Part 2: How to get governance right to strengthen accountability

Reflections from our audits: Governance and accountability.

There are many different definitions of, and principles for, good governance. There is no single right or wrong set of guidance or rules. Many factors need to come together for a governing body to perform its role effectively.

Our governance-focused work has covered a broad range of entities that manage important, high-value projects and programmes for New Zealanders.

We examined the governance arrangements for a business transformation programme in the Inland Revenue Department (Inland Revenue); three projects to rebuild essential facilities in Christchurch after the Canterbury earthquakes; and six entities responsible for ensuring that New Zealanders have access to our arts, culture, and heritage. Appendix 1 lists the reports we published under this theme and other relevant reports.

This Part expands on the eight elements we consider are essential for governance to be effective. Although the elements are important in their own right, those involved in public administration need to consider how they apply to the particular context of the entity or project that they are involved in. This applies to members of governing bodies and also to chief executives and senior managers who report to, and work with, governing bodies.

The elements apply to organisational (or corporate) governance and programme or project governance.

Appendix 2 sets out some links to good practice guides, useful toolkits, and other governance-related resources.

Element 1: Set a clear purpose and stay focused on it

Governors of an organisation should set out a clear strategic purpose and a clear direction for how to achieve that purpose. Governors' strategic thinking and planning to prepare a coherent strategy is fundamental to effective governance. It is one of their most important roles.

Governors need to contribute to, and challenge, the strategic planning process, based on an understanding of stakeholder expectations and the wider context that their organisations operate in. Strategic direction-setting includes setting realistic medium- and long-term outcomes and short-term priorities, and expenditure/investment choices and budgets.

Once established, the governing body needs a shared and strong understanding of the strategy and use that understanding to inform its decisions. The governing body must also consider how it maintains oversight of progress against the strategy and any significant deviations from it, emerging risks, and the delivery of planned benefits from any major change programmes. The governing body may need to review and update the strategy to adapt to changing circumstances.

Governors have told us that it is easy for governing bodies to become too focused on details – to manage rather than govern. It takes discipline to stay focused on strategy and to take a long-term view.

Clarity of purpose is also important at the specific project and programme of work levels. The absence of a consistent explanation of the aims of Whānau Ora contributed to confusion among many of the people we spoke to as part of our audit of that initiative.

Inland Revenue did a good job in setting a clear direction for its business transformation programme. Clearly understood aims generally lead to clear accountability and useful and timely reporting.

Element 2: Have clear roles and responsibilities that separate governance and management

This element is one of two where we found the greatest room for improvement. The roles and responsibilities of each party, including governing board members, shareholders, management, staff, and other parties (such as stakeholders) must be clearly defined. Clear roles and responsibilities make the differing interests transparent and foster effective decision-making. It is important to clearly define roles and responsibilities right at the start of an entity's or project's life, and to revisit them periodically.

A governance charter, or governance statement, can be a useful way to outline the structures, principles, and processes to be followed. However, the art of effective governance is in the execution of what is set out in the charter.

Good governance requires a clear distinction between the role of governance and the role of management. Governance involves ensuring that systems and processes are in place that shape, enable, and oversee the management of an organisation. Management is concerned with carrying out the day-to-day operations of the organisation. There is a need to guard against the risk of governors becoming involved in operational decisions because it limits their ability to then hold management to account.

We have noted a recent increase in the liability of governors. This could have the unintended consequence of driving governors deeper into management and operational matters, potentially undermining the work of management.

In practice, the separation between governing bodies and management is often not a black and white split but more of a grey zone – how well that zone operates is a function of trust and confidence based on honesty and open communication.

If there is limited trust and confidence between governors and managers, it is more difficult to build an environment in which an organisation can succeed. With stronger trust and confidence, the grey area can work to everyone's advantage – governors can probe and be "let in" to issues by managers. This can build governors' understanding of the issues and confidence in how management is dealing with them.

Clear roles and responsibilities and a clear separation between governance and management is made challenging by the fact that many project governance groups often include, or are even entirely comprised of, managers. Such groups can operate either outside or alongside the organisational governance structure. This raises questions about the understanding managers are able to bring to an internal governance role and how they are able to reconcile that role with their managerial responsibilities.

