© 2012 deloitte touche tohmatsu apac corporate governance: its applicability to the public sector...

© 2012 Deloitte Touche Tohmatsu

APACCorporate Governance: Its Applicability to the Public Sector

August 2012*The Eastern Cape town of Butterworth, where the Mquma Council does not collect garbage and can't pay for its water to be purified

©2012 Deloitte LLP. All rights reserved.

What is Corporate Governance?

Why is it important for companies to implement good governance

The areas of King III

Governance requirements in the Public Sector

The differences between governance in the public and private sectors

The inter-relationship between the Board and Management in implementing good governance

Conclusion


Definition – Corporate Governance“The system by which corporations are directed and controlled”

“Corporate governance is all those structures, systems, processes, procedures, and controls within an organisation, at both board of directors level and within the management structures of the organisation, that are designed to ensure that this organisation achieves its business objectives. That it does so within sensible risk management parameters; and that it does so efficiently, effectively, ethically and equitably”

“Corporate governance is concerned with holding the balance between economic goals and between individual and communal goals…the aim is to

align as nearly as possible the interests of individuals, corporations and society.”

Sir Adrian CadburyCorporate Governance Overview, 1999

[World Bank Report]


Corporate failures led to questioning:

Which has resulted in:

• Increasing transparency and accountability

• Demands of “corporate citizenship”

• Expectations of protection and growth of shareholder value

These issues are true of the public sector today!

Effectiveness of boards Accountability of directors

Directors’ remuneration White collar crime

Risk assessment and management processes Financial reporting

Effectiveness of audits

Why Focus on Corporate Governance?


History of Corporate Governance

Collapse of the Maxwell publishing empire in the late 1980s - direct catalyst for the publication of the Cadbury Report on Corporate Governance in the UK in 1992

Corporate Governance in South was first institutionalised 1994 - the first King Report on Governance

SA Constitution promulgated 1996 – protection of Human Rights and rights of Citizens

The collapse of Enron and WorldCom in 2002 precipitated the enactment of the Sarbanes-Oxley Act (SOX) in the US later that year

King III published 2002 placing South Africa at the forefront of countries regulating in favour of a superior governance standards

Protocol on Corporate Governance in the Public Sector released 2002

PFMA, MFMA and Treasury Regulations included governance principles

King III was released was released by the Institute of Directors in September 2009, and became effective for Companies from March 2010

JSE listing requirements require compliance with King III

Companies Act, 2008 released 1 May 2011


Objectives – Corporate Governance

An Inclusive approach:

• Good business/ organisational management

• Good performance/delivery

• Good relations with shareholders

• Good consideration for staff

• Good relations with trading partners

• Good social and environmental practices

• Good compliance with laws & regulations


Corporate Governance Pillars

Primary characteristics to be embedded

Discipline – universally accepted behaviourTransparency – candid, accurate, timely informationIndependence – no board/committee conflicts (of interest)Accountability – by law/statute to companyResponsibility – to relevant stakeholdersFairness – current & future interests/minoritiesSocial responsibility – not discriminatory or exploitive

environmentally and personally


Corporate Governance

Other essential elements:

• STRUCTURE

Beyond structure, towards:

• PROCESS

….


Evolution of Corporate Governance

From : Structures, … Basics and Appearances

To : Processes and Procedures … Effectiveness and Value

To : Ethics, Values, Culture and Corporate Integrity


So What is Corporate Governance?

Corporate Governance is essentially about:

• Best business practice• Enhancing organisational performance and

wellbeing• Adding shareholder and stakeholder value

These principles can be and are applied in the public sector!


Corporate Governance Framework

Governance

Assurance

Str

ateg

y P

erform

ance &

Re

po

rting

Risk aligned, integrated, efficient, effective, sustainable

Administration Operating Framework

Risk management

Control frameworkProgram management Financial Operational IT infrastructure

Legal & regulatory compliance IT applications & data management

Framework

Strategic risk Financial risks

Reputational risk

Technology / Data risk Project risk

Regulatory / Legal risks Tax riskFraud risk

Tools Culture ReportingMonitoring

Charters

Operating model

Delegated Authority

CommitteesPolicies

Structure / composition Ethics / Conduct Reporting

Response

Risk mitigation strategies

Council & Oversight Mayoral Committee &monitoring

Monitoring & Evaluation


King III requires corporate institutions to ‘apply or explain’ – Code of governance

principles for corporate institutions (not only companies)

King II provided for ‘comply or explain’

King III does not follow the Sarbanes-Oxley approach of ‘comply or else’

Directors need to apply the best practice principles, or explain to shareholders

why they opted not to

‘Must’ and ‘Should’

Result: Every decision counts!

