University Governance and Regulations Forum

Strategic oversight of “Controlled Entities”

Presentation  by:

Michael  KernUniversity  SecretaryJames  Cook  UniversityPast  PresidentAssociation  of  Australian  University  Secretaries

Overview of Presentation

v Why  we  use  a  Controlled  Entity  – a  quick  recap

v The  Voluntary  Code’s  “Requirements”  

v Use  of  Controlled  Entities  by  Australian  universities  – a  2015  sector  scan

v Oversight  Frameworks  within/outside  of  the  Higher  Education    Sector

v Strategies  for  effective  oversight  by  a  university

v Common  risks  and  challenges  and  how  can  these  be  overcome?

v Good  governance  practice  Principles  and  Guidelines  -­‐ Opportunity?

Why use a Controlled Entity

v Nature  and  Purpose  of  the  activities  being  undertaken

v Underlying  pressure  on  reduced  government  funding  reliance

v Commercial  V  public  sector  modus  operandi

v Legal  separation  for  liability  and  reputation  purposes

v Core  business  activities

v Non-­‐core  business  activities

v Commercial  exploitation  and  “spin  off”  readiness

Requirements Under the Voluntary Code

The  Voluntary  Code  of  Best  Practice  for  the  Governance  of  Australian  Universities  requires  each  University  Council  to  exercise  oversight  and  risk  management  of  its  Controlled  Entities

Requirements  Under  the  Voluntary  Codev ensuring  that  the  entity's  board  possesses  the  skills,  knowledge  and  

experience  necessary  to  provide  proper  stewardship  and  control  of  the  entity;

v appointing  some  directors  to  the  board  of  the  entity  who  are  not  members  of  the  governing  body  or  officers  or  students  of  the  university;

v ensuring  that  the  board  of  the  entity  adopts  and  regularly  evaluates  a  written  statement  of  its  own  governance  principles;

v ensuring  that  the  board  documents  a  clear  corporate  and  business  strategy  which  reports  on  and  updates  annually  the  entity's  long-­‐term  objectives  and  includes  an  annual  business  plan  containing  achievable  and  measurable  performance  targets  and  milestones;  and

v establishing  and  documenting  clear  expectations  of  reporting  to  the  governing  body,  such  as  a  draft  business  plan  for  consideration  and  approval  before  the  commencement  of  each  financial  year  and  at  least  quarterly  reports  against  the  business  plan.

Use  of  Controlled  Entities  by  Australian  universities – a  2015  sector  scan  

Ø %  of  universities  with  at  least  1  controlled  entityo 90%?(80%) and  how  many              35/39  (31/39)

Ø Total  number  of  controlled  entities  in  existence  at  31/12/2014o 240  (216)

ØMost  common  type  of  entity  usedo Pty  Ltd   and  how  many   133/240  (129/216))

Ø The  Total  Assets  in  Controlled  Entities  across  the  sector  waso $1.689  Billion

Ø The  Total  Revenue  of  Controlled  Entities  in  the  sector  waso $1.041  Billion

Ø Total  Contribution  by  Controlled  Entities  to  Operating  Resulto $22  Million

Oversight  Frameworks  within  and  outside  of  the  Higher  Education  Sector

v Frameworks  in  the  HE  Sector  v Frameworks  outside  of  the  HE  

Sectorv Good  Governance  Principles  and  

Guidance  for  Not-­‐for-­‐Profit  Organisations  (AICD  2014)

v The  Higher  Education  Code  of  Governance  (CUC  2014)

v Providing  your  Board  with  comfort  on  the  accountability  mechanisms  operating  your  company  (GIA  2014)

v Directors  of  wholly-­‐owned  subsidiary  companies  (GIA  2014)

Oversight  Frameworks  – Characteristics

1. Authority – understand  the  internal/external  regulatory  regimes  2. Policy – clear  articulation  of  various  processes  and  delegations3. Organisational  Structure  – clear  control/ownership  arrangements4. Constitutional  Documents  -­‐ clarity  of  roles  and  responsibilities5. Board  and  CEO  appointments – skills,  knowledge  and  experience6. Training  and  Inductions  -­‐ for  the  Chair,  other  Directors  and  CEO7. HEP  approval  -­‐ of  Business  Plan,  Budget  and  KPIs8. Review/monitoring -­‐ of  performance  against  plan  and  KPIs9. Risk  Management  -­‐ annual  risk  assessment/investment  review10. Business  Continuity  Planning  – clear  arrangements  for  disruption11. Continuous  improvement– of  oversight  Framework  and  controls

Risks  and  challenges

v Failure  to  closely  monitor  financial  position  of  entityv Failure  to  appoint  skilled  and  experienced  Chair,  Directors  or  CEOv Failure  to  address  control  breakdowns  and  systemic  control  weaknesses  

raised  in  external  Auditor’s  Management  Letterv Lack  of  integrity  in  reporting  from  Controlled  Entityv Failure  to  properly  assess  risks  of  indemnities/underwriting  issuedv Failure  to  recognise  underlying  operating/management  problems  

masked  by  subsidies  and  cross-­‐ subsidisationv Failure  to  manage  Conflicts  of  Interests

