THE STATE OF CORPORATE GOVERNANCE THE PUBLIC SECTOR

Transcription

1 REPORT ON THE STATE OF CORPORATE GOVERNANCE IN THE PUBLIC SECTOR (PARASTATAL BODIES) 2011 Office of Public Sector Governance (OPSG) Prime Minister s Office September 2011

2 Acknowledgements The Office of Public Sector Governance would like to thank all the survey participants for the considerable time spent preparing the responses to the survey questionnaire and for their participation in the interview process. We are also grateful to the participants of the three Workshops/Seminars for providing valuable comments. The information we received from the respondents was indispensable for the conduct of the survey and for developing the resulting conclusion and recommendations. We hope that the survey and the recommendations contained in this Report will prove to be useful in improving corporate governance practices in Mauritius. Each participating organisation has secured its own copy of corporate governance practices which is being annexed to this Report. We hope that this report will be helpful in driving forward the ongoing Corporate Governance reform activities in state-owned enterprises. Office of Public Sector Governance (OPSG), Prime Minister s Office Page 2

3 CONTENTS Executive Summary Chapter 1 Chapter 2 Chapter 3 Chapter 4 Chapter 5 Chapter 6 Chapter 7 Chapter 8 Chapter 9 Chapter 10 Chapter 11 Chapter 12 Appendix A Appendix B Introduction The role of the Board of Directors The board composition The role and responsibilities of the Chairman The role and responsibilities of Directors The role of the Chief Executive Officer (CEO) The role of the Secretary The role of stakeholders Disclosure and Transparency Board Committees Corporate Social Responsibility Conclusion List of State-Owned Enterprises Survey Questionnaires Office of Public Sector Governance (OPSG), Prime Minister s Office Page 3

4 Executive Summary 1.0 INTRODUCTION 1.1 Purpose of the Report The Office of Public Sector Governance (OPSG) has, amongst other duties, been mandated to promote, disseminate and monitor the implementation of the Code of Corporate Governance in public sector organisations. In this context, the OPSG carried out a survey in seventeen state-owned enterprises (SOEs) in order to review the state of governance in public sector organisations. The purpose of this report is to provide an assessment of the actual level of compliance of state-owned enterprises with the National Code of Corporate Governance and where appropriate, to identify issues which may assist those organisations in bridging the gap between current and best corporate governance practices. In addition, the report seeks to identify what further improvements that can be brought to demonstrate and improve compliance with, the spirit, rather than just the letter, of the Code. 1.2 Scope and Methodology of the Survey For the purpose of the survey, two rounds of interviews were carried out with the Chairperson, some board members, Chief Executive Officer (CEO), the Secretary and some senior officers of each of the seventeen organisations (Annex A). In addition, three workshops were organised this year to sensitize on good corporate governance practices with the participation of eminent resource persons and the findings of the survey were discussed in those workshops. 1.3 Areas of Corporate Governance covered in the Survey The following ten areas of corporate governance have been covered in this report: Role and Responsibilities of the Board; Board Composition; Role and Responsibilities of the Chairperson; Role and Responsibilities of Directors; Office of Public Sector Governance (OPSG), Prime Minister s Office Page 4

5 Role and Responsibilities of the Chief Executive Officer; Role and Responsibilities of the Secretary; Role of Stakeholders; Disclosure and Transparency; Board Committees; and Corporate Social Responsibility. 2.0 MAIN OBSERVATIONS 2.1 Level of Compliance with the Code The findings of the survey indicate that there is a reasonable level of compliance by SOEs with the Code and they are putting considerable effort into building a robust corporate governance framework based on the principles enshrined in the Code. The findings reveal that translating the principles of the Code into specific action is often challenging and several policy issues emerge given the special circumstances of stateowned enterprises. However, it is encouraging to note that some organizations have already taken note of our recommendations and have already initiated a series of corrective measures to enhance corporate governance. 2.2 Areas of Compliance, Non-Compliance and Recommendations The areas where there have been compliance and non compliance with good corporate governance practices are highlighted below. In addition, in the light of our findings and observations, a number of recommendations are proposed to allow for the: 1. improvement of the quality and level of compliance of current Corporate Governance practices with the Code and guidelines for SOEs; and 2. adoption of international best practices of corporate governance: Office of Public Sector Governance (OPSG), Prime Minister s Office Page 5

6 2.3 AREAS OF COMPLIANCE Role and Responsibilities of the Board Strategic Planning The Boards of several organisations have adopted an effective strategic planning process. It was noted that those organisations have formulated strategies in medium to long term corporate plans and action plans which contribute towards better performance. These plans enable the Chief Executive Officer to accomplish the mission of the organisation, take appropriate decisions and report to the Board on the status of the organization on a regular basis. Board Meetings Board meetings are held regularly in most of the organisations. As regards attendance at board meetings, it was noted that more than 80% of members are present at board meetings Board Composition Right Mix Most of the organisations have a right mix of Board members adequately representing key stakeholders as mentioned in their respective Acts. All organisations have a majority of non-executive directors on their Boards. Right Size A board should be large enough to include a diversity of competencies to exercise its responsibilities but small enough to engage in active discussions, make timely decisions and work together as a team. Generally, 7 to 10 members is the workable size range for boards of SOEs. In the case of one parastatal, the board is quite heavy with more than 18 members. Office of Public Sector Governance (OPSG), Prime Minister s Office Page 6