Liability in terms of Companies Act

OR

Explain decision to shareholders

Shareholder/stakeholder activism

King III - Compliance with Corporate Governance Principles


• Applies to all entities regardless of the manner and form of incorporation or establishment

and whether in the public, private sectors or non-profit sectors.

• Drafted so that every entity can apply the principles and, in doing so, achieve good

governance.

King III provides guidance to all corporate entities on various governance related aspects,

including different chapters on:

Ethical leadership and corporate citizenship (3 Principles)

Boards and directors (27)

Audit committees (10)

The governance of risk (10)

The governance of information technology (IT) (7)

Compliance with laws, rules, codes and standards (4)

Internal audit (5)

Governing stakeholder relationships (6)

Integrated reporting and disclosure (3)

King III - Overview of Chapters


King III emphasises sustainability

Natural Capital: Environmental sustainability (resource

management with an eye on future needs)

Social Capital: Social responsibility (ensuring a positive impact

on the community within which the company operates)

Human Capital: Respect for human rights

Financial Capital: Economic Performance

Profit , people and planet

King III - Key Focus Area


King III - Key Focus Areas

Effective management of stakeholder relationships (including alternative dispute resolution)

Business sustainability

Integration of strategy, sustainability and governance

Strategy, risks, performance and sustainability have

become intrinsically linked ... governance

Hence ... Integrated reporting and disclosure


King III - Ethical Leadership and Corporate Citizenship

• The Board should provide effective leadership based on an ethical foundation.Good corporate governance is essentially about effective, responsible leadership. Responsible leadership is characterised by the ethical values of responsibility, accountability, fairness and transparency.

• The board should ensure that the company is and is seen to be a responsible corporate citizen.Responsibility to also ensure performance is within the triple context in which the organization operates: economic, social and environmental.

• The board should ensure that the company’s ethics are managed effectively.Building and sustaining an ethical corporate culture requires ethical leadership. An ethical leader is a role model for the company’s stakeholders by making ethics explicit, legitimising ethics discourse, encouraging ethical conduct in others, and holding others accountable for the ethics of their conduct.


King III – The Board

Board is the focal point and custodian of good governance

27 principles relating to Boards and Directors

11 of these principles cross reference to other Chapters

Sound ethics, good corporate citizen, effective independent audit

committee, governance of risk, incl IT risk and governance, compliance

with laws, codes, etc., effective risk based internal audit, stakeholder

relations and management, integrity of integrated reporting,

effectiveness of internal controls

Independent non-executive chairman ... Not the CEO

CEO appointment and delegation of authority


King III - Boards and Directors

Composition of the board (execs, non-execs, independent non-

execs)

Minimum 2 execs

Majority non-execs ... Majority independent

Board appointment process formalised ... Nominations committee

Director orientation and induction, ongoing development and

learning

Assisted by competent company secretary

Mandatory for public and state owned companies ... Companies Act

Board, committees and director performance assessment


Accountability Structures

“Corporate governance is all those structures, systems, processes, procedures, and controls within an organisation, at both oversight/monitoring level and within the management structures of the organisation, that are designed to ensure that this organisation achieves its business objectives. That it does so within sensible risk management parameters; and that it does so efficiently, effectively, ethically and equitably.”

Oversight accountability

Direction, leadership, guidance, independence, objectivity, external experience, policy, strategy, review, monitor, oversee

Management accountability

Execute, do, deliver, manage, evaluate, implement, run operations, performance, output,Results

Practical Realities and Challenges

• Role of Board of Directors• Role of Executive Management• Role of Chairman of the Board• Role of Chief Executive Officer


The concept of Board oversight is and can be applied in the Public Sector

• National Government - Parliament (legislature), Cabinet (executive arm) and National Departments.

• Provincial Government – Provincial Legislatures (law making), Premier and Provincial Cabinet (executive) and Provincial Departments.

• Local Government – Council (legislature), Mayoral Committee (executive), Administration.

