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Last updated: 30 November 2006

Chapter 9: Agency governance

Abbreviations

A list of the abbreviations used in this report is available in the Glossary

Governance policies, procedures and structures

The issues raised in ANAO's definition of governance-the exercise of authority, accountability, stewardship, leadership, direction and control-are operationalised in agencies through governance policies, procedures and structures. A number of aspects of ANAO's definition, especially leadership, direction and control, were considered in the context of Chapter 7. Accountability issues are of course also an integral part of more general issues of integrity and fairness which were discussed in Chapter 4.

This section looks in more detail at some particular aspects of governance. The issue of authority, is explored through the effectiveness of agencies' organisational structures and decision-making. The issue of stewardship is explored through an assessment of approaches to risk management and financial management. Finally, the issue of accountability is examined through approaches to the management of conflict of interest.

Of course, these issues only provide a partial picture of governance within agencies. In addition, all three areas can be said to relate to all aspects of the ANAO definition of governance in some way. Nevertheless, an examination of agency performance against these aspects of ANAO's definition of governance begins to provide us with a picture of the effectiveness of governance structures in the APS.

The exercise of authority-organisational structures and decision-making

Organisational management and structures, and their effect on decision-making within agencies, are key aspects of governance arrangements. They are a large part of how authority is delegated and exercised within agencies.

A number of factors that influence the effectiveness of organisational structures have been identified, including the capability of committee members, the clarity with which the role and authority of committees is defined, and employees' understanding of the governance structures in their agency. All of these issues can also impact on perceptions of the objectiveness of decision-making.

Agency policies and approaches

Agencies generally have well-developed governance structures which govern the exercise of authority within the organisation, including a range of governance committees. Agencies were asked to list the governance committees they had in place as at 30 June 2006. The agency survey found that agencies were most likely to have audit committees in place (83%) reflecting the fact that these are a requirement of the Financial Management and Accountability Act 1997 and the Commonwealth Authorities and Companies Act 1997. Also common were occupational health and safety and management or executive committees (both 65%) and workplace consultative/relations (62%). IT (42%), personnel management/human resources (36%) and finance and information/knowledge management committees (both approximately one quarter) were less used.

Agency size appeared to have some influence on committee structure. For example, audit, security and IT committees were more common in large agencies, workplace relations committees in medium agencies, and occupational health and safety committees in small agencies.

The quality of the employees recruited to governance committees and those exercising the authority delegated to these committees is crucial to their success. Agencies reported a variety of procedures in place to select employees to serve as members of the various committees operating in their agency.²³ Procedures varied depending on the committee type, and were determined largely by the function, responsibilities and terms of reference of the particular committee. Membership of senior committees was commonly determined by CEO or executive nomination, having regard to the skills, experience and positions held by potential committee members. Some selection decisions were determined solely by the positions held by incumbents (e.g. remuneration committees comprised only of SES employees). Other committees commonly used a staff election process (e.g. workplace relations committees) and/or self-nomination (e.g. occupational health and safety and consultative committees). Generally, committees requiring employee representation would use some type of employee election process, with managerial committee members mostly appointed by the executive.

Some agencies recognised the need to invest in improving the capability of committee members. A variety of both formal and informal training was provided to ensure they have the requisite knowledge and skills to contribute to committee operations, the type of training being dependent on the committee in question. Membership of some committees required training to be undertaken upon entry or at specific time intervals, whereas other training was ad hoc. Although some training was undertaken internally, the majority of training was sourced from external providers. Mentoring and informal development was commonly used to facilitate knowledge transfer. In some cases, training was not considered necessary due to members being selected based on their particular skill set and professional expertise. Where committees had a formal charter they were more likely to be able to clearly identify training needs, establish specific training requirements and facilitate member induction.

