On 15 June 2009, the Minister for Finance published the revised “Code of Practice for the Governance of State Bodies” (the “Code”), which was originally issued in March 1992 and updated in October 2001 (the “2001 Guidelines”).
The guidelines set out in the revised Code are of relevance for all employees and directors of State Bodies, particularly given that in recent months, a greater emphasis is being placed on the need for strict governance and regulation of all commercial entities, be it in the public or private sector.
The Code reflects changes in legislation and administrative guidelines since 2001 that have implications for the governance framework agreed by Government for the internal management and internal and external reporting relationships of State Bodies. The framework sets out the application of best practice in corporate governance by both commercial and non-commercial State Bodies. Directors and employees of such bodies and their subsidiaries should be guided by the principles set out in meeting their responsibility to ensure that all of their activities, whether covered in the Code or otherwise, meet the highest standards of corporate governance.
State Bodies and their subsidiaries are required to confirm to the relevant Minister that they comply with the up-to-date requirements of the Code in their governance practices and procedures. The requirements should be applied in all trading subsidiaries and, as appropriate, in joint ventures of State Bodies. Appropriate confirmation should be provided to the relevant Minister in relation to these. The Code makes provision for certain requirements to be applied proportionately to smaller bodies.
It should be noted that existing legislative provisions applying to a State Body on matters that are also the subject of the Code continue to apply and the Minister for Finance may issue circulars and/or guidance notes, from time to time, in relation to the Code. Further, the provisions of the Code, which are not in themselves legally binding, do not override existing statutory requirements and other obligations imposed by the Companies Acts, Ethics legislation, Standards in Public Office legislation, the specific statutory provisions relating to the State Body itself and any other relevant legislation (e.g. equality legislation, employment legislation).
The Code updates the layout of the 2001 Guidelines, including the introduction of “Core Principles” set out at the beginning of each section under which more specific guidelines follow. This summary highlights some of the key changes and key provisions of the Code.
KEY FEATURES OF THE CODE
The Board and Directors
The Code restates the disclosure obligations and procedures to be followed in relation to “interests” of directors, their family members or connected persons which could give rise to conflicts of interest or materially influence the director in the performance of their functions. In addition to the examples of such “interests” listed in the 2001 Guidelines, details of directorships should now also be disclosed on appointment and during the course of the directorship. The Board should now also ensure that there are procedures in place to monitor and manage potential conflicts of interest of management and Board members.
The Code introduces more specific guidelines in relation to expenditure and how it should be monitored. A “performance measurement system” should be used to assess the effectiveness of major items of expenditure, and this should be reported to the Board. Specific guidelines on strategy are also introduced. It is the primary responsibility of the Board to formulate a strategic plan and a formal process should be in place for setting strategy. A draft strategic plan should be submitted to the relevant Minister whose views along with consideration of the public interest should be weighed by the Board before the plan is adopted.
Written Codes of Business Conduct that are required to be circulated to all directors and staff of State Bodies should now:
- refer those people to the need to comply with relevant legislation and regulatory requirements and should identify relevant provisions regarding conduct/conflicts of interest in the State Body’s governing legislation
- make clear that certain obligations to the body regarding, in particular, the non-disclosure of privileged/confidential information, continue after a person ceases to be a director or employee
- recommend the avoidance, for a reasonable period, of further employment where potential for conflict of interest arises
Other notable guidelines introduced by the Code for the Board include that:
- it should, in a manner most effective to the State Body, deal with the issue of post resignation/retirement employment, appointment and/or consultancy of Directors/employees by the private sector
- it should implement procedures whereby employees may, in confidence, raise concerns about possible irregularities in financial reporting or other matters, which will be followed up in a meaningful way
- the roles of Chairperson and Chief Executive Officer (CEO) should not normally be combined and that when this occurs, it should be with the consent of the relevant Minister.
Further, an outline of obligations of directors and staff under the ethics legislation is appended to the Code for the first time.
Remuneration of Senior Management and Directors Fees
The Code refers to the “Guidelines on Contracts, Remuneration and other Conditions of Chief Executives and Senior Management of Commercial State Bodies” (March 2006), available on the Department of Finance website, for the determination of remuneration and employment arrangements of newly appointed Chief Executives and senior management of commercial State Bodies. Separate guidelines on the appointment of CEO’s of non-commercial State Bodies are available from parent Departments.
