-: Now let's take a look at part A of module three
and this is where we move away from the corporate governance
to non-corporate governance.
And we look to say, are there overlaps,
are there similarities, how do they work together?
And this ties into our objective number, right?
And how we analyse the relevance of corporate governance
to the public sector.
So when government-related entities and non-corporates
of charities and not-for-profits.
So we start off with family businesses and SMEs.
So quick quiz, let's see how well you've read
this section of the study guide,
but it asks what is the percentage
of family owned firms in the UK?
So you might want to pause this for a moment
and have a quick look.
See what you can find
this link to some research done by Cadbury.
And the answer is 75%
although in some countries it's as high as 95%.
So we're not always looking at large listed companies
on the stock exchange, all of the directors' duties,
all the agency issues, all of the codes of best practise
and the big companies, but in reality,
huge number are much, much small and family companies
don't have the same agency issue because the owners
are the managers, but they have different issues.
So, family firms have some real good benefits.
They take a longer term perspective
by looking at five years, 10 years,
they're looking at when their children
and their children's children take over.
So they make good long-term decisions rather than
trying to maximise a bonus right now
and then disappear into the wilderness.
So there's a focus on succession planning.
The culture is often unique and linked
to the founder's values,
which can be a little bit quirky sometimes.
But the big risk,
so it's different to agency risk
is the fight between family members.
If you have three children and all three want to be the boss,
or if one wants to work hard and one wants to surf,
this can create tension.
If someone is not very good but you feel obligated
to put them in their position,
so if someone's a bit nasty or mean or unprofessional
or not very clever,
that's when family business hits trouble.
And one final large risk is successful growth,
which seems a bit absurd.
How can growth lead to large risk?
Well, if you're a good manager,
you might be able to look after a business with 20 people
and do a great job and then the business grows to 50 people.
But you might not be very good at managing 50
it requires a different set of skills.
Because there's going to be more formal relationships,
more reporting and backups and following rules
and procedures because there's just more people involved.
And so the more you grow,
the more risk you face if you can't handle the new level.
And that's where small business owners,
family owners normally bring in experts,
but they normally overrule those experts as well
and that can be just as troubling too.
So we're getting to the not-for-profit area and we say,
well, what's our focus?
Because in for-profit businesses, really easy.
If it's for profit, your number one objective,
I guess is to make a profit.
Drive towards your vision and your values,
but you make profit, you distribute it to the shareholders.
But in the not-for-profit sector,
we have to act with economy.
We have to be really frugal with the resources we have.
We have to be very efficient at turning inputs into outputs.
And we want to achieve specific goals.
So there's a picture of a hospital,
you can't just focus on profit.
You actually need to keep people well,
you need to fix people with operations,
you need to heal them and help them recover.
That's effectiveness.
People come in unwell and they walk out the door healthy.
So that's the effectiveness.
But we can't spend huge sums of money
'cause we don't have it.
So you've got to be really effective but very frugally,
very economically.
The other thing for not-for-profits
is they often don't have lots of professional managers
or the same level of resources to pay professional managers.
So, scandal, fraud, problems can happen
and can really hurt their reputation.
There's lots of different types of charities.
There's foundations, trusts, associations,
so there's lots of organisational structures,
rules and laws that govern them.
And there's also a much stronger focus
on the stakeholder rather than the shareholder owner
demanding a profit.
So the ACNC, at least in Australia,
is the organisation that oversees as the commission
and they issue guidance.
Now we've recorded a short clip for that.
So check that out in the part A section
of the guided learning units.
And I give you some case studies there
that bring this more to life,
but it's a massive area to regulate 600,000
not-for-profit organisations, over 57,000 charities.
Now, some of them are not set up for the right reasons.
They're there to help cheat on tax
or bring in money that's not going to be used properly.
But many of them are doing amazing work
with very limited resources.
So we want to encourage the charity sector,
but we still want to regulate it without too much red tape
to make sure that money is being used appropriately
and fairly.
So check out that short clip for more info.
There's also AICD the Australian Institute
of Company Directors of Published Guidance,
10 principles on governance for not-for-profits.
So we've already had the ASX principles,
we've had the FRC code, we've had the OSA principles,
there's a lot of principles,
but these are specifically for not-for-profits.
Now the study guide just gives you the link,
but I'm going to just quickly show you the 10 principles.
So have your clear purpose and strategy
and they have these supporting practises,
roles and responsibilities.
This looks just like the ASX principles, isn't it?
Make sure you define the roles,
make sure you separate them properly,
make sure you have a properly structured board.
So what applies in the corporate sector
is normally just as important in the not-for-profit sector.
So we need to manage risks, that's like ASX Principle 7,
remember to focus on performance,
accountability and transparency.
So proper reporting, stakeholder engagement,
that's slightly different,
I'm showing you the importance to that not-for-profit,
broader stakeholder rather than just shareholder,
maintaining compliance and establishing a healthy
and appropriate culture.
And culture can be tricky
because when you got volunteers and employees,
volunteers are passionate and committed.
And I want to have a say.
It's different to an employee where you say,
I've paid you money so you just do what you're told.
A volunteer hasn't been paid.
They are there because they're passionate
and committed so they're going to want to say.
So there is a lot of diversity in the not-for-profit sector.
And the key with surpluses
is not to make a distribution to owners,
but to reinvest in really achieving social goals.
There's often not much money.
And the skill set is quite complicated.
So how do you find the right people?
How do you deal with volunteer board members
or volunteers in the organisation
who don't have much professional experience,
they're passionate,
but they might not be knowledgeable
in things like governance.
The organisation has limited resources
and you might pay a manager to do the work,
but all these committed volunteers who all want to run
in different directions have to be herded a little bit
like cats, which can be really tricky.
