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Why good governance is more than words on a page

Author: ICAEW Insights

Published: 16 Sep 2022

Local government frameworks, process and financial controls are all very well, says Alison Ring, ICAEW’s Director of Public Sector and Taxation, but good governance must be ‘lived and breathed’.

Recent headlines have highlighted just how important governance is to ensuring the financial and reputational health of local authorities. At one council, there were “serious failings in governance” arising from a control failure involving the signing of blank cheques, leading to a loss of £238,0000. 

Meanwhile, at another city council, inspectors questioned the composition of its boards stating: “Where it continues to use councillors on the boards of its subsidiary companies, it should ensure that the non-executives (including councillors) on the relevant board have, in aggregate, the required knowledge and experience to challenge management. This is of particular importance where the company is operating in a specialised sector which is outside the normal experience of councillors.”

An inspection report at a city council discovered “serious failings … in both governance and practice” and criticised the “corporate blindness that failed to pick this up and remedy the position”.

Failures such as these have led to reminders from CIPFA and others about the importance of ensuring that a local code of governance is in place. As recommended by the 2016 Governance Framework, your code should set out how your authority’s governance arrangements work towards meeting the seven principles of good governance set out in the framework.

Unfortunately, as CIPFA has commented, “… many authorities do not have a local code and instead rely on their annual governance statement to describe their governance arrangements. Some local codes that CIPFA has seen are not fit for purpose.”

Governance failures are all too common. What can I do to make sure they don’t happen under my watch?

Putting a code in place is only the start. After all, some of the most egregious governance failures in recent times have occurred in local authorities with a local code that was full of structures, processes and procedures designed to ensure that risks were being managed, and public money was protected.

Designing a delegated authority framework, financial controls to prevent fraud or error, or setting up an audit committee to scrutinise your finances are only the table stakes. In practice, governance only works if you live and breathe it every day.

Never forget that structures and process are there for a reason 

There are many different ways of describing what effective governance looks like, but one of my favourites is from a colleague, who says that good governance is all about ensuring the right people are in the right place at the right time with the right information asking the right questions to make the best possible decisions. 

I think this is a good rule of thumb to use in thinking about how your governance arrangements are working (or not) and what you can do to improve them.

Right people: Do the people making the decisions have the right subject matter and financial expertise? Is there a diversity of perspectives to prevent groupthink? Are they able and confident to ask the right questions? Do you have a suitable number of people – not too many, but not too few – for the really big decisions?

For example, are there independent lay members on your audit committee with external perspectives, financial expertise and willingness to ask questions? Do you have a diversity of team members and perspectives in your executive team meetings? Are you inviting the most appropriate members of staff to present proposals? Have you got input from the team on the ground?

Right place: the room (actual or virtual) is important because it can make a real difference to how decisions are made. The foundations should be in place to ensure meetings are productive or that information flows work well and support doing the right thing – such as getting purchase orders raised and approved before, rather than after, a contract is let.

Right time: You need to make sure discussions to formulate, refine, recommend or approve decisions are held at the best point in time. Too late in the decision-making process, and there will be a reluctance to turn down sub-optimal proposals because of the time and effort already incurred. Too early, and the risk is that proposals are not fully developed and risks not properly assessed, letting through impractical ideas or resulting in you having to come back to the same decision again and again to get it right.

You also need to make sure there is sufficient time to properly consider a proposal, both in the time available in meetings you may have to discuss it, but also in the time provided to decision-proposers and decision-makers to evaluate and respond. While deadlines are helpful in making sure decisions are made when they need to be, they need to be set so people have sufficient time to think.

Just as importantly, time needs to be valued. Are you using people’s time effectively, making sure that decisions are being made or approved at the right level so that they have enough time for the most important decisions? Use the 80:20 rule to focus on the 20% of decisions with the most impact, and minimise the time spent on the 80% that aren’t so critical.

Right information: Good governance lives or dies by the quality of information that forms the basis on which you make decisions. This is where finance has the biggest role to play, not only because you are often the gatekeeper through which key financial and strategic decisions are made, but also in your role in supporting operational decisions at all levels throughout the organisation, as well as trying to ensure that the financial implications of decisions are thoroughly thought through.

Information must be of high quality and transparent, set out the downsides as well as the upsides, and – most importantly – it must be understandable and focused. Too often we see budgets supported by extensive commentary on operational level detail best left to line management to decide, while providing scant explanation of the benefits and risks of multimillion pound capital programmes.

Right questions: Personally, I think asking the right questions is the most important element of any governance framework. Do decision makers really understand what is going on? What is it important to know? Who should I be talking with to get the answers? If you don’t ask the right questions, you are not going to get the right answers, or you might be satisfied with superficial information that doesn’t tell you what you really need to know. Ask questions that establish the facts, enable you to challenge and scrutinise, identify risks, prompt a thorough discussion, and aid and assure decision making.

Most importantly, you need to foster a culture where it is okay to ask questions, sometimes even the stupid ones. You may not have thought of the right question to ask, but someone else may have if only they felt confident enough to ask it. 

Making the best decisions you possibly can involves rigorously evaluating what you have done so that you can do better in the future. Are you continually appraising the decisions you have made, not only to learn from mistakes but also to learn from successes? Are you getting the right answers from the process that is your system of governance?

This is where the quality of oversight comes into its own. Are your formal structures playing their full role in challenging management to be the best you can be, both at the top level (audit, finance, scrutiny, etc), but also down through the organisation? 

Is your finance committee challenging you about the accuracy of financial forecasts and projections? Is your audit committee asking about what you are doing to reduce errors in your financial processes? Are your external auditors reporting to you and the audit committee on the quality of your year-end working papers and providing feedback on where you need to improve?

Independent audit committee members with technical expertise can help by challenging decisions, acting as a critical friend to the council leader, their cabinet and the management team, and can provide financial education for councillors.

Your internal audit team can really help with evaluation, not only in their formal role examining the effectiveness of your processes each year, but also by being a critical friend within the organisation as they kick the tyres across a whole range of different assignments.

Continuous improvement is key, as processes are never perfect. Are you actively seeking to improve the quality of the decision making? If key meetings are rushed, curtailing the opportunity for proper discussion of the merits of important decisions, can they be extended or less important items moved to a different forum or dealt with much better by those close to the coal face? Are your budget documents up to scratch, providing the information management, cabinet and councillors need to make the best choices for the years ahead? 

Good governance must be lived and breathed

Making sure you have a code of governance in place is important, but it isn’t enough on its own.

You and your colleagues need to live and breathe governance for it to be effective. Otherwise, your code will be just another document gathering electronic dust in the far reaches of your website. Enough to tick a box to say you have one, but not nearly enough to help you steer clear of avoidable disasters.

This article was first published by Room151.

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