Getting things right at the top: Business Month

Posted on October 8, 2010 · Posted in Business Month

Corporate governance sits at the heart of an organisation’s operations.  If the corporate governance is strong and effective, the organisation is also likely to be strong and effective.  But if the corporate governance is weak, the organisation will almost certainly be, at best, underperforming.

 

The evidence for this is clear.  All the big corporate failures of recent years were closely tied to failures of corporate governance – RBS, Halifax, Northern Rock, Enron and WorldCom all come to mind.  In some cases there were simply colossal errors of judgement or poor risk assessment in the boardroom.  In other cases, there was malpractice or fraud that effective internal structures – that the board should have ensured were in place – would have prevented.

 

But while these failings took place in Great Britain and the United States, there are equally valid concerns about practice in Northern Ireland.  Allegations about procedures within NI Water should worry us all.

 

NI Water is a government owned company – a GoCo in the jargon – which is supposed to report to the Department for Regional Development.  A recent hearing at Stormont’s Public Accounts Committee dramatically presented a very different culture that was alleged to exist within NI Water. 

 

According to evidence presented to the Committee by the DRD’s permanent secretary, Paul Priestly, the company regularly failed to report to the department as it was required to, nor did it obtain proper approval for contracts.  In the process, according to an internal investigation, NI Water breached European Union law regarding the awarding of public contracts. 

 

“There was £28 million of irregular expenditure for which we cannot demonstrate value for money, spanning 78 contracts, all of which predate my time in post,” the current NI Water chief executive Laurence MacKenzie, told the Assembly committee.  Priestly described this as “reprehensible, deplorable, and insupportable”. 

 

We should, though, reserve our own judgement as the investigation is continuing and no doubt the four former NI Water directors, who have been dismissed by regional development minister Conor Murphy, will at some point put forward a strong defence of their role.

 

What is most worrying is that we have been here before.  In 2006 the House of Commons Public Accounts Committee conducted an investigation into the Emerging Business Trust, which received £4.35m of public money to provide equity to expanding small firms in Northern Ireland.  But the husband and wife accountancy firm that acted as administrators and managers of the loan fund were compromised by various conflicts of interest that connected them to companies that received support.  Much of the funding came from the Local Enterprise Development Unit (LEDU), which subsequently merged into Invest NI.

 

The PAC conclusions were damning.  LEDU’s problems resulted from a culture which seems to have had no respect for the proper conduct of public business,” reported the MPs.  Other comments were equally acerbic: “This is one of the worst cases of conflict of interest and impropriety that this Committee has seen.” 

 

The committee was also damning of the Department of Enterprise, Trade and Investment, which it said “has a history of inadequate oversight of its non-departmental public bodies”.  It concluded: “This was a dereliction of its responsibility to ensure that the financial and other management controls being applied by LEDU conformed to the requirements both of propriety and good management.”

 

The chairman of the NI Assembly PAC, Paul Maskey, worries that the identified weaknesses in corporate governance procedures relating to non departmental public bodies have not been corrected.  “There were recommendations from previous PAC reports, including Westminster’s PAC, that have not been adopted,” says Maskey.  “We think that is wrong.  The same mistakes have been made time and time again and that is costing taxpayers millions of pounds a year.”

 

With the PAC investigation continuing into NI Water, Maskey is understandably reticent to discuss the case, or reach premature conclusions.  He did point out, though, that “the chief executive, when we asked about corporate governance in Northern Ireland Water, said they can and must do better”.  It is clear that when the PAC’s report is published this will – or at least should – provoke a major debate on how public bodies are governed and how they are made accountable to us, the taxpayers who fund them.

 

Until then, though, Joanne Stuart, chairman of the Institute of Directors Northern Ireland, is cautious about assuming that the whole story regarding NI Water has yet emerged.  She also doubts that the problems manifest in NI Water and LEDU necessarily suggest that similar weaknesses apply widely in the private sector.

 

Stuart explains: “Those institutions were public sector or arm’s length bodies, where I think more clarification is needed regarding the role of the board, the role of the accounting officer when also the chief executive officer; and the role of a department as a single shareholder; and understanding the responsibilities of each of those and how they work together.  On all sides there needs to be a better understanding of how those things come together and where responsibilities lie.”

 

She adds: “I don’t think we can come to a conclusion [on NI Water] until the PAC completes its investigation and I will look for lessons when it is completed.”

 

Those lessons may well have relevance to the public and private sectors.  But they may have the greatest relevance to the often muddled middle ground between the sectors.  It was striking that in his evidence to the NI Assembly PAC, NI Water chief executive Laurence MacKenzie said: When I came to Northern Ireland Water, I saw an organisation that believed that it was in the private sector and behaved accordingly, without actually knowing how the private sector operated.”

 

That grey area of bodies with a public sector history and public funding, but also facing demands for additional commercial income is about the increase substantially.  In England (but not, at least as yet, in Northern Ireland) NHS trusts are to become trading social enterprises that are operationally independent of the public sector.  Other parts of the public sector may also move into this ‘half-way house’ position – as universities already have.  They will then find themselves under pressure to behave simultaneously like public and private sector bodies.  Their boards will have to decide how to square the circle.

 

But the basic principles of corporate governance should underpin the approach of all directors in all organizations.  These include not only propriety, but also inquisitiveness, challenge and risk assessment.  In addition, we require a larger and more diverse pool of competent people to fill the directors’ seats.  Joanne Stuart explains:  “One thing I’d like to see is how we encourage more people to put themselves forward as non-executive directors.”  She suggests that boards should also recognise the need for greater professionalism amongst non-executives, a commitment to continuous professional development and annual assessment of boards’ performance.

 

There has always been a risk that the role of the non-executive is seen as a sinecure – a well-paid thank you for past service.  If such a belief was ever justified, it is certainly unacceptable today.  The job of a non-executive is just that: a job.  It requires skills, experience, time and application: non-executives who cannot devote that to all their board positions need to start writing resignation letters.