• Legislative Arm – key responsibilities are make laws, exercise oversight and ensure the involvement of the citizens in legislative processes.Whilst incorporating accountability, transparency, and representivity.

• Executive Arm – key responsibilities are enforcing laws made by legislature, implementation of policies, preparing budgets, responsible for all executive functions.

State owned Companies/Entities – most aligned to private sector governance models.

©2009 Deloitte LLP. All rights reserved.21

What does “separation of powers” mean?

• The Legislative, Executive and Judicial branches are equal because they derive their powers from the same common sovereign through the Constitution.

• The 3 branches are coordinate because they cannot simply ignore the acts done by the other branches as nugatory and not binding.

• “Checks and Balances” which are created by the separation of powers can be explained as follows:• The terms “checks” refers to the ability, right and responsibility of each

branch to monitor the activation of the other. • “Balances” refers to the ability of each branch to use Constitutional authority

to limit or restrain the power of the others.• Our Constitution establishes 3 independent and co-equal branches (Legislature,

Executive and Judicial) balancing each others power and authority.

Legislative branch Executive branch Judicial branch

CONSTITUTION Supreme law of RSA


Portfolio Committees and the role of the Public Accounts Committee

The Standing Committee on Public Accounts (SCOPA) fulfils the responsibility of reviewing the audit reports of the Auditor General. This Committee plays an important and specialised role of being the protector of public monies. In fulfilling this role the Committee focuses on the following:

• Issues raised in the General Report of the Auditor-General on Audit outcomes;• Issues of financial probity as highlighted in the audit report or disclosed in the

management report or notes to the financial statements;• Compliance with the PFMA, Treasury Regulations, the Audit Committee and the

management report of the accounting officer;• Interrogation and evaluation of instances of over-expenditure and instances of

unauthorised expenditure;• Interrogation of instances relating to irregular, fruitless and wasteful expenditure;• The functioning of risk management systems; and• Corporate governance of departments, public entities, and constitutional institutions.


King III - Audit Committee

All companies should appoint an effective audit committee, comprising at

least 3 independent, non-executive, suitable skilled and experienced

directors

Public Companies and State Owned Companies: appointed by shareholders (in

terms of Companies Act) ... Nominations committee

All other companies: Board may appoint, not regulated in terms of the Companies

Act

Clearly defined role and functions of the audit committee, as per Companies Act

Recommend external auditor and verify independence

Determine the terms of reference and fee of the external auditor

Ensure appointment of external auditor complies with relevant legislation

Differentiate between audit and non-audit services and pre-approve any agreement for non-audit

services

Report in AFS as prescribed (its function, independence of auditor, comment on AFS, accounting

practices and internal financial controls)

Deal with internal and external complaints


King III - Audit Committee

Other functions as per King Report

Committee should be responsible for

Financial risks and reporting

Review of internal financial controls

Fraud risks and IT risks as it relates to financial reporting

Combined assurance model – management, internal assurance providers and

external assurance providers

Oversee integrated reporting (both financial and sustainability reporting)

Satisfied re expertise, resources and experience of finance function

Oversee internal audit

Integral to risk management process

Oversee external audit process

Report to Board and shareholders on discharging its duties


Governance in the Public Sector – Audit Committee

• must consist of at least three persons of whom, in the case of a department-

(i) one must be from outside the public service;

(ii)the majority may not be persons in the employ of the department, except with the approval of the relevant treasury; and

(iii) the chairperson may not be in the employ of the department;

• The AC must meet at least twice a year.

•A system of internal audit under the control and direction of an audit committee, complying with and operating in accordance with regulations prescribed in terms of sections 76 and 77 .

•Internal audit should report at the audit committee meetings, and have unrestricted access to the chairperson of the audit committee.


King III - Governance of Risk

Risk management intrinsically linked to company’s strategy, performance

and sustainability ... Board responsible for governance of risk

The Board: consider the risk policy and plan determination of the company’s risk appetite and risk tolerance ensure risk assessments performed monitor the whole risk management process receive assurance (combined and the three lines of defence) regarding the

effectiveness of the risk management process Management:

design, implementation and effectiveness of risk management continual risk monitoring

The Board may assign its responsibility for risk management to the risk

committee, or audit committee, but consider carefully.


