Why good governance is important in the public sector

Governance affects an organisation’s performance, its appetite for risk and ability to innovate say Nigel Phair and Robert Kay ahead of their appearances at the AICD’s Public Sector Forum.

Good governance is at the heart of any successful business. It is essential for a company or organisation to achieve its objectives and drive improvement, as well as maintain legal and ethical standing in the eyes of shareholders, regulators and the wider community. Governance is not simply a concern for large companies, but for any business or organisation of any shape or size.

Governance is especially important in the public sector because you’re dealing with the public’s money, according to Adjunct Professor Nigel Phair GAICD, the director of the Centre for Internet Safety at the University of Canberra who is speaking at the AICD’s upcoming Public Sector Forum at the War Memorial on 11 August, echoes this sentiment.

“I like a conservative government—not conservative politics, but conservative government,” says Phair. “When they’re entrusted with the public purse, I like i’s dotted and t’s crossed, and that includes governance. A government board, to my mind, should be like any board, whether it’s a not-for-profit board or an ASX 100 board or anything in between, it should have a diversity of skills and a diversity of talent,” says Phair.

At the second annual AICD Australian Governance Summit held in March, Leilani Frew MAICD, a former director of Sydney Motorway Corp, described government boards as a hybrid in terms of not-for-profit and corporate conglomerates. “Community at heart but commercial discipline in my head, that’s the approach you have to take,” said Frew, who stressed the importance of strong engagement with the community that the business or organisation serves.

The governance of any organisation affects its appetite for risk and ability to innovate, says Dr Robert Kay MAICD, the co-founder and executive director of Incept Labs who is also an Adjunct Professor at Macquarie University. Kay said that when it comes to innovation in the public sector, it’s a whole other world to the private sphere. “They are quite distinct realms when looking at why governance matters as it relates to innovation,” he says.

Incept Labs has conducted two studies in relation to public sector innovation. The first one was a CEO study conducted over 2012-2013 where 25 private sector CEOs and 25 departmental secretaries or heads of department were interviewed in relation to how they saw innovation working in their organisations. The survey used a narrative approach, and asked participants to tell a story of an innovation they were involved with or closely associated with, one that’s a success and one that’s a failure to compare the different patterns of what’s going on. Kay said this was the first time anyone obtained comparable data sets from both the private and public sectors.

The findings showed that innovation occurs very differently within the public and private sectors. “A lot of the principles that you would apply to how you design an innovation capability or how you govern innovation in the private sector, if you tried to transpose those directly into the public sector they’re unlikely to work because things like the risk appetite are quite different,” says Kay. “The nature of the risks and how they manifest in the organisation are quite different. In the public sector you’re not actually in control of your own destiny to a large extent, you get a new minister every three years and they may or may not make sense. As a result, those dynamics that could be relatively organic in a private sector context, they’ll never survive in a public sector context. We even found, to some extent, there are even forms of innovation that wouldn’t exist in the private sector.”

Innovation usually occurs when the uncertainty around any given idea or strategy is reduced so that it can be implemented. But Kay found that there were ideas in the public sector that basically had no uncertainty associated with them at all, yet the fear of scrutiny meant they were not implemented. “You just wouldn’t get that in the private sector,” he said. “If you’re in the private sector you can net out the gain from multiple failed innovations through one mega success, whereas in the public sector you can’t. If you have a mega-success, that doesn’t buy you any points if the next one is a failure and becomes a headline. The political risk associated with that means you’ll just get smashed anyway so that therefore has a natural impact on the risk appetite of the people who are playing in that space,” says Kay.

The high level of transparency around public sector organisations reduces their capacity to engage in certain exploratory activities, says Kay, who states the key goal of any public sector innovation is to not end up on the front page of the newspaper. “Private sector sentiment would say that’s really not a great environment for innovation, is it? However, the flip side of that is that the public sector achieves innovations that have a very high level of difficulty and still manages to do it. If zero risk appetite is the environment in which they have to innovate, that just means that’s a different intellectual challenge. It’s just a different problem to solve.”

Kay believes the more successful government agencies are filled with innovation. “There’ll be lots of good ideas and they’ll sit there and they’ll wait for the right political climate to see the light of day,” he says. “But having said that, you see that in private sector organisations as well, you get a new executive and they’ll want to see things done differently. I just think there’s far more scope for ideas to organically rise to the top through a systematic process in the private sector because the level of transparency over what might be happening in a private organisation is not there as it would be for a public sector one.”

Another factor affecting public sector governance is how agencies work with ministers. This unique challenge can be navigated, according to Frew, through a significant intimate relationship with your ministers, often leveraged off the relationships with the bureaucracy. She believes public sector boards can also play mentors and coaches to their shareholders, i.e. the ministers, which is why it’s crucial that all board or committee members understand the purpose of their presence in the organisation. “With government boards, if you’re agile, and you’re flexible, you’ll do extremely well,” Frew said.

This is an edited version of an article that originally appeared in the July issue of B2B Magazine.