Parallels in Private and Public Sector Governance
Parallels in Private and Public Sector Governance
Parallels in Private and Public Sector Governance
Centre for International Corporate Governance Research, Victoria University, PO Box 14428, Melbourne,
VIC 8001, Australia
Private sector governance, i.e. governance in major listed companies, has caught much public
attention in recent years due to the collapses of major corporations around the world. The result has
been a plethora of standards for corporate governance in public and private companies. In
comparison, public sector governance has avoided much of the controversies while developing
along a parallel, if dissimilar path of raised awareness of the need for governance standards in the
public sector. Examples of similarities that are markedly different in context are the role of agents,
public sector managers manage funds on behalf the public versus the role played by managers in
corporations, and the involvement (or expected involvement) of different stakeholders in both the
public and the private sectors. This paper contrasts some of the differences in the models of
governance found in the public and private sectors, and makes some observations about the
desirable attributes to be sought in each.
Keywords:
Public sector governance, Private sector governance, models of governance
Introduction
In general corporate governance is concerned with the structures and processes for decision-making,
accountability, control and behaviour at the top of organisations (Spiller, 2004). It addresses the issues arising
from the interrelationships between boards of directors, such as interactions with senior management and
relationships with the owners and others interested in the affairs of the entity, including regulators, auditors,
creditors, debt financiers and analysts (Standards Australia, 2003). The purpose of good governance is to add
value to the organisation, reduce financial, business and operational risk, strengthen shareholder confidence in
the entity, and assist in the prevention of fraudulent, dishonest and unethical behaviour (Armstrong , 2004a).
The study of governance is concerned with various governance models. In the private sector these are found in
the guidelines and standards for good governance. Examples relevant in Australia are the OECD Guidelines
(OECD, 1999), the Australian Stock Exchange Guidelines (Australian Corporate Governance Council, 2003) and
the governance standards developed by Standards Australia (Standards Australia, 2003).
In the public sector in Australia, both Commonwealth and State Auditors-General have presented models of
Governance. An example is the Victorian Auditors model discussed below and shown in figure 2.
Despite the fact that the general public seldom link the governance of the private sector with the public sector,
governance in both sectors has been moving closer. As acknowledged by the Uhrig Review (Uhrig, 2003, p. 26):
There are benefits in looking to developments and lessons learnt in the private sector when
considering appropriate governance frameworks for the public sector. The environment in
which the private sector operates creates significant challenges for companies. The
consequences of failure and threat of takeover provide incentives for the private sector to
constantly strive to improve governance practices. In dealing with the challenges of the market,
the private sector has gained considerable experience in applying the core elements of
governance. The experience of the private sector has provided the review with valuable
insights into the full spectrum of governance arrangements and the corresponding impact on
outcomes.
There is an opposing view (for example, Wettenhall, 2004) that suggests that governance experience in the
public sector is long standing and that many of the criteria applied in the private sector are unsuitable for the
public sector.
The type of governance model adopted is influenced by the type of organisation structure involved. In the private
sector, the most kind of enterprise is governed by the Corporations Law. A company which may be either a
proprietary (private) or public company, i.e. listed with the stock exchange, but the law also applies to other
entities such as partnerships and sole traders. Not-for-profit organisations may incorporate under the
Associations and Incorporations Act in each State but since the board of the National Safety council, all
volunteers, were held responsible for the losses of the corporation, the members of these boards are also
responsible for decisions in the same way as the board of a company. Tomasic (2004) presents an overview of
the rules governing corporations and in particular the duties and responsibilities of directors and other officers,
the protection of stakeholder interests, and remedies for breach of corporate governance provisions.
Similar provisions apply in the public sector, but the form of entity and the context in which public sector
organisations operate is much more complex. Public Sector orgnaisations with governance implications include a
diversity of departments, statutory bodies (eg. Universities, Workcover), State owned enterprises, partly owned
public companies (eg.. Telstra), public/private partnerships and various kinds of advisory committees.
Partnership arrangements can include arrangements with other public entities, private enterprises and non-profit
and service providers. The context is muddied by Ministerial directions, reporting requirements that may be to
Ministers or Departments or to the public.
