Auditor-general's tips on good governance: don't forget the culture

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Several recent inquiries have taken a close look at how boards operate in a range of settings, from banks to public broadcasters, and highlighted the importance of organisational culture to good governance.

“The interplay of the ‘hard’ attributes of governance (such as board composition, appointment processes and independence) and the ‘soft’ attributes of governance (such as the chair/CEO relationship, board behaviours and board culture) are critical to good governance and organisational performance,” writes the Australian National Audit Office.

The ANAO has written up a guide to board governance drawing on its own recent reports on SBS, Old Parliament House, the Australian Institute of Marine Science, and the Sydney Harbour Federation Trust, as well as several royal commissions, including this year’s Hayne inquiry into the financial system.

ANAO noted a series of questions highlighted in the royal commission. Every entity must ask itself these questions:

• Is there adequate oversight and challenge by the board and its gatekeeper committees of emerging non-financial risks?
• Is it clear who is accountable for risks and how they are to be held accountable?
• Are issues, incidents and risks identified quickly, referred up the management chain, and then managed and resolved urgently? Or is bureaucracy getting in the way?
• Is enough attention being given to compliance? Is it working in practice? Or is it just ‘box ticking’?
• Do compensation, incentive or remuneration practices recognise and penalise poor conduct? How does the remuneration framework apply when there are poor risk outcomes or there are poor customer outcomes? Do senior managers and above feel the sting?

Hayne also recommended that entities should, as often as reasonably possible, take proper steps to:

• Assess the entity’s culture and its governance;
• Identify any problems with that culture and governance;
• Deal with those problems; and
• Determine whether the changes it has made have been effective.

Auditor-general Grant Hehir has a range of other suggestions.

Introducing a board charter can support board members by providing a single reference point that clearly sets out the functions, powers and membership of the board, as well as roles, responsibilities and accountabilities. Including key behavioural and cultural expectations for board members can assist in articulating the desired culture.

Periodically evaluating board performance is a good way to cast an eye over what has been achieved and whether it fits with the organisation’s goals. Boards should also ensure they are thinking about the mix of skills required in the future, and engage with the agency and its minister to get the right mix.

Actively managing and recording conflicts of interest is important. Including conflicts of interest as a standing agenda item is a good way to ensure this issue gets attention. Taking down details of each board member’s interests in board papers, including paid and unpaid external engagements, can also assist board members to ensure that all their interests are actively considered.

Keeping sufficient evidence of decision-making processes and outcomes is “fundamental” to good governance, says ANAO. “It also contributes to efficient practice, the utilisation of evidence and enabling a learning organisation.”

The auditor also wants to make sure boards “actively question and challenge management”:

“Board members must hold management to account. Setting expectations for management reporting to the board can assist in ensuring that the board and management have a shared understanding of the board’s requirements and can assist the board in meeting its obligations as the accountable authority.”

The report offers a few other pointers:

• Review key strategic risks in corporate risk registers and set risk appetite.
• Ensure the audit committee and its operating arrangements support the board obtaining the external advice and assurance it requires.
• Approve and periodically review key policies and frameworks — particularly those relating to the duties of an accountable authority.
• Provide appropriate inductions to help board members understand their obligations.
• Seek management assurance regarding internal controls and compliance.
• Seek consolidated progress reports on results against all performance targets in corporate plans.