7 Term of office The term of office for directors is staggered (i.e directors are appointed for different terms of one, two or three years) to ensure continuity of the Board. This also ensures a regular influx of fresh and objective thinking The Role and Responsibilities of Chairperson Profile of Chairperson The survey shows that there are a few highly qualified and well experienced Chairpersons who operate in a pro-active manner. This is reflected in the good performance of their organisation. Conduct of Board Meeting - Leadership It is observed that in more 60% of the organisations, the Chairperson provides overall leadership to the board while at the same time he encourages and ensures active participation of each member in board deliberations. Inter-personal relationship Our survey also reveals that in several organisations, the Chairperson holds a good working and inter-personal relationship with the members of the Boards by bringing out the best in each member and adopting a collaborative approach. Relationship between Chairperson and CEO It has been noted that in most cases, the CEO is getting the support and advice of his Chairperson in fulfilling his executive responsibilities. This working relationship is further consolidated when the Chairperson abstains from interfering in the day to day management of the organisation. Office of Public Sector Governance (OPSG), Prime Minister s Office Page 7

8 2.3.4 Role and Responsibilities of Directors Participation of Directors In general, it is observed that directors are assuming their role and responsibilities in a satisfactory manner in terms of attendance, participation, objectivity, confidentiality and professionalism. As mentioned earlier, the rate of attendance in board meetings is quite acceptable. According to the Chairpersons, the Board receives the support and contribution of most Directors Role and Responsibilities of the Chief Executive Officer (CEO) Separation of Supervision and Management In all organisations, the title, function and role of the Chief Executive Officer are separate from that of the Chairman which is a major requirement of the Code. The CEO is responsible for the day-to-day operational management of the organisation while the Chairperson together with the Board is responsible for formulating strategies and policies as well as having an oversight over the affairs of the organisation. Profile of CEO Most of the CEOs are found to have the experience, skills and knowledge necessary to discharge their duties and responsibilities effectively and efficiently. They work towards the achievement of the organisation s financial and operating goals and objectives as set by the Board and ensure that the day-to-day business of the organisation is properly managed and monitored. Office of Public Sector Governance (OPSG), Prime Minister s Office Page 8

9 2.3.6 Role and Responsibilities of the Secretary Appointment of Secretary All organisations have appointed a Secretary with the responsibility for taking notes of meetings, preparing agenda, and convening meetings of the Board and Board committees. In most cases, administrative officers are performing the duties of the secretary to the board. According to Chairpersons interviewed, these officers are performing to the satisfaction of the Board Role of Stakeholders Rights of Stakeholders In most organisations, the rights of stakeholders are mirrored by their representatives on the Board. Their active participation in Board meetings ensures that their interests are safeguarded. According to the respondents, there is an effective cooperation and collaboration between the organisation and its stakeholders like government, employees, contractual parties and the public. This relationship improves the quality of service delivery and ensures long term sustainability of the organisation. Communication with Stakeholders Most of the organisations have developed various means of communication such as websites, brochures, regular meeting, fairs, etc to be in close contact with their stakeholders as well as disseminating their policies and values. This ensures stakeholder engagement in compliance with good corporate governance practices. Office of Public Sector Governance (OPSG), Prime Minister s Office Page 9

10 2.3.8 Disclosure and Transparency Submission of Annual Report It is observed that few organisations are complying to the Code and to the relevant Acts (Financial Reporting Act 2004 and Finance and Audit Act 2009) as regards submission of their annual reports which should, among others, include their audited financial statements and corporate governance reports, within the time schedule as laid down in legislation Board Committees Meeting and Reporting The survey reveals that in those organisations that have well-structured board committees, meetings are held at regular interval and the rate of attendance is appreciatively high. It has also been pointed out the Board Committees are meeting their purpose and objectives and are reporting to the Board in an effective manner. Most organisations have appointed a secretary to assist Board Committees and the deliberations are duly recorded Corporate Social Responsibility Most organizations are aware of the need to participate in such activities that may benefit the society and some have already operationalised their CSR activities Degree of Compliance The degree of compliance to the National Code as regards to the ten areas of good corporate governance covered by the survey is illustrated in the Chart below. Office of Public Sector Governance (OPSG), Prime Minister s Office Page 10

11 80% Degree of Compliance 70% 65% 62% 67% 63% 60% 50% 51% 56% 58% 54% 50% 40% 30% 28% 20% 10% 0% 23rd March The Chart above shows that the degree of compliance to the Code of corporate governance is satisfactory. The average level of compliance is estimated at more than 50% in most of the 10 corporate governance topics surveyed. 2.4 AREAS OF NON COMPLIANCE - Observations and Recommendations The areas of non compliance together with recommendations are detailed below Role of the Board Responsibility of the Board It is noted that, in some organisations, the Boards are not aware of the need and benefits of complying with the Code of corporate governance. Boards should be responsible for good governance activities such as monitoring and evaluating the implementation of strategies and policies, identification of key risk areas, compliances to relevant laws, regulations and code of best practice, etc. Recommendations (Number 1) Boards should ensure that directors fully understand the role and responsibilities of a Board and the contribution they are expected to make, including in particular the Office of Public Sector Governance (OPSG), Prime Minister s Office Page 11