In most cases the elements of both private and public sector governance models (see Table 1) refer to the
governance structure of organisations (see for example, Standards Australia, 2003), the underlying principles,
values and ethics of an organisation (Francis, 2004), the relevant law (Tomasic, 2004), and the theories held by
different disciplines about good governance mechanisms (Armstrong, 2004b).
Table 1. Some of the elements included in models of governance
Structures
Organisation models
Values
Accountability
Transparency
Honesty
Integrity
Diligence
Diversity
Equality
Excellence
Principles
Governance policies
Role, powers, conduct of board
Provision of governance infrastructure
Relevant law
Constitutional
Statutory (Corporations, CAC) Law
Regulatory (OH&S, Whistleblower
protection)
Leadership
Direction
Control
Authority
Stewardship
Accountability
Several organisations have identified values relevant to governance. For example, Standards Australia (2003) in
its Good Governance Principles lists the values: accountability, transparency, fairness and balance, honesty,
dignity, goodwill. Another value often stated in the private sector is customer service. The Victorian Public
Administration Act 2004 sets out values of responsiveness, integrity, impartiality, accountability, respect and
leadership. Victoria University has its own set of values: knowledge and skills and critical and imaginative
inquiry, equality of opportunity for students and staff, diversity, co-operation, integrity, and excellence.
The principles which enable good governance are governance policies, infrastructure and actions to be taken to
implement various good governance measures. The latter refer to board composition including selection and
member skill profiles, the method of appointment of directors, structure and membership of audit and other
committees and board operations and procedures. These complement the mechanisms for achieving good
governance. Good governance mechanisms refer to the processes that provide answers to the question how well
is the organisation managed and are demonstrated through the assessment of leadership, direction and control,
authority, stewardship, and accountability.
Leadership refers to how well the chair and board set the strategic vision and direction for the entity and add
value to the program. It relies on clarity about roles and responsibilities and compliance with ethical and
governance standards. Stewardship refers to the structures, systems and processes for decision making and
control, communication and financial responsibilities, risk management and compliance. Accountability address
standards of behaviour and systems in place for auditing, risk management and reporting procedures. Some
differences in governance between the public and private sectors are listed in Table 2.
Table 2. Some differences in governance between the public and private sectors
Governance
Private Sector
Public Sector
Organisation structure
Enterprise:
Outsider/insider models
Department
Statutory Authority
State owned enterprise
Private/public partnerships
Regulation
Corporations Act
Commonwealth Corporations
Act
State Owned Enterprises Act
1992
Statutory legislation
Agents
Regulated
For Shareholders
Objectives
Profit
Public good
ASX
Standards Australia
Auditors General
Public Service Commissioner
Authority
Board
Government
Minister/s
Department
Board
Responsibility
Responsibility diffused
Independence
Ministerial control
Governance
Private Sector
Public Sector
Accountability
members
To shareholders
Diffuse
Reporting
Ministers
Parliament
Auditor general
Agency Heads
Treasury and Finance
Public and private sector governance in essence share some basic common characteristics. It is the context in
which they are embedded that drives the differences.
The similarities are: in the private sector, managers acting as the agents for shareholders oversee the day-to-day
management of the listed company. In parallel, in the public sector, the officials of the public sector (the public
servants) acting as the agent of tax payers manage the public organisation for the purpose of serving the best
interest of the general public (although it is often debatable on what is really the best interest for the general
public). In terms of managing the interests of various stakeholders, in the case of the private sector, now, there is
an increasing consensus among controllers of publicly listed companies that the company should not only serve
the best interest of the shareholders, it should also consider the interest of other stakeholders of the company
such as the interest of employees, customers, suppliers as well as the interest of the local community where the
corporation is operating. In the case of the public sector, various levels of governments will have different
stakeholders but the ultimate aim is to serve the public interest and provide services to the community on behalf
of the government (Uhrig, 2003, p.30), and at the same time to provide adequate solutions when market failure
is likely to happen (Uhrig, 2003, p.32).
Differences between the public sector and the private sector governance are also obvious: they serves different
interest groups and the public sector is subject to much greater scrutiny. The independence is a major difference.
All public sector entities are subject to Ministerial control and auditing by an Auditor-General; they must meet
performance targets and they are constrained by political reality. In addition, usually the appointment and
removal of chair and CEO is at the discretion of the Minister. Another related difference is that should an
enterprise fail, it goes out of business and the owners lose their investment. Government enterprises are more
likely to be rescued and losses absorbed even if the enterprise is closed down.