So governance has a slightly different flavour
in the not-for-profit sector.
So let's take a look at public sector enterprises briefly.
If you're working in government,
you're not there to make a profit.
There are some government entities that are profit oriented,
but most of them have economics, social, political.
If you're in the department of health,
you have a lot of social outcomes
that you're aiming for health related.
And if you're working in the department of defence,
it's very, very different to a regular business.
So we have political goals, economic goals,
social goals to meet,
but according to Uhrig 2003
the same best practise for corporates
is relevant for public companies.
So there should still be committees,
there should still be board reviews.
You should still have the right directors
and you should still kick some of those directors out
after they've been there too long
'cause they just maybe taking up space.
So we still want to bring good professional governance,
but we have to remember that
all these public sector organisations are very unique.
I hope you like the fruit example.
Lots of different flavours and types and colours.
Whereas for-profit is kind of simple.
Make a product, have a service, sell it, make a profit.
Okay?
Okay, we can get a bit more complicated,
you could choose new customers and new regions,
but really they all look the same.
But governments and government departments
are all achieving.
There's a department of education,
department of agriculture and science, department of health,
department of defence, that huge variation and uniqueness.
So we are about producing public values
and promoting equity.
Complex decision-making, political factors,
economic factors, keeping everyone,
so people who come from a corporate environment
who are used to a strict hierarchy
and giving instructions find it impossible
'cause they don't know how to work closely with stakeholders
because the key is working together to achieve outcomes,
not to destroy a competitor.
So it's cooperation rather than competition.
So you're using public money but also public power.
So it's a different way of doing government,
of doing organisations.
Now, one key thing that we really want to see
in that public sector
is independent from political interference,
but it doesn't always happen.
So we have things like the reserve bank.
You know, in America they call it the Federal Reserve.
It's supposed to be an independent board
who sets interest rates.
Because if politicians get involved,
they want to set interest rates that get them voted again
and make them ever unhappy.
I love this photograph because it shows you
that this particular president appointed someone
and expected that someone to do exactly what they were told,
a complete lack of independence.
But this person maybe stood up a little bit so you can see,
he was told that he's a terrible golfer
who is unable to pot and has let the country down.
And so here we have these personal attacks
and what we've got is a president handpicking someone
to run an independent body.
And you can see straightaway
there's a sense of, Hey, I picked you.
You owe me.
And this significant pressure
to cut interest rates to maybe boost the economy
and make the economy look good
and then the president can claim credit.
Australia faces similar issues,
but probably has a greater level of independence
with our reserve bank.
So our reserve bank is supposed to set monetary policy.
There's two boards,
the Reserve Bank Board and the Payment System Board.
And successive governments have emphasised independence
but it's interesting how much pressure they put on don't to,
you know, especially in election time,
don't put the interest rates up
'cause if you put interest rates up
then everyone's mortgage goes up.
And if interest rates go down, they claim a lot of credit.
Look at us it's fantastic, everything's great.
So what they want is an independent body, not really,
and that's the trick in these public sector organisations
is how to steer away from all that political influence.
So couple of brief references.
There's the OECD guidance,
just like we have the OECD principles,
we have the ASX principles, FRC code.
We also have these guidance documents,
but the study guide doesn't go really
through there in much detail,
a little bit on the ANAO 2007
accountability, transparency, integrity, stewardship.
You can see a lot of overlap in these concepts.
And then a brief example is given
in the Victorian public sector.
So the parliament is where the laws
are set by the representatives of the people.
People vote in the politicians, they are our agent,
we are the principal.
The parliament then has a minister appointed
to a particular area and they work with the public sector
to pursue and enact these policies.
So there's a lot of game-playing and a lot of politics.
That's the whole game.
But we should still be working hard
to achieve those outcomes.
Now, if you've been following the Australian news
in the last couple of months,
some of the politics is linked to funding,
funding of sports area.
So instead of the government properly funding
sporting groups and charities that needed it,
they funded those that would get them the most votes.
But the problem with that strategy was like all caught
and it's now caused a significant amount of backlash
and frustration.
So you have to be careful and you can see what happens
when that independence is turned upside down.
So the significance of the non-corporate sector.
Now this is an interesting table
because it really has nothing to do
with the non-corporate sector.
It's just showing you business sizes.
But what it is saying and why I want to talk to it
is just because we're doing corporate governance
for the big companies, the listed companies,
don't forget the small ones.
Now in Australia there are only 3,700 organisations
with more than 200 employees.
So about 2,200 of those
are listed on the Australian Stock Exchange
or Australian Securities Exchange.
So there's some large companies that are in business,
but there's also large hospitals
there's government departments,
department of defence for example,
but there's only 3,700 that are actually lodged
that really need that big corporate governance,
financial reporting, those types of things.
And here we have over 2 million teeny-tiny organisations
where that idea of separation, ownership and control,
not so much of an issue.
That made the massive compliance documents,
not really an issue.
So for 97% of employees in the economy type thing,
a lot of this doesn't apply.
But what is good for the big organisations
in modified format is good for the smaller.
Good governance is still relevant.
You just have to adapt it to fit the right size.
So to conclude in this area,
we hope that there's a trickle-down effect.
We hope that good governance at the top of our corporates
leads to our sporting groups, our charities,
our smaller businesses adopting similar kinds of concepts
to improve performance, improve results.
But the problems in not-for-profit is
agency is less of an issue
'cause it's not separation of ownership and control
and there is a problem with different objectives,
social objectives, economic, political objectives,
and especially dealing with volunteers.
That's pretty tricky.
So, that brings us to the end of module three.
I hope you are on track with your studies
and getting ready to sit your exam and in doing so,
please practise writing out those answers
rather than just reading questions, reading solutions.
Thanks.