In most cases, agencies recognised the importance of ensuring that the role and authority of governance committees was clear. Over two-thirds of agencies mentioned using committee terms of reference to ensure that the roles of each committee are clearly established. Committee charters were also mentioned by approximately one-third of agencies. Various forms of departmental documentation were highlighted as being available to identify committee roles, provide guidelines for action and other information relating to responsibilities. This type of information was commonly published on agency Intranets. Another mechanism included a review of roles and charters to ensure that the committee roles were clearly defined.

The methods used by agencies to ensure that committee members are clear about their role were similar to those used in ensuring the roles of the committee itself are clearly established. Over one-third of agencies had terms of reference and approximately one-quarter listed a committee charter, though these were mentioned less commonly by small than by medium and large agencies, suggesting a tendency to adopt a less formal approach.

Processes of member role definition were generally divided between formal (e.g. committee charters, terms of reference) and informal mechanisms where no formal individual roles exist (e.g. induction briefings, mentoring, committee discussions); the latter are more common. Several agencies relied upon the chair of the committee, and to a lesser extent the secretariat, to ensure that committee members are aware of their respective roles. Among those agencies that did use formal mechanisms to define committee members' roles, the documentation relating to this process was sometimes made available to all agency employees, most commonly through the agency Intranet.

The existence of terms of reference or other means of member role definition is an essential prerequisite of effective governance processes, but this does not guarantee effective participation or outcomes. Being effective as a committee member is not just a matter of understanding one's role. It also requires members to be thoughtful, helpful, critical and active participants. These are characteristics not easily measured through a survey. However, it is incumbent on all agencies to encourage this type of commitment from their committee members.

For governance processes to be effective, they also need to be widely understood among all employees. Procedures to ensure that employees have access to information that outlines the agency's decision- making processes and/or relevant committee structures were widespread, being reported by 89% of agencies. Another 8% had arrangements in development. Small agencies (91%) were slightly more likely than large agencies (87%) to have these policies and procedures in place.

One mechanism for explaining the structure and authority of governance arrangements within the organisation is through a diagrammatic representation of the relevant structures. Just over one-third of agencies (37%) had a diagrammatic representation (e.g. a flow chart) of how some (or all) of their agency's committees link together (54% did not and 10% had diagrams in development). Such diagrams can be an important tool to enable employees and committee-member understanding of decision-making structures. Large agencies (61%) were more likely to have a diagrammatic representation than medium (38%) or small agencies (20%).

Employee awareness and understanding

There are fairly high levels of awareness and understanding of how authority is exercised in agencies among APS employees. The majority of respondents to the employee survey (64%) agreed that they understand how their agency's decision-making processes operate (e.g. relevant committee structures and how committees are linked); 14% disagreed. Employees were more likely to agree if they were located in the ACT, or were from small agencies.

Just over half (55%) of employees agreed that their agency provides them with information that clearly outlines the agency's decision-making processes (e.g. relevant committee structures). Employees from small agencies were more likely to agree than those from medium or large agencies. Agreement across large agencies varied widely and ranged from 30% to 70%.The agencies with satisfaction rates significantly above the APS average were DFAT and FaCSIA.

SES employees showed much higher agreement regarding their understanding of agency committee structures and their relationship to decision-making processes (93% and 87% respectively) than APS level (62% and 53%) or EL employees (71% and 59%).This is not a surprising finding, given the generally greater level of committee involvement and higher-level strategy work undertaken by SES employees. Women, employees not reporting a disability and those from non-English speaking backgrounds all showed higher levels of agreement than their counterparts.

The fact that the majority of employees both understand and agree that their agency provides them within formation on its decision-making processes is consistent with the high proportion of agencies reporting that they provide this information. However, the variability of results across groups and the fact that a minority of employees disagree that the information is provided indicates that some organisations may need to improve the effectiveness of their information dissemination.

