Corporate Governance
In the
Public Sector
A presentation for the
Institute of Certified Public Accountants of Kenya
during the
International Public Sector Accounting Standards, IPSAS’s Workshop
7th & 8th April 2011
Laico Regency Hotel, Nairobi.
Chachi S. Francis,MBA (Free State), BSc (Nairobi)
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Definitions
• Corporate:
– Involving or shared by all members of a group.
– Connected with a corporation.
• Corporation:
– An organization that is recognised by law as a single unit.
– A legal person (in law).
• Govern:
– To control or influence somebody/something or how
something happens.
• Governance:
– The activity of controlling a country/organisation.
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contd…definitions
•
•
Transform:
– Change the form/appearance of something.
Transformation:
– The process by which the form/appearance of a thing is changed.
• Q: in your day to day work:
–what are the inputs? Outputs?
–Who are your stakeholders? What are their interest?
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Corporate Governance
•
Corporate governance is the exercise of power / control /
influence over a legal entity/organization/country.
•
The Concept originated in the Private Sector:
•
Corporate failures:
- weak management boards
- over-powerful chief executives
- weak internal controls
•
Private sector is characterized by:
- lack of segregation of chairman and chief
executive roles.
- lack of audit committee/internal audit functions
- weak control/override of controls.
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contd…Corporate Governance
Initial focus was on:
• Financial reporting and accountability.
• Separation of chief executive and chairman roles.
More recent focus on:
• Identifying and managing risk.
• Securing independent element on Board.
• Defining the role of audit committees and relationship
with audit, internal and external (audit charter?).
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Corporate Governance
Factors influencing corporate governance:
•
•
•
Is there an issue about concentration of power?
•
•
Is there an issue of risk and if so how well is it managed?
Is there clarity about about reporting to stakeholders?
Is there clarity about accountability? Indeed what is meant by
accountability?
Is there need for an independent element to review executive
management and to liase with audit?
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An issue for the public sector?
Constitution of Kenya and corporate governance
Sec 166. (1) The President shall appoint—
– (a) the Chief Justice and the Deputy Chief Justice, in accordance
with the recommendation of the Judicial Service Commission, and
subject to the approval of the National Assembly; and
– (b) all other judges, in accordance with the recommendation of the
Judicial Service Commission.
SIXTH SCHEDULE (Article 262, TRANSITIONAL AND
CONSEQUENTIAL PROVISIONS)
– (2) A new Chief Justice shall be appointed by the President, subject
to the National Accord and Reconciliation Act, and after
consultation with the Prime Minister and with the approval of the
National Assembly.
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contd…Constitution of Kenya and corporate governance
National values and principles of governance
Sec 10. (1) The national values and principles of
governance in this Article
– bind all State organs, State officers, public officers
and all persons whenever any of them—
(a) applies or interprets this Constitution;
(b) enacts, applies or interprets any law; or
(c) makes or implements public policy decisions.
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National values
(2) The national values and principles of governance include –
a) patriotism, national unity, sharing and devolution of
power, the rule of law, democracy and participation of
the people;
(b) human dignity, equity, social justice, inclusiveness,
equality, human rights, non-discrimination and
protection of the marginalised;
(c) good governance, integrity, transparency and
accountability; and
(d) sustainable development.
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Bill of rights
20 (3) In applying a provision of the Bill of Rights, a
court shall —
(b) adopt the interpretation that most favours the
enforcement of a right or fundamental freedom.
21 (4) In interpreting the Bill of Rights, a court, tribunal
or other authority shall promote —
(a) the values that underlie an open and democratic
society……
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Corporate Governance
Public Sector Definition:
“The system by which organisations
are directed and controlled”
Underlying this definition are three
principles:
- Openness
- Integrity
- Accountability
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Objective of IPSAs
• IPSAs aim to:
– improve the quality of general
purpose financial reporting by public
sector entities, leading to better
informed assessments of the
resource allocation decisions made
by governments, thereby increasing
transparency and accountability.
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Corporate Governance
Openness:
- gives stakeholders confidence in
decision making processes, actions
of entities, and in the individuals
concerned.