12 commitment of time and energy that the organization expects of its directors. Board members are required to promote the vision and mission of the organisation and not act solely as representatives of their respective ministries/departments. Decisions of the Board should be taken in the interest of the organisation. Corporate Objectives Statement (COS) Most organisations have not formulated a Corporate Objective Statement (COS) which allows them to focus on strategies, service standards and performance targets. They are, in fact, not aware of the COS, which is a requirement of the Code, though in some cases the organisations do have a strategic plan. Recommendation (Number 2) A Corporate Objectives Statement (COS) spelling out the strategies, service standards and performance of the organisation have to be formulated and agreed with the Parent Ministry. This document will then serve as a basis for implementation of government policies and the organisational objectives. It will as well help to monitor the performance of the organisations and their boards. The COS should include, in respect of an organisation, among others, the followings: Vision, mission and values Purpose(s) and objectives; Value drivers, A statement of expected behaviour of stakeholders; A statement of accountability by the Board; and Expectations of financial as well non-financial performance for the year Evaluation of Effectiveness of the Board Most organisations do not have a mechanism to monitor and evaluate the performance of the Board, Chairpersons and other board directors in terms of level and quality of strategies and policies development, oversight of implementation of strategies, control Office of Public Sector Governance (OPSG), Prime Minister s Office Page 12

13 and risk management system. For this purpose, directors should be assessed both individually and collectively as a Board. Recommendation (Number 3) It is necessary to conduct, on an annual basis, some form of performance measurement for board members including the Chairperson as well as the board as a whole. This exercise can be effected internally or, for more objectivity, by an external body Board Composition Absence of Executive Directors Many Boards do not have the appropriate balance of executive and non-executive directors. In fact, the Boards do not have any executive directors while the Code recommends the appointment of at least two such directors. In addition to contributing to decision making, executives have the experience and insight on the activities and management of the organisation. Recommendation (Number 4) The appointment of Executive Directors will bring inside experience and a wider perspective to a Board due to their familiarity with the specific issues connected to the organization's governance. Initially, OPSG considers that the board should comprise at least one executive director i.e preferably in the person of the CEO. Size of the Board It is observed that one of the seventeen organisations surveyed is headed by a board with not less than 16 members. This situation may be a major hindrance for timely and rapid decision-making due to potential lengthy deliberations where many directors may be, for active discussion purpose, willing to voice out their opinions. Office of Public Sector Governance (OPSG), Prime Minister s Office Page 13

14 Recommendation (Number 5) There is a need to review the size and composition of the board of organisations with heavy boards with a view to render the board more effective and efficient. In fact, a right size leads to more cohesive functioning and decision making could be expedited will add to the efficiency of the organisation. In this context, the Act regulating the organisations has to be reviewed and amended as regards the size and composition of the board, as some date back prior to Profile of Directors It has been observed that board members are recruited and appointed in accordance with the respective Act of the organisation. In addition, the Act requires that some directors are nominated by the Minister. In certain cases, it is noted that the profile of some directors in terms of skills, competencies, experience and integrity, is lacking and inadequate which results into an ineffective and inefficient Board. They are unable to contribute through poor involvement in Board deliberations which require a certain level of professionalism, knowledge and experience. Recommendation (Number 6) The choice of Chairpersons and members of the Board should be individuals of integrity who can bring a blend of objectivity and commitment to the Board. The nomination or appointment should be made out of a list of eligible candidates (maintained by a central government agency) with appropriate professional background, skills, experience and knowledge. The Board may consider having a Nomination Committee to appoint new directors from the eligibility list. Non-fulfilment of Vacancies of Directors Prolonged vacancies of directors at board level hinders the smooth running of the organisation in terms of imbalanced and uninformed decision, inadequate discussion, lack of representation of required interests and also lack of required quorum. It was Office of Public Sector Governance (OPSG), Prime Minister s Office Page 14

15 noted that in one particular case, there were more than four vacancies at Board level which have not been filled since more than two years. Recommendation (Number 7) The Board of an organisation should ensure that vacancies at Board level be filled within reasonable time to allow for a full board necessary for the smooth running of the organisation. The parent ministry should keep a watch on such situation and initiate appropriate action, if necessary, in consultation with the central government agency The Role and Responsibilities of Chairperson Relationship between Chairperson and CEO In a few cases, it has been noted that, the conflictual relationship between Chairperson and CEO is impairing the proper functioning of the organisation. The reasons for this situation are, in the first place, the poor understanding and awareness of their respective roles and responsibilities by the Chairperson and CEO as laid down in the Code and secondly, the unwelcome interference of the Chairperson in the day-to-day management of the organisation. This often seems to be more a problem of conflict of personalities. Recommendation (Number 8) A better understanding of the role and function of the Chairperson and the Chief Executive Officer as laid down in the Code would largely contribute to avoid conflicts as well as unwelcome interference of the Chairperson and also board members in the day-to-day management of the organisation. The OPSG would continue its sensitisation activities through regular workshops, seminars, etc. Unawareness of Role and Functions The survey reveals that there are a number of common core functions which are not performed by the Chairperson in some cases. These include, amongst others, ensuring monitoring and evaluation of Board and director appraisal, maintaining sound Office of Public Sector Governance (OPSG), Prime Minister s Office Page 15

