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Section 2 Principles of Corporate Governance
2.1 Introduction and Background to Corporate Governance
What is corporate governance?
Corporate governance was defined in the Cadbury Report as 'the system by which organisations are directed and controlled'. Corporate governance is, therefore, concerned with the structures and processes for decision-making and accountability, controls and behaviour at the top of organisations. In the private sector, the focus is on the Board. In the public services, in the broadest sense, 'the Board' is sometimes difficult to identify and define but the decisions, actions and behaviour of top policy makers and managers in public bodies are equally, if not more, critical.
In whatever way 'the Board' is configured, constituted or described, all public bodies must have, at their head, a group which is responsible for:
- giving leadership and strategic direction;
- defining control mechanisms to safeguard public resources;
- supervising the overall management of the body's activities; and
- reporting on stewardship and performance.
It is to this 'Board' that the principles of corporate governance apply.
Why is corporate governance important?
Corporate governance has been a high profile topic in recent years principally because of public concern at a lack of control at the top of organisations. There is a perception that, in certain cases, senior managers appear to have been able to act without restraint and that inadequately designed systems have failed to prevent fraudulent, inefficient or inappropriate behaviour.
In the early 1990s, developments in corporate governance gained momentum partly as a result of scandals involving Directors or other senior staff in private sector organisations, for example, the Maxwell saga and the failure of BCCI.
In the public sector, a series of reports by the Committee of Public Accounts at Westminster in the 1990s highlighted serious failings in the area of corporate governance, for example the reports on the Welsh Development Agency and the Wessex and West Midlands Regional Health Authorities.
In Scotland, there have been a number of high profile reports and inquiries in recent years highlighting inadequacies in the governance of public bodies. In one report, a Parliamentary Committee concluded that the governance arrangements in an NDPB did not identify or prevent a crisis which it should have done. Although not the primary factor, the Committee believed that the Board failed sufficiently to challenge the Chief Executive over a significant operational development that ultimately failed. In another report, the Scottish Parliament's Audit Committee concluded that, on the evidence received, 'members of the Board of a public body had acted with probity throughout a very difficult period but could not escape criticism for not being aware of problems of which they should have been aware.'
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