When an organisation is facing particularly challenging issues, it can be appropriate for the governing body to become more closely involved in operational matters. A recent example of this was the more hands-on role played by the board and, in particular, the chairman of Te Papa Tongarewa (the Museum of New Zealand) during the transition phase between chief executives. The chairman became more involved in operational decisions, providing visible leadership to the organisation and being the spokesperson for media inquiries.

An important aspect of the distinction between governance and management is the allocation and delegation of decision-making rights. Governance documents, such as charters and terms of reference for the governing body and any sub-committees, provide a vital framework for clarifying and delegating respective roles and responsibilities. Formal instruments of delegation are an important part of governance documents.

Our audit of governance in the arts, culture, and heritage sector found that the boards of six entities we looked at were clear about the difference between the roles and responsibilities of the board and those of management. These roles were well set out in the board charters and policies of the entities.

In our audit of the Auckland Manukau Eastern Transport Initiative (AMETI) programme, we found that a change in the composition of the Programme Control Group led to the same person being the chairperson of that group as well as the programme sponsor, manager of the division responsible for delivering the programme, and line manager of the programme director.

This person was also responsible for chairing the AMETI advisory group and the main stakeholder forum. In our view, this placed too much responsibility in the hands of one person and reduced the reliance that the Board of Auckland Transport could place on the Programme Control Group for independent guidance and advice.

A strength in Inland Revenue's governance of the business transformation programme was that, despite a complex governance structure, the roles of the many separate groups that had governance roles were clear; each of these groups had clear terms of reference and clearly defined accountabilities.

In our audit of the three Christchurch rebuild projects, we found that the governance arrangements for the bus interchange had been well thought out. There were clear roles for each part of the governance structure, and people understood these roles.

However, the governance arrangements for the new central library project were initially not well defined, with no clear separation of governance and management. During our audit, Christchurch City Council made substantive changes to its governance arrangements for this project and provided more clarity about the project's governance.

The art of governance against the discipline of project management

Good governance is necessary to oversee major programmes and projects so that they deliver their intended benefits, at the intended price, at the intended time. We found examples of governance and project management being merged and confused. This is worrying.

Independent quality assurance is important in large projects to provide assurance to the project manager and those charged with governance that a project is being run successfully. In some projects that we looked at, governance and project management were being confused. As noted above, the new central library project in Christchurch initially did not have a clear separation of governance and management. The Project Control Group was acting at a management level and did not show the level of oversight we expect for a governance group.

We found similar issues in the AMETI programme – the purpose of the Programme Control Group was not well understood, and the chairperson had both governance and project management responsibilities.

Many projects have long lives. Inland Revenue's business transformation programme is expected to take a further 10 years to be fully implemented. The Auckland Manukau Eastern Transport Initiative (AMETI) has a planned delivery timescale to 2028. Therefore, it is important that the people responsible now for governing and managing this programme clearly understand its purpose and continuing strategic fit with other regional plans for Auckland.

Projects will often be broken down into manageable tasks. Although it is possible to separate tasks at a working level, project governors need to keep oversight of the project as a whole, while the organisational-level governance (often a board) needs to provide oversight of projects as well as the entity's "business as usual" activities.

Element 3: Lead by setting a constructive tone

The leadership role of governors is to set a suitable tone from the top that shapes the culture and demonstrates the desired values and ethics of the organisation. This is achieved through establishing and approving policies, making decisions, and the approach and behaviour the board takes to its work, both with management and external stakeholders.

In our audit in the arts, culture, and heritage sector, we identified four factors that contribute to good leadership and culture:

  • a clear distinction between governance and management;
  • the chairperson's relationship with other governors and management;
  • an effective relationship between governance and management; and
  • the governors' ability to challenge the management team.

The chairperson is the cornerstone of effective governance arrangements and the governing body working together well. The governing body appoints the chief executive. The chairperson and chief executive need to develop and maintain a relationship based on mutual trust and respect. However, in this relationship, the chairperson still needs to be able to challenge the management team.

The quality of this relationship will determine how easy it is for the governing body to ask questions openly, freely challenge management, and get the answers it needs. A strong relationship between the chairperson and chief executive is critical in supporting an effective overall relationship between governors and managers.

As well as providing the basis for governance to be effective, strong leadership is also necessary to address difficult situations when they arise.

A positive aspect of the acute services building project in Christchurch was the strong leadership provided by the Hospital Redevelopment Partnership Group. This group's leadership kept the project moving despite the difficulties in other parts of the governance arrangements.