16 relationship with stakeholders through the desirable level of communication and disclosures. Recommendation (Number 9) It is recommended that the letter of appointment for Chairperson should stipulate the main responsibilities and functions, taking into account the specificity of the nature of business of their organisations. It is advisable that Chairpersons should have undergone training in directorship prior to appointment. After appointment, he should follow an induction course organised by the concerned organisation Role and Responsibilities of Directors Contribution of Directors In few cases, the inadequate and poor input of some directors has been highlighted in that they do not participate actively in board deliberations and their contributions are considered to be uneven. Some directors are not involved in overseeing the strategic direction and management of the organisation and promoting its overall success and keeping abreast of development in its business sector. Recommendation (Number 10) To address the above issue, the organisation should put in place an appropriate mechanism for the assessment of the performance of the Directors. This will allow the organisation to take corrective action such as providing relevant training to or replacement of non-performing directors. This mechanism will encourage directors to bring better contribution at Board level. Training and Development No formalised induction or training course has been observed to be carried out in respect of new members joining the board. There is also a need to provide for specific training Office of Public Sector Governance (OPSG), Prime Minister s Office Page 16

17 of directors and the executive management in regards to both corporate governance issues and the fiduciary duties and other board responsibilities. Recommendation (Number 11) The Code requires that a formal induction programme be set in place to familiarise new directors with the organisation s operations, its strategic plan and its business environment. It should also include such important issues as fiduciary duties and responsibilities of directors, situation of potential conflict of interest and personal liability as directors. Multi-Directorship The survey reveals that some members are sitting on more than one board thereby giving rise to multi-directorship. Multi-directorship may affect the directors commitment by diluting their effectiveness and capacity to participate fully in boards deliberations. Moreover, this may give rise to conflict of interest by directors being required to take decision on matters which may not be in the best interest of other related organisations. Recommendation (Number 12) For the purpose of nominating or appointing Directors, the essential criteria, among others, regarding multi-directorship should be taken into account. This will allow the selection of directors who have the time and energy to meet the demands of their role as directors Role and Responsibilities of the Chief Executive Officer Relationship between Chairperson and CEO In most cases of the conflicting relationship between the Chairperson and the Chief Executive Officer, this conflictual environment is mainly the result of the chairperson s ignorance or disregard of his role and function in as much as his appointment letter does not define his role, function and accountability. Office of Public Sector Governance (OPSG), Prime Minister s Office Page 17

18 Recommendation (Number 13) A better understanding of the role and function of the Chairperson to lead the Board and oversee the affairs of the organisation and that of a Chief Executive Officer to manage and execute Board decisions will assist in creating the appropriate relationship free from potential conflicts. It is in the interest of both parties to shoulder their respective responsibilities in a manner that display sound corporate governance. Moreover, it is advisable that Chairpersons receive a formal letter of appointment with well-defined roles and responsibilities and deliverables. Evaluation of Effectiveness of the Chief Executive Officer Most organisations do not have a proper mechanism to monitor and evaluate the performance of the CEO as regards implementation of policies and strategies and maintenance of an adequate system of internal control. Recommendation (Number 14) To ensure that the objectives of the organisations are achieved, organisational performance indicators should be set against which the performance of the CEO can be assessed on an annual basis. Management Information The effectiveness and efficiency of the Board depend to a large extent on the intelligent, timely and accurate information provided by management. Moreover, the information obtained should be appropriate and comprehensive to make informed decision Role and Responsibilities of the Secretary Duties of Secretary In most organisations, the officers who are acting as Secretaries are not aware of the relevant statutory and regulatory requirements of their organisations. They are not fulfilling their role as required by the Code which includes, amongst others, advising the Office of Public Sector Governance (OPSG), Prime Minister s Office Page 18

19 board on good corporate governance practices and also guiding the board in discharging its fiduciary duties while ensuring that the organisations and its directors operate within the ambit of the law. Recommendation (Number 15) Necessary training relating to the duties and responsibilities as a secretary as required by the Code should as far as possible be provided to them. Such responsibilities include, among others, assuring compliance with necessary statutory and regulatory requirements, code of conduct and internal rules and regulations, acting as focal point of contact for stakeholders, and providing guidance and advice to the Board on matters of ethics and corporate governance. Notice of meeting In a few organisations, notice of meeting including the agenda as well as other board papers are not sent to Directors well in advance of the Board (or/and Board Committees) meeting. Recommendation (Number 16) Notice of meeting should be forwarded to Directors within a reasonable time before the Board (or/and Board Committees) meeting to apprise themselves of the Board papers. This will allow the Directors to participate constructively in discussions at Board meeting and to contribute to decision-making The Role of Stakeholders Non-representation on Board It has been pointed that, in few cases, some stakeholders of the organisations are not represented on Boards which may lead to their interests being overlooked. Office of Public Sector Governance (OPSG), Prime Minister s Office Page 19