The Code restates the guidelines covering the payment of fees to the Chairpersons/ Directors/Members of State Bodies issued by the Minister for Finance in July 1992. The Code adds to those guidelines that fees paid to a Chairperson, Director or Board member are, in general, exempt from the deduction of PRSI and that PAYE must also be deducted from all fees paid to members of the Board.
The Code introduces guidelines on Risk Management Policy. The Code lists examples of key elements that would be included in the Board’s oversight of risk management, such as:
- making risk management a standing agenda item
- considering the establishment of a Risk Committee or including it in the Audit Committee charter
- including risk management expertise in the competencies of at least one director or allowing for external expert advice to be sought
- appointing a Chief Risk Officer or empowering a suitable management alternative
- requiring an external review of the effectiveness of the risk management framework on a periodic basis
An Audit Committee should now be established by the Board of any body with more than 20 employees. The Board should satisfy itself that:
- at least one Committee member has recent and relevant financial experience
- the Committee monitor and review the effectiveness of the State Body’s internal audit activities
- any internal audit/audit items that relate to the Board’s areas of responsibilities should be communicated to the Board as soon as identified
Relations with the Oireachtas and the Minister
The Code acknowledges the recommendation of the Report of the Task Force on the Public Service, published in November 2008, that a “Performance Framework” be developed through dialogue between Departments and State Bodies. The Code states that such a framework provides an opportunity to define expectations of Government, Ministers and the State Body itself regarding its performance, clarify the body’s role in the policy sector and define the parameters of the body’s resources.
It is also stated that the development and widespread use of Service Level Agreements for State Bodies involved in service provision should form part of the wider performance management framework. Also annual output statements should be produced by all non-commercial agencies in line with the performance framework.
Reports and Accounts of State Bodies
In the interests of transparency and good governance, the Code provides that State Bodies should now also publish in their annual reports, in addition to the requirements set out in the 2001 Guidelines:
- details of fees paid to each of the body’s directors
- the expenses paid to the Board, broken-down by category
- the salary of the Chief Executive Officer
Further, the Code provides that the Chairman must include in his report to the relevant Minister an outline of the steps that will be taken to guard against any identified breach of the system of internal financial control and that he/she must certify compliance with Government travel policy requirements.
Annual reports should be published on the website and generally State Bodies should consider online publication when this can reduce costs.
Chairpersons of subsidiaries should formally report to the main Board in a similar manner as the main Board’s Chairperson reports to the relevant Minister, prior to the main Board’s reporting.
The Accounting Officer of the Department responsible for the State Body should satisfy him/herself that the requirements of the Code are being implemented and if reports indicate that problems exist, ensure that appropriate action is taken as soon as possible.
Diversification, Establishment of Subsidiaries and Acquisitions by State Bodies
The Code restates the 2001 Guidelines on diversification, that the approval of the relevant Minister should be obtained for any intended action which would extend or change significantly the nature, scope or scale of the State Body’s activities. Equally, the consent of the Minister for Finance should be obtained to any action which the relevant Minister considers would have significant consequences on debt, profitability or the body’s ability to pay dividends (where relevant).
Consistently with the 2001 Guidelines, the establishment of subsidiaries, joint ventures and share acquisitions by State Bodies is subject to the legal capacity to do so, and the prior written approval of the relevant Minister, given with the consent of the Minister for Finance.
The details of such transactions should be supplied to the relevant Department for approval at the earliest opportunity, and the Department’s response should be equally prompt in order to avoid delays.
Procedures for Procurement
The Code adds more specific requirements to the procedure for procurement set out in the 2001 Guidelines. The Code reiterates that competitive tendering should be the standard procedure in the procurement process. The Code adds that management and the Board should ensure focus on good practice in purchasing and that procedures are in place to ensure compliance with procurement policy and guidelines. The Code provides that it may be appropriate to have a sub committee of the Board (or to include it in the charter of the Audit Committee) where there is a significant procurement function.
The Code refers to the imposition of legal obligations on public bodies by EU directives and national regulations regarding advertising and the use of objective tendering procedures for awarding contracts above certain value thresholds. Even in cases of procurement which may not attract the full scope of EU directives, the Code refers for the first time to the need to observe EU Treaty principles such as the principles of non-discrimination and equal treatment.