Asking powerful questions

The governing body's questioning of management needs to be constructive and testing. Effective governors use their combined experience and skills to query information, to probe, and to challenge so they can make informed decisions. Governing bodies need to keep asking questions until they understand what they are being asked to approve. Sometimes decisions need to be deferred until further information is supplied.

It helps if governors ask powerful questions. One governor shared these questions with us and they seem to be a useful guide for a governing body to have the right conversation with management:

What are the entity's three top risks and how did you arrive at those risks?

Who are our customers?

Have we carried out a project of this size before? If so, what did we learn?

Do we have the right team in place to carry out this project and realise the benefits?

What are the three top risks in this project?

Why should the entity carry out this project and how does it link to our strategic plan?

How clear are the accountabilities and ownership for this initiative?

How could this service be delivered differently?

Do we understand our project portfolio? What are the main links and interdependencies?

What are our most important performance indicators?

How will we know whether we are successful?

Element 4: Involve the right people

Governance is characterised by a series of personal interactions between people operating within structures and policies. Good governance needs good people.

For governance to be effective, it is critical that the right people are involved. The level of trust between people – between governors, management, and stakeholders – affects the effectiveness of the governance arrangements.

Having the right mix of people and skills on a governing body should help it to be more effective. An effective board will have members who bring multiple perspectives, who debate issues robustly, and who then speak with unity of voice and message about the decisions made.

Governing bodies need to invest in capability so that the right mix of skills are applied to ensure that organisations deliver value and manage risks effectively.

Having a mix of wise heads and newer governors who can learn from them is important, as is having a mix of "big picture" thinkers and people who bring much-needed specialist knowledge.

The wise heads, those people with the skills and experience to take a strategic view, identify the issues and risks to focus on, and who know how and when to dive deeply to probe specific opportunities or risks, add huge value to boards.

Demographic changes are resulting in New Zealand's population becoming older and more ethnically diverse. There is a need for governing bodies to change their membership to reflect this changing demographic. Diverse backgrounds and ways of thinking provide a depth of perspective to the role of governance.

In our 2014 report, Maintaining a future focus in governing Crown-owned companies, some interviewees told us that it was a challenge to achieve the right mix of skills while maintaining a positive team dynamic at the board table.

Identifying gaps in the board's skill set and filling vacancies accordingly can be very beneficial. Some governing bodies have a mix of members – some appointed by the Government and others elected by the public. Some governing bodies compensate for skills gaps by bringing the relevant skills onto their audit committees through the appointment of independent members.

Co-governance arrangements in the environment sector illustrate well the challenges with getting the right people in governance roles. Experienced people are in short supply and those who are experienced are busy. Another feature of the governance of these arrangements is that some iwi members might not be experienced in governance matters but bring a depth of connection, perspective, and cultural knowledge that others might not have.

For longer term projects, such as AMETI and Inland Revenue's business transformation project, governance arrangements might need to change over time. Change can be necessary because individuals, both governors and managers, might change during the life of a project, as might the nature and risks of the project. Adapting the governance arrangements will help to ensure that the right skills are brought to bear as the project evolves.

Induction and training

How entities invest in and develop new governors is important. It is vital that new people receive a formal induction into the organisation they will be governing. This is an important first step to becoming an effective member of that organisation's governing body: that is, developing an understanding of how the organisation is meant to function, and its business and goals.

In our work in the arts, culture, and heritage sector, we identified that the training and professional development available to board members could be improved. The governance induction workshops for new board members run by the Ministry for Culture and Heritage could be extended to provide ongoing programmes for boards and senior managers in that sector.

Spending time on a board will equip members with the knowledge and experience required to contribute to that organisation's governance. The ongoing interactions and discussions with managers and other board members provide valuable on-the-job training.

From our work on audit committees, we know that committee members value the opportunity to share and discuss experiences in safe, collegial environments. We convene a regular forum for chairpersons of audit committees to have relatively informal discussions about matters of mutual interest.

Depending on a person's background, there can also be a need for formal training for governors on topics such as changes to financial reporting standards and to legislation (for example, the Health and Safety at Work Act 2015).

Board appointments process

Many governors and some officials have talked to us about the public sector board appointments process, particularly for appointed governors.