20 Recommendation (Number 17) To enhance participation of major stakeholders in the organisations, it is proposed that as far as possible, their representatives should form part of the board. In this respect, the respective Acts need to be amended accordingly. Communication Most organisations do not hold regular meetings with their stakeholders with a view to encouraging the latter to participate in the affairs of the organisations. It was also noted that they do not carry out any survey to assess their performance in service delivery and the needs of stakeholders. Recommendation (Number 18) As service providers, the organisations need to carry out surveys with the major stakeholders or other related means to assess the level and quality of services delivered. In order to encourage participation of the stakeholders in the affairs of the organisation, two-way communication is vital. In this context, there is a need to adapt a proactive approach by holding regular meetings with them or informing them of the recent activities of the organisation through letters, s, sms, etc. Website All organisations have their own high-quality websites which are convenient tools to add value and satisfaction, display corporate information and improve communication with stakeholders. However, it is observed that the information on some websites are not updated on a regular basis and are not user-friendly. Office of Public Sector Governance (OPSG), Prime Minister s Office Page 20

21 Recommendation (Number 19) The websites of most organisations need to be upgraded to be more user-friendly and should be updated on a regular basis. The information which is displayed on the website should be easily understood by the public at large Disclosure and Transparency Non-submission of Annual Reports Most organisations are not adhering to the timeframe as required by the Finance and Audit Act 2009 for the submission of their annual reports. In some cases, the CEO has failed to prepare the report within the stipulated period. Where the report has been prepared, it has not yet been approved by the Board within the prescribed three months following the year end to be submitted to the auditor. It has been reported that one of the main reasons for not preparing the financial statements within the required timeframe is the non-availability of internal accounting expertise. Also, the current practice requires that organisations submit their annual reports to the parent ministry which thereafter tables them at the National Assembly. There are also cases where the parent ministry has received the annual report but has not tabled same at the National Assembly. Recommendation (Number 20) The National Audit Office has made representations year after year about nonsubmission of annual reports by SOEs within the laid down legal time framework. In terms of accountability and transparency and to comply with the law, the Board should ensure that annual reports are prepared within the legal timeframe. It is the responsibility of the CEO to ensure that the financial statements are prepared and that of the Board to approve same and for the Ministry to submit to the National Assembly. Office of Public Sector Governance (OPSG), Prime Minister s Office Page 21

22 In the Consolidated Finance and Audit Act 2009, there is no mention of the time frame for tabling annual reports of SOEs by parent ministries at the National Assembly. Necessary amendments should be brought to relevant Act to require a reasonable time frame for the preparation, approval, audit, submission to parent ministry and tabling at the National Assembly. Incompleteness of Information It is also observed that most of the financial and non-financial information disclosed by organisations were accurate but not necessarily complete. Information on areas such as Directors details, profile of Senior Management team and terms of reference of Board Committees, etc have not been disclosed in the Annual Report. Recommendation (Number 21) For the purpose of completeness, it is recommended that all financial and non-financial information be disclosed in the annual report in accordance with the relevant Acts, International Accounting Standards (IASs) and the Code. This will enhance the degree of disclosure and transparency enabling all stakeholders to obtain a full and fair view of the performance of the organisation. It should be pointed out the Financial Reporting Act 2004 requires that designated institutions such as listed companies, banks, large public and private companies and more especially stated-owned enterprises, including statutory corporations and parastatal bodies should disclose or explain the reasons for their non-compliance of the national code. Office of Public Sector Governance (OPSG), Prime Minister s Office Page 22

23 2.4.9 Board Committees Absence of an Audit Committee and a Corporate Governance Committee According to the Code, all organisations should have, at a minimum, an audit committee and a corporate governance committee. Our survey shows that the majority of the seventeen organisations have not set up these committees. In the absence of an audit committee and corporate governance committee, internal auditors are reporting directly to the CEO just impairing the independence and objectivity of the auditor while issues relating to good governance are being overlooked. Consequently, the Board may be unable to exercise adequate oversight. Recommendation (Number 22) To comply with the Code, the Boards of the organisations should have, as a minimum, an audit committee and a corporate governance committee. The Audit Committee should focus, among others, on the functioning of internal control system and the internal audit department, risk areas, external audit and compliance with relevant rules, regulations and laws. On the other hand, the Corporate Governance Committee should ensure that the reporting requirements on corporate governance are in accordance with the principles of the national Code. Terms of Reference of Board Committees In the few cases where all required Board committees have been set up, their terms of reference have not been clearly defined and documented as required by the Code. This may not allow those committees to meet their intended purpose and to perform effectively. Office of Public Sector Governance (OPSG), Prime Minister s Office Page 23