Given the many similarities and differences of corporate governance in both the private and public sector, this
article will confine its attention to the relationship between the organisation structure and different corporate
governance models in the private sector and the public sector.
The questions addressed in this paper are: What are the major governance structures in the private and the public
sector? What are the essential similarities and differences in the models? What conclusion can we draw from the
state of governance in the public sector and the private sector overall?
Shareholders
appoint
Board of directors
Committees
Audit
Governance
Nomination
who
appoint
and
monitor
Management
As listed in Figure 1, the dominant corporate governance model in Australia, which is a subset of the AngloAmerican model, can be described as follows: The shareholders appoint the board of directors, who appoints and
monitors management. The result of these series of agency relationships have ultimately put management as the
controller of the corporation, who oversee the day-to-day business of the corporation. Senior management has
the most intimate knowledge of the company and therefore really controls the corporations. The agency
problem that is, that management in control of the corporations could pursue their own best interest other
than the best interest of the shareholders (see further Berle and Means, 1932; Jensen and Meckling, 1976), is one
of the major corporate governance problems in Australia as well as in other Anglo-American economies. To
alleviate the agency problem, independent directors were introduced to the board in the hope that they would
provide a better monitoring mechanism to management. Board committees could also be set up to help address
specific issues better. For example, as recommended by the ASX Corporate Governance Council (ASX
corporate Governance Council, 2003), the following committees should be established in the board: a
nomination committee, an audit committee, the risk management committee and other relevant committee to risk
management, and a remuneration committee. The different roles played by various committees are listed as
follows:
The responsibility of the nomination committee should include (ASX corporate Governance Council, 2003,
p.22):
The aim of establishing audit committee is to ensure the integrity of the financial statements of the company
and the independence of the external auditor (ASX corporate Governance Council, 2003, p.30). The risk
management committee is to ensure there is a systematic approach to managing the level of risk exposed by the
company (ASX corporate Governance Council, 2003). Lastly, the remuneration committee is to ensure that a
proper system of performance evaluation and incentive system is available to evaluate and remunerate senior
executives. In the next two sections, corporate governance models and practices in the public sector will be
reviewed, before a detailed analysis of the comparison the two sectors will be provided.
should be established etc. In terms of the relationship among the minister, the board and the management, it is
recommended that (Cameron, 2003, p.9):
Ministers should be free to determine how best to undertake their responsibilities, but core
features should include regular communication and formal reporting arrangements with the
board against agreed objectives.
Unlike the board committees that operate in the private sector, which have their own independent decision
making power, the board committees set up in the public sector are only to (Uhrig, 2003, p.97):
assist in the efficiency of operations and for reasons of accountability, (and) committees should
operate with a clear written mandate from the full board. The operations of committees should
also be agreed including how committees will report to the bard and how committees will
interact with management and other relevant parties. This will clarify whether a committee has
the power to make decisions and approve management proposals or report to and make
recommendations to the board.
Besides the board committees, there usually exist an advisory committee in the public sector that provide advises
and recommendations to the minister of each statutory authority. Therefore, it is also useful to distinguish
between a board appointed to manage a government business corporation and an advisory committee.
The differences between the responsibilities of government sector boards and advisory committees are: in the
former the executive board is not seen as a representative institution but is appointed, usually by Legislation, to
be responsible for the vision of the organisation and overseeing its execution. The accountabilities include
financial and other legal responsibilities and consequently, the board acts with independence in setting its targets
and its structure may include subcommittees responsible for such things as audit, governance and appointments.
Auditing is conducted by the Auditor-General and a formal report is made to the Minister. Membership is based
on the merit principle and the requirements of a board for particular skills or expertise.
In contrast, an advisory committee is often a representative committee, appointed by the Minister. There is little
independence and accountability rests with the Minister or Senior Officer of the relevant government agency. In
making appointments the key criteria for appointment is often the extent to which members represent some
particular group or constituency.
In the public sector, apart from the general model of minister-board-management, there are also different
governance arrangements such as the partnership model of governance in the Health sector and the community,
and the emerging network governance in university governance.