Some governors have expressed the view that they would like more of a voice in identifying new governors who could offer the particular skills and experience that their governing body needs, and then recruit new board members to meet these needs.

It is beyond our mandate to comment on the government appointment process. The State Services Commission, the Treasury, and specific departments have a role to advise Ministers on such matters.

For council-controlled organisations (CCOs), local authorities are required by the Local Government Act 2002 to have an objective and transparent process for appointing CCO governors. In our report on CCOs, we recognised the value of including the chairperson of the CCO board in that process.

Regardless of the approach taken, good governance needs good people. It is important that a board's needs are identified and directors appointed who can meet those needs.

Element 5: Invest in effective relationships built on trust and respect

Effective relationships are critical for good governance. We have already noted that strong relationships between governors and management are essential. These relationships should be based on mutual respect and trust. However, they should not become too cosy.

Strong relationships between governors and stakeholders are also important. Effective stakeholder engagement is of particular value in understanding stakeholder views when making important decisions, forming strategies, and identifying sources of funding. Good practice involves preparing formal stakeholder engagement plans or formal relationship protocols with important stakeholders.

In our report looking at the governance and accountability of CCOs, we found that a CCO's success depends largely on an effective relationship between the CCO and its local authority shareholders. Such a relationship goes beyond the statutory requirements and requires ongoing commitment from both parties.

Despite the name "council-controlled", we found that CCOs are most successful when the local authority seeks to influence rather than control the CCO. To work in practice, the relationship needs to be close enough for the local authority to know how the CCO is performing but allow the CCO to operate at arm's length.

In our work on co-governance arrangements in the environmental sector, we noted the importance of taking the time to build and maintain relationships, and of maintaining a shared understanding of different parties' aspirations. The quality of the relationship between the parties to a co-governance arrangement affects its chances of success.

The parties need to invest in their relationships and involve people who value relationships. This means having people who are willing to work together, listen to and learn from each other, and who are willing to try and understand each other's perspectives. Co-governance requires diplomacy, a willingness to compromise, and the ability to persuade and influence without being domineering or disrupting.

Our February 2015 report on education for Māori highlighted the importance of effective relationships between schools and whānau, in which a school's governors, teachers, students, and families work together to improve students' overall performance.

These relationships are more effective when there is clear communication, there is a willingness to be flexible to enable effective participation, and communities feel listened to. This is not easy and requires constant attention.

Element 6: Be clear about accountabilities and transparent about performance against them

Governance practices need to support accountability. Governance structures should include a clear accountability framework that shapes how an organisation's (or project's) financial and operational performance will be monitored and reported. The framework should also cover how the governing body will be accountable for future-focused decisions, such as maintaining and enhancing the capability of the organisation.

Effective governance depends on governing bodies receiving regular reports that provide a clear and objective view of an organisation's (or project's) performance. Governing bodies need to be provided with enough detail to support performance management and decision-making, while avoiding unnecessary details about operational matters.

We found that the three rebuild projects in Christchurch we reviewed would benefit from producing a clearer accountability framework that includes specific and general accountabilities for all levels of these projects.

We also found that accountability to the public worked best when people were told how their input had been used in a project. We saw good public accountability when a range of social and other media were used to keep people up to date about project progress.

We see challenges for local authorities in setting up CCOs because the local authority remains accountable to its community for the CCO's performance. The local authority needs to have in place effective monitoring processes to enable it to discharge its accountability obligations. This requires the local authority to:

  • have structures, systems, information, and capability to promote its interests in the CCO, influence the direction of the CCO, and monitor its performance; and
  • show its community that it is managing the community's financial and operational interests in the CCO in an effective and efficient manner.

Element 7: Manage risks effectively

In our view, risk management is one of the two least mature elements of governance in the public sector. We see few examples of excellence.

Identifying, understanding, and managing risks is a fundamental part of effective governance. As a senior public servant said recently, "good governance keeps the fan clean".

As well as avoiding failures, good governance can ensure that opportunities are not missed. Governing bodies that think strategically and consider their organisation's role in a wide context are more likely to identify and be in a position to take opportunities for better financial or operational performance, or to achieve benefits faster.

Governing bodies have a leading role in establishing an organisation's overall understanding of risk, including the potential effect of its strategic, financial, operational, and reputational risks.