24 Recommendation (Number 23) In establishing Board committees, the Board must clearly define and document their terms of reference, life span, role and function. The terms of reference of each committee should include its objectives, purpose and activities, composition, tenure and reporting mechanism to the Board. Composition of Board Committees Sub-committees are set up to assist and to make well-considered recommendations to the Board on issues delegated to them. It is observed that in some organisations, the Chairperson of the Board also chairs Board committees. This is not a good governance practice as it may influence the ultimate Board decision. The views and recommendations of the Chairperson at Board Committee level are more likely to prevail during final decision making at Board level. Recommendation (Number 24) As far as possible, Boards should ensure that their Board Committees are not chaired by the Chairperson and should comprise mainly independent directors to allow for better and independent decision making. In addition, the Chairperson and the CEO should not form part of the audit committee to allow for objectivity and independence in both internal and external audit function and reporting. Where necessary, the respective Acts should be verified accordingly. Evaluation of Board Committees In nearly all organisations, Board committees are not subject to regular and formal evaluation by the Board to assess their performance and effectiveness. Office of Public Sector Governance (OPSG), Prime Minister s Office Page 24

25 Recommendation (Number 25) The Board should devise an appropriate mechanism to be able to assess and evaluate the performance and effectiveness of Board committees as a whole and of the members individually Corporate Social Responsibility (CSR) Though many of the organisations are more or less involved in CSR activities, they do not have a defined policy on CSR. The absence of CSR activities will hinder the organisations from benefits such as long term economic sustainability and social harmony through acceptable employment policies and ownership structure. Recommendation (Number 26) Corporate social activities are in the long-term economic interest and success of the organisations and help them in conducting themselves as responsible citizens. To encourage greater involvement of SOEs in CSR activities, parent ministries should formulate workable policies on CSR together with appropriate incentives. 3.0 CONCLUSION A review of the findings of the survey reveals that, in overall, the degree of compliance to the national Code by the seventeen organisations is around 50%. The OPSG has proposed a number of recommendations to improve the existing non-conformities, the main ones being the absence of a mechanism to evaluate board and board committees effectiveness, Directors profile inadequacy, formulation of Corporate Objectives Statement, conflict between Chairperson and CEO, passiveness of certain Directors, non submission of Annual Reports, etc. In line with the OPSG corporate governance programme, the review and survey on corporate governance will, in the near future, be extended to other public sector organisations with a view to ensuring that public sector organizations become a model Office of Public Sector Governance (OPSG), Prime Minister s Office Page 25

26 of good corporate governance by actively inculcating, advocating and promoting good governance practices in the public sector. In the context of making public sector organisations more outcome-oriented, a closer monitoring of service standards, through the Parastatals Information Management System (PIMS), will encourage and enforce greater accountability on Boards, Chairpersons and CEOs. The OPSG would wish that the practices of corporate governance, more particularly, the nomination of Chairpersons, Board Members and CEOs, follow international standards as indicated in the Code approved by the Government in The OPSG undertakes to monitor the implementation of these recommendations. Back to Page 3 - Contents Office of Public Sector Governance (OPSG), Prime Minister s Office Page 26

27 Chapter One: Introduction 1. Introduction T he Report on Corporate Governance (the Report), which sets out the current state of corporate governance in seventeen State-owned enterprises and recommendation of measures to raise corporate governance standards, reflects the on-going effort of the Government to ensure that the public sector organizations become more cost-effective and outcome-oriented and to re-establish confidence in the Mauritian public sector service delivery. In line with the above objectives, the Office of Public Sector Governance (OPSG) was given an expanded mandate of making state organizations a model of good corporate Governance by actively inculcating, advocating and promoting good governance practices in the public sector. 2. Background The globalization of markets within most industries, technological changes and liberalization in many infrastructure sectors have made readjustment and/or restructuring of the state-owned enterprises(soes) an imperative. And at the same time, Corporate governance took the centre stage internationally as governments and multilateral institutions sought to address issues such as the nature of transactions between companies, financial institutions and capital markets, the design of corporate laws, bankruptcy procedures and practices, the structure of ownership and crony capitalism, the fiduciary responsibility of boards, disclosure and transparency and accounting and auditing standards. 3. State-owned enterprises State-owned enterprises (SOEs) occupy a prominent position in the Mauritian economy and play an integral part in Mauritius development. They are engaged in various activities from the airport, port, public housing, water and electricity services to marketing boards. The activities of SOEs impact on the quality, accessibility and affordability of services provided to the community, especially the poor and vulnerable. Indeed the peculiarity of SOEs is that they are an effective vehicle for socio-economic development and the pursuit of growth and development as an integrated effort. SOEs are founded (and their legal position defined) in separate acts that also outline their raison d etre. SOEs are in principle supervised by associated parent ministries. The SOEs legal status requires them to be audited on an annual basis with the audits submitted to the National Assembly for discussion. Office of Public Sector Governance (OPSG), Prime Minister s Office Page 27

