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Government and Business must move together Back  
Aidan Pender discusses why the quality of governance systems in the
public and private sector must be consistently improved
At a conference in Seoul in February of this year, the Korean President, Kim Dae-jung opened proceedings by saying that ‚€‘ 'I believe democracy and a market economy are like two wheels of a cart, and that both must move together and depend on each other for forward motion'. It may be safely assumed that in making this remark, the Korean President was not offering a particularly prescient insight into developments in Ireland later in the year but rather was reflecting on an emerging universal concern about the quality of our systems of organisational 'governance'. In recent months however, we in Ireland have had our own pressing reasons to take another look at the governance cart and to consider whether it continues to function as we might wish.

To a great extent of course, the concept of governance is a relatively new one. It is interesting to observe for example in the quotation above, the clear juxtapositioning of the terminology of 'democracy' and 'market economy'. The implication appears to be that the government and business sectors are both inter-linked and inter-dependent, and furthermore that any deficiency in the operation of one will somehow give rise to negative impacts on the other. In the Irish case, the evolution of sophisticated systems of public sector governance is quite recent. In the decades immediately following the foundation of the State in 1922, public sector management behaviour may perhaps best be characterised in terms of a strict compliance with a prudent and even conservative fiscal orthodoxy. As economic expansion gathered pace in the 1960s, and as the State became ever more interventionist in its promotion of economic development, the interface between the public and private sectors, and their proper spheres of influence, became more ambiguous. It could be argued that a recognition lag developed between understanding the nature and complexity of an expanded economic sector and the associated requirement ‚€‘ in a small and culturally homogeneous society ‚€‘ to put in place oversight arrangements which were equally developed. Towards the end of the 1980s deficiencies in the operation of public sector governance began to be recognised, and throughout the 1990s we have witnessed the emergence of a significant number of initiatives aimed at improving the quality of our governance systems.

In 1988 for example, the Committee of Public Accounts of Dail Eireann (PAC) published a special report entitled IIThe Future Role of the Comptroller and Auditor General and the Committee of Public Accounts. This report recommended that the C&AG should undertake an expanded role in relation to the review of public spending and that the PAC should have a widened level of direct influence in this regard. The thrust of these recommendations was subsequently given legislative effect in the Comptroller and Auditor General (Amendment) Act (1993). Guidelines for board members of state sponsored bodies (SSBs) were compiled by the Department of Finance and promulgated in 1992, and an Ethics in Public Office Act was passed in 1995. At an administrative level, both the Strategic Management Initiative (1994) and Delivering Better Government (1996) set out a view of the performance standards to which the public sector would be expected to operate. In 1997, the Ombudsman took the opportunity in presenting his Annual Report to list his Principles of Good Administration. Also in 1997 the Dail passed the Freedom of Information Act and the Public Service Management Act ‚€‘ this latter development representing the first significant legislative revision of the civil service since the original IIMinisters and Secretaries Act of 1924. Also passed in 1997 was the Committees of the Houses of the Oireachtas (Compellability, Privileges and Immunities of Witnesses) Act ‚€‘ the so called 'compellability' legislation which significantly enhanced the role and influence of Oireachtas committees as powerful players in the area of governance.

The path towards improved oversight mechanisms in the private sector has followed a different route and has been much concerned to develop a greater conceptual and practical clarity around the terminology of 'corporate' governance. Although it is perhaps increasingly unfashionable to say so, a more mature and self-confidant Ireland continues to exhibit some susceptibility to demonstration effects from certain parts of the anglophone world. The business community in Ireland shared the general sense of unease, which surrounded the collapse in the late 1980s of companies such as Blue Arrow, Polly Peck, BCCI, and Maxwell Communications. In the United States, the due diligence process surrounding the 1985 $4.5 billion take-over of Nabisco by RJ Reynolds unearthed the story ‚€‘ much quoted since then ‚€‘ of the separate private jet which the Nabisco CEO had arranged for the routine transport of his pet dog. Such corporate extravagances gave rise in turn to an unprecedented level of 'shareholder activism' which sought to confront the perceived passivity of a complacent management. According to this point of view, managers were considered to accumulate and retain a monopoly of information on corporate affairs, which was not always exercised to the advantage of shareholders. In the US for example, much attention has focused on Calpers (The California Public Employers Retirement System) which, as a major pension fund investor has spearheaded this wave of shareholder agitation. A study in 1993 suggested that companies targeted by Calpers, which had under-performed the S&P 500 index by as much as 7.1% a year in the five years prior to the fund‚€ôs involvement, subsequently out-performed the index by an average of 6.8% over the five years following its intervention.