Corporate governance model in the public sector The partnership model of governance
The governance model in the public sector in Australia stems from Australian adoption of the Westminster
model, in which the accountability, in theory, runs through ministers to parliament. Some current practices in
Australia have led to diffuseness in responsibility. For example, the partnership model of governance offers a
new structure that challenges the traditional hierarchical authority structure of government.
The governance structures of some government entities fall somewhere between a board and an advisory
committee. An example is the HealthSMART Board which has a different structure to either an Advisory
Committee or the Board of a government business entity. (HealthSMART is the Victorian information
technology program for the health sector). Although it is called a Board, it does not exhibit many of the
characteristics expected of a Board. It does not set the strategic directions of the program, appoint or review the
performance of its Chair or Chief executives, control the budget, report on activities, and has no autonomy nor
independence. This is not unusual of many boards in the public sector.
Members are appointed to represent the stakeholders in HealthSMART. It has four subcommittees each of which
is responsible for implementing one of the HealthSmart programs that are part of the total package. The Chairs
of each subcommittee are members of the Board. Where the Board differs from many other government sector
boards is in its responsibility for decisions about a major government business enterprise which not only is
involved in services delivery but is also a major commercial enterprise.
This partnership model includes representatives of other agencies on the Board but, not being legally
constituted but appointed within the Department of Human Services (DHS), it does not have the legal
accountabilities of a formally constituted board. In keeping with the partnership concepts espoused by the
Victorian Government in Growing Victoria Together the HealthSmart Board can be seen as a partnership
model of governance which incorporates the representatives of those stakeholders who have a vested interest in
the success of the new systems.
The HealthSMART Board consists of thirteen Members, representing DHS, Executive Directors and senior
representatives of metropolitan health services, rural alliances, primary and community health agencies, key
government stakeholders and independent specialists. The Director of the program and the Executive Officer are
in attendance at Board meetings.
The Chair of the Board is the Secretary, Department of Human Services. The Deputy Chair of the Board is the
Executive Director, Metropolitan Health & Aged Care Services, Department of Human Services. The Board is
supported by four Steering Committees, the Chairs of which are also Members of the Board.
The Chairs of the four Steering Committees are responsible for the four HealthSMART projects: Resources
Management (financial and HR), Clinical, Patient and Client Management, and Shared Services which is
intended to integrate and provide management and support for the systems projects.
The Board is not constituted by legislation and the Members are not Directors of a public entity and
consequently not required by law to comply with the duties of directors specified in the Public Administration
Act 2004.
Governance in the public sector community, partnership, and network governance and engagement
Similar forms of governance, also termed participatory governance or network governance, represent a
preferred DHS model for managing partnerships with the not-for-profit sector. The inclusion of representatives
of other Agencies is in keeping with the Victorian governments commitment to whole of government and
joined up government policies and practices intended to encourage different agencies to work together to
resolve complex problems and achieve common goals and objectives.
The purpose of whole of government and joined up government policies is to co-ordinate the resources of
departments to address complex community problems. In studies of community governance (Armstrong and
Francis 2004) discussed more fully below this approach has been found to be very successful in bringing
departments together under the auspices of police or local governments to address problems such as crime, youth
delinquency, and community safety. The major problems are the lack of accountability, departments have
difficulties in recognising the performance of those involved and there is still reluctance to share information
between departments.
In the University sector an approach intended to link universities into the communities in which they are located
(place management) is termed community engagement. This approach to university governance is not only
proposing to bring representatives of industry and other stakeholders on to university councils but also to have
them linked into academic structures. For example, representatives of the community could sit on Academic
boards and course development and assessment committees (Harman, 2005). The long term advantages for
universities are the increased access to private sector funds and sponsorships. The disadvantages may be loss of
opportunities for innovation and creativity and of academic independence.
Community Governance
Another area of corporate governance in the public sector is singled out due to its different arrangements of
stakeholders is community governance. The concept of community governance has been widely adopted in many
countries including the UK, New Zealand, United States, Canada and Australia. Within loc term is often used
synonymously with the term local governance. Community governance is defined as community level
management and decision making that is undertaken by, with, or on behalf of a community, by a group of
community stakeholders. In a new framework for governance, government services across administrative levels
co-ordinate their activities and develop partnerships with local government, business and other government
agencies, in joined up government (which is the sharing of data, information and knowledge across government
agencies and community groups), and promotion of community ownership of and capacity to address local
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