Governance of Risk in the Public Sector

The Accounting Officer must ensure that the institution has and maintains:

• Effective, efficient and transparent systems of financial and risk management and internal control;

• Guidelines from Treasury have been issued!

• The Corporate plan must cover 3 years and must include (amongst others) a risk management plan.

• The accounting officer must ensure that a risk assessment is conducted regularly to identify emerging risks of the institution. A risk management strategy, which must include a fraud prevention plan, must be used to direct internal audit effort and priority, and to determine the skills required of managers and staff to improve controls and to manage these risks. The strategy must be clearly communicated to all officials to ensure that the risk management strategy is incorporated into the language and culture of the institution.


King III - IT governance

Board to ensure: proper IT governance

proper alignment of IT with the strategy, performance and sustainability

objectives of the company

responsibility for implementation of IT governance framework, management of

operational IT risk, including security, delegated to management

Information assets managed effectively, monitor and evaluate significant

investments and expenditure

IT risks an integral part of company’s risk management

The risk committee may be assigned responsibility to oversee the

management of IT risk

The audit committee should consider IT as it relates to financial risk and

reporting


King III - Risk based internal audit

Board should ensure an effective risk based internal audit Strategically positioned within the company to understand the strategy Internal auditor must take account of the company’s strategy Identify risks and opportunities relating to the strategy, assess controls Inclusive approach – all risks and opportunities, all controls to achieve

strategy

Audit committee to oversee internal audit As an internal assurance provider internal audit should form an integral

part of the combined assurance model Internal audit to provide written assessment of internal financial controls to

the audit committee

Internal audit to provide written assessment of effectiveness of

internal controls and risk management to the Board


Governance in the Public Sector

PFMAA system of internal audit under the control and direction of an audit committee, complying with and operating in accordance with regulations prescribed in terms of sections 76 and 77.

Treasury Regulations• All Public Entities to which regulations apply to have an internal audit function.• Risk management and fraud prevention plans to guide internal audit effort and priority.• Purpose, responsibility and authority of internal audit to be defined in a charter that is

aligned to the Institute of Internal Auditors (IIA) definition of internal audit.• Internal audit to be conducted according to the IIA Standards.• IA must in consultation with the Audit Committee prepare a three year rolling plan and an

annual plan for internal audit coverage.• IA to be independent, report to accounting authority and audit committee, unlimited access

to information.• IA must co-ordinate with other internal and external providers of assurance to ensure

proper coverage and to minimise duplication of effort.


King III - Compliance with laws, rules, codes and standards

Board to ensure company complies with applicable laws, and considers

adherence to codes, rules and standards Board/directors to have working understanding of impact of laws, rules,

codes and standards

Compliance risk an integral part of risk management

Management to implement effective compliance framework and processes


Ethics and compliance programs

2

Foundational elements of an “effective” program

Management and board

Corporate ethics and compliance program

Board oversight and management responsibility

Written standards and procedures

Risk assessments

Communication and training

Monitoring and auditing

Laws, rules, regulations, conventions

Incident reporting process

Corrective actions and discipline

Source: United States Sentencing Commission


Board committees

Customary: Audit committee oversight of compliance

• Compliance & Ethics

• Risk management and legal commonly included in audit committee charters

Emerging: Compliance oversight separated from audit committee

• Audit committee workloads

• Emergence of risk or governance or compliance committees of the board

Compliance program oversight

Role of the board

7

Management

Two models of compliance leadership

• Dedicated senior executive

• “Dual-Hat” executive

• No one-size-fits-all solution

• Compliance Officer

• Key considerations: authority, stature, character, integrity, technical excellence

Board of directors

• Tone at the top

• Independence

• Oversight

• Advice and guidance

• “Last line of defense” for the company-guardian of shareholder value


King III - Governing stakeholder relationships

Stakeholder perceptions affect the company’s reputation and performance

Board should delegate to management to proactively manage stakeholder

relations

Strive to achieve balance between the interest of various stakeholders, the

best interest of the company

Board should ensure disputes are resolved effectively, efficiently and

expeditiously

Alternative dispute resolution – conciliation, mediation, negotiation and

arbitration

ADR clauses in contracts



Constitution• Rights of Citizens to participate

PFMA and MFMA• Public participation in terms of IDP, Budget, Annual Reports and other

communication.

Government has the responsibility to allow the public to participate through various mechanisms:• Various issues on which it must inform the community, • Certain times it must consult the community, and• In others it must involve the community.