Further Guidelines introduced by the Code in relation to procurement include:
- that there is a strongly implied requirement to publicise contracts of significant value in order to allow other Member State parties the opportunity to express an interest or submit tenders
- that the National Public Procurement Policy Framework requires that all non-commercial State Bodies complete a Corporate Procurement Plan
- that all State bodies must ensure that the tax clearance requirements set out in the Department of Finance Circulars 44/06 (December 2006) and 43/06 are adhered to
Capital Investment Appraisal
The Code introduces reference to the “Guidelines for the Appraisal and Management of Capital Expenditure Proposals in the Public Sector” issued by the Department of Finance in February 2005. These procedures apply to State Bodies as well as to Departmental investments. The Chairperson of each State Body should confirm in his/her annual report that these guidelines are being complied with.
State Bodies should also have regard to appropriate models for investment appraisal in their sectors and to seek to apply best practice in the appraisal and management of all investment proposals. The Department of Finance Value for Money Frameworks should be adhered to in all cases.
The Code introduces a new section of guidelines in relation to travel, in particular that commercial State Bodies should recognise the need to achieve economy and efficiency in expenditure on official travel. Boards that incur significant annual expenditure on foreign travel by staff or Board members should put appropriate procedures in place to monitor, report and enforce the relevant rules and requirements. A Framework Travel Policy is appended to the Code.
Disposal of State Assets and Access to Assets by Third Parties
Disposal of assets or the granting of access to property or infrastructure for commercial agreements with third parties, with an anticipated value above a certain threshold, should be by auction or competitive tendering process, as was the case under the 2001 Guidelines. The Code increases the threshold value from €70,000 to €150,000.
The anticipated value may be determined either by a reserve price recorded in advance in the body’s records or by formal sign off by the Board on the advice of the Chief Financial Officer (the CFO) or, if delegated by the Board, sign off by the CFO or Board Audit Committee, that in its view, the anticipated value is likely to be less or greater than €150,000. The 2001 Guidelines had previously allowed formal sign off in this regard by the director with responsibility for financial matters or a director who was also a member of the Board Audit Committee.
The Code restates the principle set out in the 2001 Guidelines that disposal of assets to directors/employees, their families and connected persons should be at a fair market-related price. The Code adds that a director should absent himself from Board deliberations on any disposal to which he is connected. Minor disposals below €5,000 or a threshold approved by the Board may be omitted from the register where disposals to such persons are required to be recorded.
The Code directs that State Bodies should be exemplary in their compliance with taxation laws and should ensure that all tax liabilities are paid on or before the relevant due dates.
In addition to its other reporting requirements, a report on the body’s compliance with tax laws should be furnished each year to its relevant Department. The report should confirm that the body has complied with its obligations under tax law.
State Bodies, while availing of all legitimate taxation arrangements, should not engage in clearly unacceptable tax avoidance transactions. Where a doubt arises in a particular instance, the State Body concerned should consult the Revenue Commissioners.
Legal Disputes Involving Other State Bodies
Under the Code, every effort should be made to mediate, arbitrate or otherwise any legal dispute involving another State Body before expensive legal costs are incurred. A list of any such legal issues should be provided to the Department of Finance together with an estimate of the legal costs incurred up to the date of such information.
THE FINANCIAL REPORTING COUNCIL’S PROGRESS REPORT AND SECOND CONSULTATION
It should also be noted that in March 2009 the Financial Reporting Council (FRC) announced the latest of its regular reviews of the impact of the Combined Code on Corporate Governance (the “Combined Code”). It is always worth noting the Combined Code when considering matters of Corporate Governance.
UK incorporated companies listed on the Main Market of the London Stock Exchange are required under the Listing Rules to report on how they have applied the Combined Code in their annual report and accounts. Overseas companies listed on the Main Market are required to disclose the significant ways in which their corporate governance practices differ from those set out in the Code. Listed companies are also required to report on how they have applied the main principles of the Code, and either to confirm that they have complied with the Code's provisions or, to provide an explanation, where they have not.
On 28 July 2009 the FRC published a progress report on the review of the Combined Code so far. This report identifies and invites views on the main issues that have emerged to date. It would be of benefit for all companies including State Bodies to note the issues flagged for consideration in the progress report. The report can be found on the FRC website. The FRC aims to publish its final report before the end of the year.