At an institutional level, capital markets in the English speaking world have also sought to stiffen the regulatory environment within which listed companies operate. In the UK, the Cadbury (1992), Greenbury (1995) and Combined Code (1998) reports, all sought to articulate a case for the adoption by business of certain principles of 'best practice'. In the USA, the Blue Ribbon Committee (1999) has similarly made ten recommendations for best practice. Because of the historic links with the London capital market, and because of the common regulatory environment faced by Irish listed companies, the UK initiatives in particular have had a considerable influence in Ireland.

A common concern of these initiatives was to distinguish quite deliberately between the terminology of 'governance' and 'management'. The Cadbury report suggested that corporate governance is about 'the system by which companies are directed and controlled'. The Chartered Institute of Public Finance and Accounting in London has offered the view that 'corporate governance is about the management of management'. Some years ago, the Economist magazine commented that 'corporate governance is based on the belief that managers (like anyone else) work best not when their freedom is tramelled but when they are made to account for what they do with it'. Perhaps this latter point about accountability captures most directly the fundamental concerns which lie at the heart of the governance debate.

Certainly in Ireland, the recent upheavals in our public life would appear to stem from misgivings about the manner in which power and influence have been exercised and the very limited extent to which accountability and scrutiny formed any part of that process. There appears also to have been a failure to acknowledge that companies are surrounded by a set of stakeholder interests of which shareholders are but one sub-set. Other legitimate stakeholders might include a local community, a local planning authority, a staff pension fund or the Revenue Commissioners. All of the recent lamentable events which have come to light as a result of the Dirt Inquiry and the McCracken, Moriarity, and Flood Tribunals have arisen as a consequence of the manner in which the wealth producing sector of our economy engages with the government sector.

This engagement takes two principal forms as follows:

the interface between business and the party political system
the interface between business and the regulatory public administration system.
The first of these interfaces raises questions of a fundamentally political and philosophical nature, and requires us as a society to reflect on the operational quality of our democracy. This presumably is the type of issue which Korean President Kim Dae-jung hinted at earlier this year, and it is a debate which still has a long way to run in Ireland. A considerable amount of unfinished business remains to be addressed.

The second of these interfaces is about the technical quality of public management, and represents a more immediately tractable issue. It is also in this second respect that more demonstrable progress has been achieved. The most recent and perhaps most striking example of such progress has been the report into the DIRT issue by the C&AG which was presented last July. In order to empower the C&AG to conduct this investigation, the Dail passed into law on the 16 December 1998 the Comptroller and Auditor General and Committees of the Houses of the Oireachtas (Special Provisions) Bill, 1998. This new Act together with the compellability legislation passed in 1997, positioned both the C&AG and the PAC to extend their reach beyond the conventional bounds of public spending and into the rather more expansive territory of compliance with public sector regulation. These and other legislative revisions support an emerging argument that over the past decade the governance and oversight machinery of the state has begun to develop a level of sophistication which is more consistent with the economy which it would seek to regulate.

Chaos theorists would invite us to believe that a butterfly flapping its wings in China could set off a chain of reactions which might conceivably alter the weather patterns of New York city. Those chaos scholars who seek support for their views could do worse than consider the causal relationship between the reported adventures of a prominent Irish businessman in a Florida hotel in February 1992, and the sequence of legislative and administrative reforms which have characterised the Irish public sector over the remainder of the decade.

The views contained in this article are those of the author and do not necessarily represent those of the Institute of Public Administration.

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