. Under less good practice, government interventions may be frequent and considerably less circumspect. Such interventions can take the form of a directive or worse still a minister’s order in response to a government need. Often, such a situation puts boards in an untenable position, torn between their duty of loyalty to the public entity and the need to act on behalf of owners and the state.
The role of the board of directors of public entities is an important yet delicate one and one that should not be taken lightly. Just as government through the Management Efficiency Unit strives to improve the efficiency and effectiveness of the public sector, it should also consider looking at public entity boards and, among other things, carry out performance evaluations to ensure they improve their function.