When public boards go rogue: ‘they don’t know who the shareholder is’

By David Donaldson

Thursday September 28, 2017

Cheryl Batagol speaking at Public Sector Week 2017. Source: IPAA Victoria Facebook page

A surprising number of public sector boards see themselves as being completely independent of government, says the man responsible for overseeing the governance of public sector entities in Victoria.

“The fact that so many public sector boards operating at arm’s length from government don’t identify themselves as part of the public sector is a real challenge for governance,” explains Tony Bates, deputy secretary for governance policy and coordination at the Department of Premier and Cabinet.

Public sector values of responsiveness, impartiality, integrity and accountability can all be put at risk when boards go rogue, he told Public Sector Week last month.

It increases the likelihood of entities making decisions that are out of step with community expectation, “or worse, that are contrary to the publicly announced policies of the democratically elected government.”

This threatens to undermine public trust and governments’ pursuit of public value.

It’s a problem that’s especially pertinent in Victoria, where public sector entities — organisations that are part of the public sector but are given space to make their own operational choices — are especially common.

86% of the Victorian public sector comprises such bodies — that’s 246,000 people, compared to just 40,000 public servants. This includes hospitals, schools — which have a higher level of independence in Victoria than elsewhere — TAFEs, police, water, transport and other functions. The state has 33,000 public entity board members, 85% of whom are paid nothing for their time.

Private sector governance models don’t quite fit

They’re all part of the Victorian government, though day-to-day it may not always feel like it.

One of the factors contributing to some boards’ misplaced sense of independence is that it’s currently more difficult for public sector employees to gain board positions, resulting in the membership comprising a disproportionately high number of people with private sector backgrounds. Such people undoubtedly have many skills to offer, Bates noted, but are often not very familiar with public sector norms.

“With the push for greater public sector efficiency, I wonder sometimes if boards have become confused about their roles as they look at private sector models that are under the endless search for greater productivity dividends and higher returns,” Bates said.

Similarly, the standard Institute of Company Directors course, which many have completed, has a strong emphasis on protecting shareholder value.

“The challenge for many of our public sector boards is they don’t know who the shareholder is,” he added.

“The shareholder in the classical sense really is the minister or the treasurer … but a lot of the board members can get confused in the absence of shareholder meetings and the shareholders’ association asking questions. They often start to identify more strongly with the organisation and think the organisation is the shareholder, and not the minister or the public.”

An Ombudsman’s report found that inadequate induction resources, poor board culture and patchy recruitment processes were the biggest sources of lacklustre performance, arguing that these trends have created conditions ripe for mismanagement, conflicts of interest and poor quality oversight of government projects and services.

The auditor general also found that much of the guidance departments provide to boards is ad hoc and reactive. DPC and the Victorian Public Sector Commission will work to help boards better understand their roles and responsibilities over the coming year, said Bates.

“Government is not something to be worked around.”

‘You are captured by your organisation’

Cheryl Batagol, who has been chair of the Victorian Environmental Protection Authority since 2009, says turnover of board members was healthy.

Batagol, who has had a long career in governance in the public and private sectors, and was chair of Melbourne Water for five years, offered some of her insights about the key ingredients for good governance at IPAA Victoria’s Public Sector Week.

“Terms of office: no longer than ten years.

“I’m at eight now, and what I can tell you is that you are captured by your organisation, you fall in love with your organisation and what it does, and its people,” she explained.

“You are captured, and as a result your objectivity decreases. Ten years is absolutely my limit, even though I feel like EPA is my spritual home. I felt like that about Melbourne Water, mind you. But I can’t go longer than that.”

She noted the value of diversity of professional background.

“Diversity of thought, experience and skills is critical to good governance. I love how you put a problem on the table as a chair and you watch the different people, when they come from different backgrounds like engineering or science, come at it from a different angle. It means your ability as a board to work through that is so much stronger if you have that diversity of skills and experience.

Organisational culture is important — including right at the top.

“The working relationship between the chair and the CEO sets the cultural tone of the organisation. That is where the organisational, cultural leadership starts from. I have had my staff and my CEO comment to me, I’ve had two CEOs at EPA now, on the observed relationship between us. We stand up at all staff meeting and they know if we’re getting along or not. They know how we lead the organisation.”

And lastly, see the silver lining in a bad report, she urged.

“Turn every negative review — in our case it was Ombudsman, VAGO, stakeholder reviews — into opportunities for reform. Major and minor.

“Continually build improvement and better practice in your organisation.”

Creative thinking can help overcome diversity roadblocks

Diversity of board membership is a big focus for the Victorian government at present, as “our boards should reflect the Victorian community they’re serving,” Bates explained.

“Diversity is not just an end in itself, the business literature clearly shows that boards with high levels of diversity perform better.”

Finding a spread of people reflective of the community could be challenging in some areas, Bates conceded — but pointed to the Department of Environment, Land, Water and Planning as an example what could be achieved by looking beyond a narrow definition of what qualifies a person to serve and using some “creative” thinking.

Boosting the number of women on catchment management authority boards proved tricky at first.

“There’s a requirement that half the board members need to be primary producers. We’ve really struggled with finding enough women in that space. DELWP tapped into networks that had contact with a number of prominent females in victoria, and were reaching out to people, and I’m told they were often met with the reply: ‘but I’m not the farmer, my husband is.’

“And just having on-the-ground interaction with people and asking them questions like, ‘could your husband run the farm without you?’ and they say, ‘well no, he couldn’t’, and they say, ‘well that means you’re classed as a primary producer’.”

Image: Cheryl Batagol speaking at Public Sector Week 2017. Source: IPAA Victoria Facebook page.

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Nicholas Gruen
Nicholas Gruen
4 years ago

An interesting discussion. I’m intrigued that Tony Bates seems to think that the ‘shareholder’ of Vic Government agencies with boards is their Minister. I’d say it was the public, subject to their enabling legislation.

Something else that happens on government boards is that getting their agency’s logo on things in my experience generally comes to be seen as an end, rather than a means to the end of delivering public value.

John Glenn
John Glenn
4 years ago

Is “going rogue” a euphemism for not doing it the public service way?

Public sector measurement of value is different to that in the private sector – so outcomes are measured differently. That difference can be hard to learn in the private sector, but the focus on outcome not activity is equally hard to learn in the public sector.

This doesn’t mean that Boards are not the right vehicle for driving strategy, compliance and operational excellence. Commercial practices designed to elicit excellent performance may not always be appropriate, but perhaps more often than we currently accept. “We’re different” is a deflection, not a rationale.

Some thinking about how public sector boards should operate would be useful, but they shouldn’t be inducted and aligned – they should be more demanding and challenging. We would have better public outcomes if they were. While the AICD Company Director program would benefit from some adjustment to support public sector Boards, it is better than naught.

While Boards shouldn’t set public policy, they should create the environment for policy generation and implementation. If Boards are told “this is the mandate and object”, their job is to set strategy, guide implementation and drive operational performance.

Induction into the ways of the public sector isn’t appropriate – I would suggest quite the opposite. There is a good case to widen their remit and have the public sector adapt to the lessons that more diverse participants can bring.

Diversity of thought is key to innovation. “Sameness” isn’t helpful. Diversity generates challenge. It is uncomfortable. We should not only learn to live with that discomfort – we should seek it.

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