Objectivity in decision-making

An important issue with regard to governance and the exercise of authority within agencies is the actual and perceived objectivity of decision-making processes. Employee perceptions of objectivity in decision- making were generally positive. Sixty-two per cent of employees agreed that their agency has procedures and systems that ensure objectivity in decision-making (12% disagreed). Those from medium agencies (50%, compared to 58% for small and 63% for large agencies) were less likely to agree that these procedures and systems were in place.

Agency-specific results for large agencies ranged from 39% to 71%. Centrelink had a satisfaction rate significantly above the APS average.

Sixty-three per cent of employees agreed that their immediate manager would take appropriate action if decision-making processes were found not to be objective (12% disagreed). Large agency results ranged from 52% to 70% agreement. There was considerable variation across groups of employees. In particular, as with their greater understanding of committee structures and decision-making, SES employees (82% and 83%) were more likely than other employees (61% to 68%) to believe that processes exist in their organisation and that their immediate manager would act to ensure objectivity in decision-making.

Women were more likely and those with disability were less likely to believe that procedures and systems were in place to ensure objectivity. Those in the youngest age category (i.e. those aged under 25 years) agreed more often than older employees with both these items. Employees of Aboriginal and Torres Strait Islander background were less likely than other employees to believe that their immediate manager would take appropriate action if decision-making processes were not objective.

Exercise of stewardship-risk and financial management

Risk and financial management relate to all aspects of ANAO's definition of governance, but have a particular relevance to the issue of stewardship. Uhrig's definition of governance also puts particular emphasis on the way organisations take into account risk and the environment in which they operate. The Uhrig Review and the Finance publication, Governance Arrangements for Australian Government Bodies,²⁴ outline appropriate frameworks for risk and financial management as do the Financial Management and Accountability Act 1997 ²⁵ and the Commonwealth Authorities and Companies Act 1997.²⁶

Risk management

The APS appears to do particularly well against the stewardship aspect of governance. Risk management practices are well-embedded across the APS, with most agencies (90%) indicating that they have policies and procedures in place to ensure appropriate assessments of risk are conducted. Of those that did not, most were developing these arrangements (8%). Large (100%) and medium (92%) agencies were more likely to report risk assessment arrangements than small agencies (83%).

Employees were also generally positive about this issue. Over two-thirds (69%) of employees agreed that their agency has policies and procedures in place to ensure that appropriate assessments of risk are conducted (7% disagreed). This is a high result, but it does indicate some disparity between employee perceptions and results from the agency survey, with most of the difference explained by a large proportion of employees who neither agreed nor disagreed with this question. Consistent with the findings from the agency survey, employees from small agencies were less likely to agree than those from large agencies. Employee results across large agencies ranged from 57% to 81% agreement.

Sixty-three per cent of employees felt that in general, employees in their agency appropriately assess risk(9% disagreed). Agency-specific results for large agencies ranged from 49% to 77%.The large agencies with satisfaction rates significantly above the APS average were CRS and Customs.

Consistent with their generally high rate of satisfaction against governance questions, SES employees had approximately 10%-20% higher levels of agreement regarding the appropriateness of risk management in their agency, than other employees. Some other characteristics also influenced the findings, with women having higher agreement levels than men, and Aboriginal and Torres Strait Islander employees and employees with disability being less likely to agree than other employees.

Financial management

There was also a strong focus among APS agencies on ensuring that employees have adequate information about financial issues. Almost all agencies (96%) had policies and procedures in place to keep employees informed about updates, changes or revisions that relate to financial and other delegations, and to ensure that Chief Executive Instructions (CEIs) are available to all employees (95%). All large agencies had such procedures.

Employees generally agreed that their agencies had such procedures. Seventy per cent of employees agreed that their agency provides them with information about updates, changes or revisions relating to financial and other delegations (8% disagreed). The majority of employees (63%) also agreed that they know where they can find their agency's CEIs (20% disagreed). Employees located in the ACT were more likely to agree and those from small agencies were less likely to agree.

Levels of agreement within large agencies ranged widely from 37% to 78%. Defence, FaCSIA, Health, DOTARS, DEST, DITR, Finance, DAFF and DEH had agreement rates significantly higher than the APS average.

