What directors should know about public sector boards

Governance works differently

Directors joining PSE boards will find that governance operates quite differently from what they may have experienced in corporate or NFP settings, particularly when it comes to appointing or overseeing the CEO.

According to Carol Mills, Director of the Institute for Public Policy and Governance at the University of Technology Sydney, the board itself is generally appointed by the responsible minister and has either a direct or indirect reporting line to that minister.

Similarly, the chief executive is typically appointed by the government, sometimes based on the board’s recommendations, and usually reports to the responsible minister. 

“No public sector boards can be governing boards in the same sense as they are in the private sector, because the structure of them is different, the legislation is different and the risks are different,” says Mills.

Risk is unique

Ministers are responsible for funding the PSE, not the board, and, unlike in a private company or NFP, the board does not set the strategy. Instead, the government outlines both the entity’s purpose and its strategy. The job of the board and CEO is to interpret and implement it.

“How you then interpret the delivery of that strategy is something boards and authorities can have a lot of influence over,” says Mills. “In many ways they bring a skillset — guidance, support and technical skills and perhaps a culture of making things happen a bit faster than traditional public sector models, but they don’t govern in the same way.”

She explains that without needing to set the strategy or fund the organisation, the risk for directors isn’t financial or regulatory, instead it is mostly reputational.

“Ultimately, no minister can delegate all their responsibilities to a board,” she says. “Community expectations would not be satisfied by the minister saying: ‘It had nothing to do with me. It was a bad decision by the chair of the board’.”

Consensus matters

“Understanding the purpose of the organisation, as well as the purpose of the board’s role is really important in the public sector, as well as understanding where risk lies and where the various parties’ responsibilities lie,” says Mills.

Being accountable to and reporting to the minister, the CEO of a PSE will often meet with the minister weekly and maintain a close working relationship. The board, in turn, may meet with the CEO — sometimes only in an advisory capacity. 

Mills adds that the board also has a reporting line to the responsible minister, a key difference from corporate governance models. Thus, triangular relationships make consensus key. 

“The consensus model is really important… a sense of cooperation and aiming for the same goals, bringing different potentially skillsets,” says Mills.

She also warns there can sometimes be some tension between the board’s long-term horizon and the government looking for more immediate results.

Financing can cause tension

Traditionally, PSEs were fully funded by the government, but this is changing, with some PSEs expected to earn part of their funding from commercial activities. For example, the Sydney Opera House is expected to earn most of its revenue from commercial activities, such as renting out its spaces, food and tours, with the government footing the bill for building maintenance and some of its operations.

Mills says situations such as this can cause the PSE’s board to question why they are still accountable to the government if they generate, for instance, 90 per cent of the income. Additionally, she notes that at times, a minister’s expectation that a PSE generates revenue through a commercial activity can conflict with the legislation under which the entity was established. This particularly applies to older institutions, such as a museum, where the legislation doesn’t articulate activities such as restaurants, shops or commercial hire. 

“This balance between flexibility of how the business operates and the structures of the legislation sometimes need to evolve,” says Mills.

Sometimes boards are brought into a PSE — particularly public private partnerships for infrastructure delivery — to provide business and commercial acumen to a project.

“A lot of the more recent boards are told to behave commercially,” she says. “But how do you articulate that if you’re building a metro? It’s basically government money — the government has determined it and allocated it. Those boundaries are evolving and I don’t think the legislation has always caught up with those expectations.”