28 Due to conflicting objectives, SOEs do not only have commercial goals but that they are also under obligation to serve social objectives such as providing jobs, serving public interests and providing basic necessities. This is different from the conditions faced by private companies where they have a single goal as a business entity, i.e. profit maximization. Simply put, SOEs have the burden of satisfying public needs in addition to pursuing their business activities. Therefore due to these multiple tasks, SOEs can be disadvantaged in competing with their private company counterparts for profits. Thus, the incentives for board members and managers to maximize the value of the company and keep costs in check are reduced. Accountability and performance may also be hindered by political interference, poorly defined non-commercial objectives, and an absence of transparency. Strong internal controls, good disclosure, independent boards of directors, and other CG tools can help state -owned enterprises perform well and act in the best interests of citizens and other shareholders. To help make state owned enterprises more competitive, efficient and transparent, the National Committee on Corporate Governance has developed a set of Guidance Notes, as a complementary document to the Code issued in May The Guidance Notes For State-Owned Enterprises (GNSOE) is also designed to inform directors, senior executives and other stakeholders of the requirements under the different sections of the Code so that they can discharge their duties and responsibilities efficiently. 4. The Code of Corporate Governance The Code of Corporate Governance (The Code in short form) which was launched on October 6th 2003 provides a roadmap for our enterprises to raise our corporate governance structure to international levels of best practice and will surely usher in a radical transformation of our corporate image. The goal of the Code is to build greater trust between the Company and investors to lower the cost of capital essential for companies to buy-in to the project- between the Company and their other stakeholders to help build a culture of social and environmental responsibility and between SOEs and the public to enable SOEs to enhance the quality of service they deliver to the public at large. The Code purports to be more than a set of rules. It is an essential element that enables stakeholders to exercise better oversight of a company s business and affairs. The premise is that a company that is well governed is transparent and accountable to its shareholders and other stakeholders, including the broader community. It also seeks to provide a set of principles to better harmonise our corporate objectives with the values of our society. It includes Office of Public Sector Governance (OPSG), Prime Minister s Office Page 28

29 considerations that would uplift society in relation to sustainable development issues, environmental and social concerns, stability of employment, and wealth creation. 5. Compliance and Applicability. The Code of Corporate Governance for Mauritius was launched in October 2003 and gazetted in May As from the reporting year ending 30 June 2005, all designated institutions (set out in section 1.1 of the Code) are obliged to comply or explain why they have not complied. All state-owned enterprises (SOEs), including statutory corporations and parastatal bodies, are designated institutions. The Financial Reporting Act2004 and the Financial Reporting Council The Financial Reporting Act 2004 requires that all state owned enterprises should apply the Code of Corporate Governance. In case of non-compliance, these SOEs shall disclose and explain reasons for their non-compliance. The Financial Reporting Council (FRC), a body corporate set up under the Financial Reporting Act 2004 act as a custodian for the CODE. The FRC is mainly responsible for promoting confidence in corporate reporting and good corporate governance in SOEs. 7. Conformance and Performance Good corporate governance on its own cannot make an organisation successful. Strategy and performance are also important. The key message of enterprise governance is that an organisation must balance the two dimensions of conformance and performance needs to ensure long-term success. The conformance dimension covers corporate governance issues such as roles of the chairman and CEO, the role and composition of the board of directors, board committees, controls assurance and risk management for compliance. The performance dimension tends to take a more forward looking view. It centres on strategy and value creation. The focus is on helping the board to make strategic decisions, to understand its appetite for risk and its key performance drivers. 8. Corporate Governance Reform : Survey The OPSG conducted a preliminary survey to evaluate the present state of Corporate Governance in seventeen Public Sector Organisations (Annex A) out of the 35 organisations which sought assistance and come up with recommendations to improve the Corporate Governance practices in these organizations. Office of Public Sector Governance (OPSG), Prime Minister s Office Page 29

30 9. Purpose, methodology and structure of the Survey Purpose: The primary objectives of the survey were the following: Methodology To allow stakeholders to gain an understanding of the extent to which public sector agencies follow corporate governance practices To assist public sector organizations close any gaps between best and current practices by identifying areas of improvement and To provide organisations with some guidelines on which to base its corporate governance reform activities The officers of OPSG were required to conduct separate meetings and interviews with at least three officers including the Chairman, the Chief Executive Officer/ Manager and the Secretary or a member of the Board. Structure In the course of the meetings, the following issues were addressed and the respondents were asked to give their views on the following CG reforms: The Board-- Its role and responsibilities, composition and frequency of meetings The Chairperson, Chief Executive Officer, Board Members and the Secretary--Their profile, appointment, role and responsibilities. The Board Committees-- The role, responsibilities and composition. Transparency and disclosure of information. The role and rights of the stakeholders Corporate Social Responsibility The findings of phase I of the survey were discussed at a workshop held in June 2011 and further investigated in a second round. Phase II of the survey explored additional areas at the level of performance, which were not covered in Phase I and tested the validity of selected responses from Phase I. In each corporate governance category, the specific areas of overall strongest and weakest compliance with international good practices were observed through specific questions. The respondents were also asked to provide their comments on the draft copy of their own individual reports and for suggestions on how their organisations can improve upon its present CG practices. A copy of the survey questionnaires is at Annex B. Office of Public Sector Governance (OPSG), Prime Minister s Office Page 30