Again, although these results are positive, there appears to be some disparity between the agency and employee survey results on these two issues. Some agencies may need to assess the effectiveness of their information dissemination on finance-related updates and CEIs.

As before, SES employees showed much higher levels of agreement (86% and 92% respectively) on these issues than other employees (58% to 77%). Employees were less likely to agree that they know where to find their agency's CEIs if they were aged under 25 years. Aboriginal and Torres Strait Islander employees were much more likely to disagree (20%) than other employees (4%). Those with an ongoing disability also showed lower agreement than other employees on both financial management items.

Exercise of accountability-managing conflict of interest

Accountability is a key part of ANAO's definition of corporate governance.²⁷ One of the mechanisms by which agencies ensure accountable and prudent decision-making is through procedures to manage conflicts of interest. Under the Code of Conduct employees are required to disclose, and take reasonable steps to avoid, any conflict of interest (real or apparent) in connection with APS employment.²⁸

Conflict of interest obligations are an important element of public sector governance and agencies need to develop procedures for managing real and apparent conflicts of interest. They also need to ensure that APS employees are aware of the circumstances in which conflict of interest issues may arise and of how to resolve these issues. Agencies also have a responsibility for defining and communicating their expectations of ethical behaviour to non-APS employees including service providers, consultants and people supplied by labour hire firms.

Agencies have made significant progress in developing procedures to help their employees manage conflict of interest. Each agency reported implementing at least one measure aimed at raising employee awareness of conflict of interest obligations. Small agencies averaged four such measures, medium agencies averaged five and large agencies averaged six.

Ninety-two per cent of agencies reported having internal policies or procedures in place regarding the acceptance of gifts and benefits (including hospitality). However, the potential exposure to situations leading to a conflict of interest is not equally distributed across all APS roles, and agencies were asked if learning and development activities on this issue were provided to particular groups of employees.

Only 63% of agencies reported providing targeted guidance/development activities to particular groups of employees; 29% did not offer employees these activities. Large and medium agencies were much more likely to offer these activities than small agencies.

There is a range of potential conflict of interest issues in the area of contractual relationships. Sixty- three per cent of agencies reported having policies in place governing employee conduct in the market testing and contracting out phases of contract procurement. This was influenced considerably by agency size, with large agencies (87%) more likely to have these arrangements in place than medium (73%) and small agencies (40%).

A similar proportion of agencies (62%) used contractual provisions that place restrictions on key public servant participants in a tender process being employed by the successful tenderer. Again, this result differed by agency size, 83% for large agencies, 73% of medium and 40% of small agencies. However, only 48% of agencies reported having policies dealing with the issue of avoiding conflict of interest when taking up employment after leaving the public service; 39% of agencies did not but 13% were developing such systems. Just over half of large agencies and medium agencies (57% and 54% respectively) and 37% of small agencies had these policies in place.

The decision-making responsibilities associated with senior management positions in the APS place the senior executive cadre in another area of high potential for conflicts of interest to occur. Eighty-three per cent of agencies required SES employees to provide a written statement of their interests. This was required in approximately three-quarters (77%) of small and medium agencies and all large agencies.

Last year's State of the Service report noted that the Uhrig report ²⁹ had highlighted the scope for conflicts of duty to arise where APS employees sit as representatives on boards or committees. Although the progressive implementation of the recommendations of the Uhrig report accepted by the Government should reduce the scope for such conflicts of duty, APS employees who do sit on boards need to exercise considerable care in identifying, declaring and managing conflicts of interest and conflicts of duty. Seventy-five per cent of agencies reported procedures for alerting employees who sit on boards or committees of the need to declare and manage potential conflicts of interest. These procedures were in place in most agencies, regardless of size (large 83%; small 74%; medium 69%).