Effective risk management by public entities involves identifying, analysing, mitigating, monitoring, and communicating risks. We expect to see a risk management framework and register that is formally defined, widely understood, and aligned to the organisation‘s strategy, risk appetite, objectives, business plan, and stakeholder expectations.

In our inquiry work, it is often clear, with the benefit of hindsight, that there were warning signs that things were going wrong. The inability of an entity to identify these signs, or to "join the dots" between pieces of information, is often a reason why problems arise. Good governance of risks or threats to an organisation can prevent such failures.

One good example we saw was Inland Revenue's approach to managing risks to its business transformation programme. Strengths of the approach included a strong focus on risk identification and management. The risk management culture appeared mature and a good risk management framework and associated reporting structure were built into the design of the programme's governance.

In managing risks, Inland Revenue's approach included scheduling reviews of governance structures and focusing on balancing executive leadership's time between programme governance and managing the current tax system. We recommended that Inland Revenue keep doing these things during the life of the business transformation programme.

In contrast, for the five governance aspects we looked at in our audit of governance in the arts, culture, and heritage sector, we found that, while entities had formal risk management frameworks, practices were variable. Risk registers tended to focus on operational rather than strategic risks and they had not been reviewed for some time.

Getting the best from audit and risk committees

Effective risk management also involves having clear roles for audit and risk committees.

All organisations need governance arrangements and practices to continuously evolve and to manage risk. Many public sector entities choose to establish a group of advisers to give advice to, and to test and challenge, the governing body and management. Such groups go by many names (such as audit, risk, or assurance committees or advisory groups). They take a range of different approaches, from those that are largely reactive to those that take a forward-thinking, proactive, and more strategic approach.

For example, an audit committee could focus on the evaluation of compliance and financial effectiveness for the purchase of an asset, or it could play a broader and deeper role and focus on the useful life of an asset. Through our work with members of audit and risk committees, we identified principles that help an audit committee add value: independence; clarity of purpose; competence; and open and effective relationships. What makes a committee work best is applying these principles in the context of the entity.

We released a discussion document to start the conversation about how public entities use audit committees. Many members of audit committees told us that there is not necessarily a "best practice" way of solving the issues that audit committees in the public sector face.

This is because solving these issues requires experience, judgement, perspective, and knowledge of the entity's context. Those involved with committees told us that discussions with people in similar situations are helpful, as is knowing how others manage similar issues, risks, and opportunities.

We also consider that discussions between audit committees and their external auditors can be a useful way to highlight issues and bring a different perspective to them.

We have resources about audit committees on our website. The aim is to support discussions between audit committee members so that they can learn from each other about what works well – and what does not.

Element 8: Ensure that you have good information, systems, and controls

Governors are accountable for the decisions they take. Therefore, they need relevant, accurate, and up-to-date information to make good decisions.

Governing bodies also have a role in assessing the design and effectiveness of an organisation's internal systems and controls. These systems and controls are organisational (terms of reference, independence, and separation of duties), operational (planning and budgeting) and about personnel (recruitment, training, and development).

These systems and controls are critical to providing assurance that an organisation's activities are compliant and in line with expectations. The governing body has a role to review them regularly to ensure that they remain fit for purpose.

Our 2012 inquiry into aspects of the board-level governance of the Accident Compensation Corporation (ACC) followed allegations that an ACC claimant had benefited from approaching a member of the ACC board whom she knew. We found no evidence that the approach had affected her claim.

However, we found that the board, at that time, had no formal policy to guide board members on communication with individual claimants when there is a high risk that board members will know claimants, given that most New Zealanders will be a claimant at some time. In early 2014, we noted that ACC had addressed the concerns we had raised.

An "off the shelf" set of policies and controls will not always be enough. Governing bodies need to think about their organisation's particular circumstances.

Our inquiry into Health Benefits Limited (HBL) identified a similar problem; that HBL's board lacked timely and accurate information to inform its decisions. We noted the changes that HBL made to address this problem. A lesson from that inquiry is that governing bodies need good-quality information before making significant decisions and must be confident that they have enough information before making a decision to proceed with a programme.

As well as needing good systems and information to support internal decision-making, good information is also required to keep stakeholders informed of progress and of important decisions that are made.

Today, the public has access to more information and data than ever before. People expect public entities to keep them informed and engaged. Members of the public have a right to know that their taxes and rates are being used appropriately and they deserve answers when things go wrong.

Good information supports public entities' effective engagement with the public.