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Corporate Governance
Integrity:
- honesty and objectivity.
- propriety in the stewardship of public funds and
resources.
- dependent on control framework.
- Dependent on personal standards and
professionalism of individuals within entity
- reflected in decision making procedures and
quality of financial and performance reporting.
Propriety: behaviour considered to be acceptable.
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Corporate Governance
Accountability:
- process whereby entities and individuals within
them are responsible for their decisions and
actions, including stewardship of public funds and
performance
- achieved though clarity of responsibilities and
roles
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Corporate Governance principles
These principles are reflected in four
“dimensions” of public sector governance:
- standards of behaviour (Balance of
Power and Authority)
- organisational structures and processes
- control
- external reporting
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Standards of corporate governance/ Balance of Power






There should be a governing body of a Public Sector
Entity with:

Chairperson of the Governing body (e.g. Board of
Directors / Governors / Trustees,

Non-executive Members of Governing body.
 Executive Management.
Organisation leaders determine values and standards.
Organisation should publish formal code of conduct.
Code of conduct should cover: probity and propriety,
selflessness, objectivity, honesty.
Relationships – actual or potential conflicts of interest
including political interests to be disclosed.
Gifts, hospitality and entertainment controlled to ensure
‘no undue influence’.
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Structures and processes
Other Regulators
PPOA, ERB, KACC,
etc etc etc
Public
Stakeholders
Shareholders
Board
Auditor
CEO
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contd…structure and processes
• Clear policy on hiring and removal (of staff, directors,
contractors).
• Clarity of roles of shareholders, BOD, management.
• Clear qualification requirements.
• Clarity of remunerations.
• Clear code of conduct and made available to all
persons involved (staff, directors etc).
• Clarity of Board schedule of meetings, reporting, etc.
• Clarity of corporate social responsibility interventions.
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Control
Risk Management
• Internal Audit
• Audit Committees
• Internal Control
• Budgeting, Financial Management, Training.
• Identify nature and extent of major risks.
• Review of past risks.
• Identify new risks arising from new objectives
and activities.
• Anticipate future risks and changes to risk.
• Assess ability to reduce incidence of risk.
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External Reporting
Annual Reporting including:
 Use of Appropriate Accounting Standards.
 Performance against targets.
 External Audit.
 Statement of aims and objectives.
 Commentary on the accounts and performance.
 Statement of compliance with relevant codes.
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Role of the governing body
- defines the vision, mission and long-term objectives
within policy and resource framework.
- oversees delivery of planned results.
- appoints senior management
- approves and adopts annual report, including
financial statements.
- ensures there is an effective system of internal
control.
- oversees the processes of risk management
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Chairperson
separate from Chief Executive
• preferably independent (non-executive).
• provides leadership and cohesion.
• ensures there is an effective process for reviewing
performance of governing body (Board assessment).
• ensures that the governing body has adequate
support and information.
• ensures that the business of the governing body is
undertaken efficiently and on a timely basis.
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Audit Committee
•
•
•
•
•
•
•
At highest level of the organisation
Is independent of executive management.
Is a sub-committee of governing body.
Membership confined to non-executives.
Chairman to be other than chairman of board
Meetings normally attended by Finance officer, internal
auditor and external auditors.
Have authority to investigate any matter.
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Audit Committee’s Terms of Reference
• May also known as the Audit Charter.
• General roles include:
• oversight over management’s responsibility for
effectiveness of internal control system.
• review adequacy of policies and practices for
ensuring compliance with regulations, policies, etc.
• review adequacy of internal audit resources.
• recommend/approve appointment/removal of head
of internal audit.
• review activities and programme of internal audit,
and co-ordination with external audit.
• oversee entity’s relationship with external auditor.
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Trends in corporate governance in the public
sector
Now considered a serious issue in the public sector
because of concerns about:
• Excessive confidentiality in decision making.
• Avoiding influence of special interests?
• Inefficiency in public expenditure.