Figure 9.1 shows an increase over time in the use of agency measures to help raise awareness of employee obligations in relation to conflict of interest. The initiatives with the most marked increase in use between2004 and 2006 were policies regarding board member declaration of conflict of interest (56% in 2004,75% in 2006), policies developed for those involved in market testing and contracting out processes (45% in 2004, 63% in 2006) and contractual provisions used to restrict the employment of key participants in the tender process by successful tenderers (44% increased to 62%).

Figure 9.1: Measures used by agencies to raise employee awareness of conflict of interest obligations, 2003-04 to 2005-06

Source: Agency survey

Employee survey results were generally consistent with the high level of measures reported by agencies. Seventy-one per cent of employees agreed that their agency had policies and procedures in place to assist employees manage conflicts of interests, and a further 7% disagreed with this statement. Employees inthe ACT, and those working in small and large agencies (as opposed to medium agencies) were more likely to agree. Agreement levels within large agencies ranged from 56% to 83%.

Employees were still positive, but had slightly lower levels of agreement, about whether employees in their agency effectively manage conflicts of interest, with 62% of employees agreeing that this was the case. Employees were more likely to agree with this statement if they were located outside the ACT or were SES employees. Agreement within large agencies ranged from a low of 45% to a high of 73%. CRS, ASIC, DITR and ATO had agreement rates significantly above the APS average.

Employees who agreed that their agency had policies and procedures in place to assist employees manage conflicts of interest were more likely to also agree that generally, employees in their agency effectively manage conflict of interest. Those who disagreed that policies and procedures existed, were more likely to disagree that employees in their agency effectively manage conflicts of interests. This result suggests that agencies that take an active role in ensuring all employees are familiar with agency policies and procedures for managing conflicts of interest can make a real difference to levels of employee confidence.

Policies and procedures for non-APS employees

Non-public servants are increasingly providing direct services on behalf of APS agencies both to other government agencies and to the public. The Commonwealth Procurement Guidelines specify that officials, departments and agencies are answerable and accountable for any plans, actions and outcomes involving the expenditure of public money. Agencies are expected to include provisions in tender documentation and contracts alerting prospective providers to the public accountability requirements of the Commonwealth.

The APS Values and the Code of Conduct are particularly relevant where contractors are delivering services to the public on behalf of the APS. When establishing relationships with providers, agencies need to consider how the Values and the Code might be relevant, how they will be drawn to the attention of contractors (and their employees), and how compliance is to be monitored.

Over the last three years, there has been a steady increase in the proportion of agencies reporting and communicating to non-public servants the agency's expectations that they would behave in accordance with the relevant Values and the Code (from 77% in 2004 to 90% in 2006). Of these agencies taking such action in 2006, 68% did this through information set out in tender documentation, 71% reported using general clauses in contracts referring to the Values and the Code, and 29% reported including specific contractual clauses regarding only relevant aspects of the Values and the Code. These results are generally consistent with those from last year, although there was a decrease in the proportion of relevant agencies using specific contractual clauses. Only 15% of relevant agencies reported using non-contractual arrangements such as briefing sessions, protocols, the provision of information and training-the same proportion as last year.

Due to the introduction of a range of questions on committees in the agency survey this year, and the absence of obvious pre-determined response categories, several of these items were structured as open-ended questions. For this reason, exact quantitative results on some issues are not available and are discussed in more general terms.
Department of Finance and Administration 2005, Governance Arrangements for Australian Government Bodies, <http://www.finance.gov. au/finframework/governance.html>
Financial Management and Accountability Act 1997, <http://www.finance.gov.au/finframework/fma_act.html>
Commonwealth Authorities and Companies Act 1997, <http://www.finance.gov.au/finframework/cac_act.html>
ANAO, Public Sector Governance Vol 1, Better Practice Guide, July 2003, <http://www.anao.gov.au>
PS Act, s.13(7).
J. Uhrig, Review of the Corporate Governance of Statutory Authorities and Office Holders, June 2003.