Public Participation and Engagement


King III - Integrated reporting and disclosure

Allows all stakeholders to assess the economic value of the company

Integration of the company’s financial reporting with sustainability reporting

and disclosure

The Board should ensure the integrity of the company’s integrated report

The Board may delegate oversight of the integrated report to the audit

committee

The audit committee should oversee the provision of independent

assurance

The audit committee should assist the Board by reviewing the integrated

reporting and disclosure to ensure that it does not contradict financial

reporting



PFMA and MFMA• Requirements regarding Annual Reports and submission deadlines

• Public sector operates with a social mandate• Annual Reports include achievement of financial and non-financial

information• Performance reports

• The conversations on whether an Integrated Report is required are starting to happen.

Annual Reports


Corporate Governance issues in the Public Sector – What’s in the news

Auditor-General warns about dire situation in SA

ANC to pursue objective of professional public service

'The people voted into power are slow in taking responsibility for what they have been voted in for'

Auditor-General Terence Nombembe has criticised the government and public servants for a weakening of the pillars of governance protecting South Africa’s democracy, Business Day reported on Monday.He also expressed concern about the vulnerability of his office because of growing lack of support from the government to his warning about this deterioration.Nombembe said the management supply chains, service delivery, the security of government information and accuracy of government reports were deteriorating.

“Things are serious, and they are even more serious than we thought they are,” he said at the opening of Deloitte’s new building in Pretoria on Thursday.“They are more serious because the people that are employed by government to do work are least prepared and equipped to do it. The situation is dire.“We are equally vulnerable as those countries where the auditor-general has limited scope to do its work because what we are saying is not taken seriously, not by the government, not by ourselves and those who need to do something about it.”

He said his office would soon release the audit results for local municipalities, and he expressed his dismay at them.The people voted into power were slow in taking responsibility for what they had been voted in for, he said.“The accountability for the results is not taken as serious as it should be. Bad results are regarded as a norm and when people get a disclaimer or qualified reports, little happens to them to show that this is unacceptable. This is the culture we need to be concerned about,” he said.

07-May-2012 | Sapa, Business Day

ANC WELCOMES THE AUDITOR - GENERAL'S REPORT

The African National Congress welcomes the 2010-2011 local government report released by the Auditor-General, Terence Nombembe, on the 23rd July 2012. This report is important for the ANC and we remain committed in ensuring that all municipal managers and senior management in municipalities are appropriately qualified.

We note with disappointment that out of 283 municipalities only 13 manage to get clean audits. This is indeed a matter of serious concern in the ANC. In this regard the ANC will strengthen its existing capacity to monitor government performance through the introduction of early warning mechanism. We will also as we will indicate below, deal distinctively with recurrent problems as identified in the AG's report.

In line with the intervention measures introduced by government to reverse the negative performance by municipalities, the ANC will pursue the objective of a professional public service that is accountable and responsive to public needs and the need to accelerate service delivery. We also call on government to use existing government prescripts to ensure that compliance and enforcement of accountability measures are strengthen.

We also call on government to accelerate the solution of non- viable municipalities through a funding model that will afford all municipalities the requisite capacity.

As the ANC, we firstly extend our congratulations to the Ehlanzeni, Steve Tshwete, Victor Khanye and the Fatakgomo municipalities for being the best performance according to the report. We urge all other municipalities who did not perform well to learn from their counter-parts who did well as contained in the AG's report. The people of South Africa expect nothing but accountability and service delivery.

The ANC will use the forthcoming ANC Lekgotla, to get an analysis of the AG's report and the state of municipalities on this regard.

Statement issued by Jackson Mthembu, ANC National Spokesperson, July 25 2012Politicsweb


Conclusion

• Led to more awareness of the need for and value of good governance

• Challenged directors and Board competency (those charged with oversight)

• Elevated the role of the Compliance Officer and Chief Audit Executive

• Enhanced the Company Secretary role regarding governance custodianship

• Given auditors a serious wake up call regarding quality and independence

“The Rules of the Game have Changed”

© 2012 deloitte touche tohmatsu apac corporate governance: its applicability to the public sector...

Documents

governance requirements

controlledcorporate

equitablycorporate governance

governance principles

good governance conclusion

king report

public sectoraugust

management structures