Now greater demand for:
• Openness and accountability in government, with
• Greater willingness to challenge decisions.
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Control of public money
(Constitution of Kenya)
A state organ may be denied funds only for a serious
material breach or persistent material breaches.
However, a decision to stop the transfer of funds:
• may not stop the transfer of more than fifty per cent
of funds due to a county government.
• shall not stop the transfer of funds for more than sixty
days; and
• will require the approval of both houses of parliament
within thirty days or else the decision lapses.
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Controller of Budget and Auditor General
 The new constitution of Kenya
separates the functions of:
“Controller of Budget”; and
“Auditor General.
 Q: What are the implications if both
positions were to be held by one
person?
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Controller of Budget
 Role of The Controller of Budget:
to oversee the implementation of the
budgets of the national and county
governments by authorising withdrawals
from public funds.
to submit to each House of Parliament a
report on the implementation of the
budgets of the national and county
governments every four months.
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Auditor General
 The Auditor-General:
may audit and report on the accounts of
any entity that is funded from public funds.
Submits audit reports to Parliament or
county assembly.
To be audited by a professionally qualified
accountant appointed by Parliament.
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Parliament/county assembly
 Parliament or the county
assembly shall, within 3
months after receiving an audit
report, debate and consider the
report and take appropriate
action.
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The link to globalization
•
Globalisation:
– The process by which regional economies, societies, and cultures
have become integrated through a global network of political ideas,
communication, transportation, trade, technology, culture etc.
•
In essence, the world has become a global village and hence the
evolution of uniformity/standards:
– Air travel safety standards
– IT / Telecommunication standards (computers, mobiles etc).
– Radiation standards (X-rays, transceivers, scanners etc).
– Financial standards (IFRS, IPSAs etc).
– Audit standards (IAS).
– Etc
•
The UN system has adopted IPSAs.
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Benefits of corporate governance
1. The separation of ownership and control.
2. Alignment of the interests of the organization, shareholders ,
board, employees as well as the community in which the
organization operates.
3. Protection of organizations as they are important to the welfare
of individualsa) They create jobs, generate income and income tax.
b) They produce a wide variety of goods and services.
c) They provide mechanisms for savings and investments.
4. Creation of efficient organizations.
5. Environmentally and socially responsible corporate
organizations.
6. Promotes competitiveness.
7. Gives confidence to investors.
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Parting shot
The primary responsibility for
ensuring that Good Corporate
Governance prevails in an
institution lies with the BOARD
of DIRECTORS of
the
corporate body.
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Summary
Do we agree:
• Corporate governance is an issue for the public
sector?
• There is a link with efficiency/effectiveness?
• About the standards that should be covered?
• That there will be effects upon the organisation?
• About the impacts on reporting and control?
• That personal behaviour has to be covered?
Overall, will raising the standards of corporate
governance lead to better public services?
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Further reading
Garratt, B. (ed.). 2003. Developing Strategic Thought: A Collection of the Best Thinking on
Business Strategy. London: Profile Books.
Peters, T. 2003. Re-imagine! Business Excellence in a Disruptive Age,. London: Dorling
Kindersley.
Noel Hepworth, 2003. Corporate Governance in the Public Sector, CEF Conference, Slovenia.
Wikimedia Foundation, Inc. 2011, International Public Sector Accounting Standards, retrieved 4th
April 2011, from www.wikipedia.org.
Wikimedia Foundation, Inc. 2011, Globalization, retrieved 4th April 2011, from www.wikipedia.org.
International Federation of Accountants. International Public Sector Accounting Standards Board,
retrieved 4th April 2011, from www.ifac.org.
Commonwealth of Australia. 2009. Corporate Governance: Handbook for the board: 5 Useful
guides and checklists, retrieved 4th April 2011, from www.w3.org.
United Nations Development Programme. 2009. Orientation Session on International Public Sector
Accounting Standards (IPSAS).
David Woodward,2004. Corporate Governance in the Public Sector. European Internal Audit
Conference.
Eudora Koranteng. 2004. Corporate Governance. Ghana.
Thank You!
fchachi@gmail.com
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