Moving from the private to public sector

Monday 20, April 2015

Governance in the public sector is complex, with more layers and different points of accountability than in the private sector

One of the current big ideas in governance is ‘enlightened shareholder value’ – the idea that companies should look to sustain growth and profits responsibly and consider the interests of all stakeholders. Its centrality to the governance debate has been underlined by the enactment of section 172 of the Companies Act 2006, which requires that directors act in a way that is ‘most likely to promote the success of the company for the benefit of its members as a whole’.

Directors must have regard to a range of interests linked to the company’s stakeholders – which include employees, suppliers and customers – and the impact of corporate activities on the community and the environment.

Despite having origins in the private sector, the influence of stakeholders is often even more pronounced in the public sector, given the nature of the services it provides. To determine how stakeholders influence organisational outcomes – and by extension governance arrangements – it is useful to compare and contrast the differences between public and private money.

Public money

Lord Sharman, in his report ‘Holding to Account’ set out the characteristics of public money as having:

  • An element of compulsion in terms of how it is collected, e.g. through taxes
  • A requirement for it to be used for the purposes for which it was intended
  • Recognised standards of ‘propriety’ defined as ‘expectations as to how public money should be used’
  • Demonstrable ‘value for money’ imperativesthat serve as a substitute for efficiencies that would be secured in a competitive environment

Consequently, the accountability framework surrounding how public money is spent has implications for public sector corporate governance arrangements. The most significant is the wider range of stakeholders involved in influencing decision making and the specific governance roles which complicate the processes.

Boards in the public sector do not enjoy the same degree of autonomy in decision making as private sector boards. Guidance from the Treasury on ‘Managing public money’ notes that it is ministers, advised by officials, who decide policy. The role of the board is that of an advisory body on the ‘operational implications and effectiveness of policy proposals’.

The minister in charge of the relevant government department is accountable to parliament for all of its policies, decisions and actions, including those made by ‘arms length bodies’. An accounting officer is appointed by the Treasury or designated by the department ‘to be accountable for the operations of an organisation and the preparation of its accounts.’

The influence of these key governance actors – the minister and the accounting officer – creates a different context for corporate governance and decision making. These key players are important when considering how to best engage with wider stakeholders.

Effective engagement

In 2014, the International Federation of Accountants (IFAC) and the Chartered Institute of Public Finance and Accountancy (CIPFA) published ‘International Framework: Good Governance in the Public Sector’. The report outlines the not-for-profit purpose of public sector organisations and how their outcomes are focused on social issues and the need to generate consensus among a wider range of societal groups. This contrasts with a narrower range of constituencies with which private sector entities routinely need to engage and also their ability to focus on economic objectives. The report defines governance as the ‘political, economic, social, environmental, administrative, legal, and other arrangements’ that are put in place to define and achieve the intended outcomes for stakeholders. It also has useful tips on engaging with all categories of stakeholders – individuals and organisations – by operating in a transparent and effective way.

A clear framework for managing the stakeholder engagement within public sector organisations helps establish clarity on respective roles and responsibilities. This leads to more successful governance outcomes.

Gary Martin is Senior Lecturer, Department of Accounting, Finance and Economics at Ulster University Business School

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