31 10. Survey findings The Findings of the Survey have been structured into these three main categories; Compliance to the Code of Corporate Governance Non compliance or Limitations/Barriers to improve Corporate Governance Practices and Recommendations on some of the limitations and barriers to the implementation of best practices in Corporate Governance. 11. Structure of the Report The different sections in this report will discuss in detail the following CG related topics: Role of the Board Board composition Role and Responsibilities of the Chairperson: Role and Responsibilities of Directors Role and Responsibilities of Chief Executive Officer Role and Responsibility of Secretary Role of stakeholders Disclosure and Transparency Board Committees Corporate Social Responsibility Each section starts with some background information on a particular corporate governance topic and the role and responsibilities as defined by the Code followed by an analysis of the results from the survey on each topic and concludes with appropriate recommendations for best CG practices. Where relevant, the analysis includes comments and suggestions given by the survey respondents or discussion group members. Back to Page 3 - Contents Office of Public Sector Governance (OPSG), Prime Minister s Office Page 31

32 Chapter Two: The Role of the Board 1. Boards B oard of directors is a corporate governance instrument in charge of monitoring and advising the management, in both private and state-owned enterprises. The Board of directors is believed to be of significance in improving the enterprise performance as it provides expert advice, acts as safeguards, brings skills, knowledge and experience. On Boards, the Guidance Notes for State-Owned Enterprises (GNSOE) draws attention that: Every state-owned enterprise should be led by an effective board which exercises leadership, enterprise, integrity and judgment in directing the enterprise, and one which acts in the best interest of the enterprise in a transparent, accountable and responsible manner. The board should be empowered to function in full operational autonomy, and should be the link between the shareholders/ stakeholders and the enterprise. 2. Main Functions The main purpose of a Board of a public body is to provide effective leadership, direction, support and guidance to the organization and to ensure that the policies and priorities of the Government are implemented. The responsibilities of the Board as defined in Sections to of the Code of Corporate Governance (The Code) apply to state-owned enterprises. This can be summarised into these three main functions: To report to the Parent Ministry and ultimately to Government which is the shareholder. Board members should be clear about Ministerial policies and expectations of their organisation. To provide active leadership of the public body by agreeing the organisation s strategy; setting cost effective plans to implement the strategy; establishing a performance management framework which enables under-performance to be addressed quickly; establishing the values and standards of the organisation and ensuring that the highest standards of governance are complied and that a framework of prudent and effective controls is in place to enable risks to be assessed and managed. Office of Public Sector Governance (OPSG), Prime Minister s Office Page 32

33 To hold the Chief Executive (and senior staff) to account for the management of the organisation and the delivery of agreed plans on time and within budget. 3. Strategic Planning Strategic planning is a useful tool for the Board to meet its responsibilities. Strategic planning refers to the process by which directors go about shaping the direction, future and vision of the organisation. Boards are constantly under pressure to add value to the performance of the organisation and stakeholders expect directors to recognise their responsibility for direction setting and the suitability of strategies. Boards have to determine its objectives, seek opportunities and set priorities to improve performance aiming at becoming more outcome and results oriented. Strategic planning is one way of clarifying and communicating this strategic direction to all stakeholders. Strategic planning process assists the board and management to focus on the purpose of the business. It involves developing a framework within which the organisation is able to: assess the environment within which it operates; review and analyse target markets in which it competes to ensure that customer's expectations are met; examine its performance and assess its strengths and weaknesses; evaluate internal policies and legal requirements and compliance; and Formulate strategies which guide the organisation to achieve the desired objectives. Provide clear-cut instructions to management on the strategic direction of the business Lay down the basis for the allocation of resources Ensure that investment priorities are met Builds up a shared vision to meet the objectives, values and principles agreed upon and Establish a proximity between stakeholders and management 4. Corporate Objectives Statement (COS) Good corporate governance should be integrated with the organisation s business strategy and not viewed as simply a compliance obligation. Within the corporate governance structure, every SOE should conclude a COS. The COS must be agreed by the Board and the Parent ministry. Office of Public Sector Governance (OPSG), Prime Minister s Office Page 33

34 This means that the Board has to: establish the corporate mission, aims and objectives of the organisation; This should be made explicitly clear: why the organisation exists? - what it hopes to achieve and what are the obligations? oversee the development (and review) of strategies, plans and policies of the public body; ensure the operation and work of organisation is closely aligned with the policies and performance targets to ensure efficiency and effectiveness; and oversee the development (and review) of performance targets, including key financial targets. It is thus recommended that these be reflected in a Corporate Objectives Statement (GNSOE, Section 2) as shown below: Office of Public Sector Governance (OPSG), Prime Minister s Office Page 34

35 5. An Effective Board In the wake of the recent spate of corporate malfeasance globally, it became apparent that in many organizations, boards of directors did not function according to relevant laws and codes and the spirit behind those laws and codes. The board of an organisation represents the stakeholders and is intended to make decisions that are in the best interests of the organisation Office of Public Sector Governance (OPSG), Prime Minister s Office Page 35