Strategies  to  overcome  Risks  and  Challenges

v Controlled  Entity  establishment  requiring  HEP  approvalv Constitutional  documents  – ensure  adequate  and  include  rules  

around  Director  communication  of  informationv Directors  -­‐ highly  skilled/experienced  external  Council  members,  

executive  staff  members  and/or  external  professionalsv Periodic  (¼ly,  ½yrly)    reporting  against  KPIs  and  Business  Plan  

objectivesv Properly  assessed  and  reviewed  indemnities/underwritings  v Clarity  of  officers’  roles  and  responsibilities  especially  where  

staff  involved  (COIs)  v Governance  manual  accessible  by  all  CEs  and  officersv Approval  of  a  Business  Plan  for  each  CE  <  commencement  of  the  

year  v Annual  Risk  Assessments  undertaken  on  each  CE

Good  governance  practice,  principles  and  guidelines  -­‐ Opportunity?

v Start  up/Acquisition

v Board  Composition,  performance  review  and  succession  planning

v Strategic  Intent  and  Values  alignment

v Planning

v Review  and  Monitoring

v Reporting  and  Accountability

v Disestablishment/Disposal

Start up/AcquisitionvAre  the  objects  of  the  CE  clear  and  aligned  to  the  HEP?v Is  the  authority  for  forming/acquiring  a  controlling  interest  in  a  CE  clear?vAre  the  delegations  of  authority  appropriate?v Is  the  appropriate  entity  being  formed,  acquired  or  used?vHow  does  the  HEP  wish  to  be  able  to  exert  its  control  over  the  CE?  vWhat  are  the  CE  Board’s  primary  responsibilities.vAre  Director  communications  to  HEP  authorised?vAre  the  roles  and  responsibilities  of  the  CE’s  Board,  Directors,  Chair  and  

management  vis  a  vis  any  concurrent  HEP  roles  clear  and  documented?v Is  the  constitutional  document  appropriate?v Is  there  a  clear  schedule  of  delegations  of  authority  of  the  CE?v Is  the  induction  and  ongoing  training,  including  COI  training,  adequate?v Is  it  clear  to  what  extent  HEP  policies  will  be  applied  or  modified  to  the  

CE  or  replaced  with  CE  specific  policy?  

Board composition, performance review and succession planningv Is  size,  structure  and  composition  of  CE  Board  appropriate  to  achieve  intent?  v Does  the  CE’s  board  have  its  own  objectives  clearly  articulated?v Is  there  a  clear  and  transparent  process  for  nominating,  selecting,  appointing,  

retiring,  removing  and  replacing  board  members?v Is  there  a  process  to  ensure  an  appropriate  mix  of  skills,  knowledge  and  

experience  with  Directors?v Is  the  Board’s  performance  evaluated  against  its  objectives  on  a  periodic  basis  

and  action  taken  to  improve  in  areas  identified  for  improvement?v Is  poor  attendance,  participation  and  contribution  by  CE  Directors  addressed?v Is  the  CE’s  succession  planning  appropriate  for  the  short  and  long  term?v Are  CE  Directors  aware  of  their  general/specific  legislative  compliance  

obligations?v Is  the  program  of  Induction  and  PD  for  directors  of  CE’s  adequate?v Is  the  CE  receiving  appropriate  secretariat  support  including  timely  and  

adequate  agendas,  agenda  papers,  reports,  SOBs,  minutes  etc.v Are  the  terms  of  appointment  of  board  members  appropriately  staggered?

Strategic Intent and Values alignment

v Is  the  CE’s  statement  of  strategic  intent  clearly  articulated  and  aligned  to  the  HEP?

vHas  the  CE’s  code  of  conduct  been  clearly  articulated  and  the  company’s  ethical  tone  been  aligned  to  the  HEP?

vAre  the  key  functions  of  the  CE  clearly  articulated  in  constitutional  documents?

Planning

v Does  the  CE  prepare  the  following  annually?q Business  planq Budget  (including  clearly  defined  assumptions  and  risks)q Clearly  defined  Performance  Measures  and  Targets

v Is  the  CE’s  Risk  Management  appetite  reviewed  periodically  and  aligned  to  operational  strategies?

v Is  the  Budget/  KPIs/  Business  Plan  submitted  to  the  HEP  for  approval  prior  to  the  commencement  of  the  year?

v What  is  the  process  to  review  the  effectiveness  /  appropriateness  of  any  subsidy  or  underwriting  commitment  by  the  HEP?

Review and Monitoring

v Is  operational  performance  reviewed  against  Budget  and  KPIs  at  appropriate  intervals  including  at  EOY  and  reported  to  the  HEP?

v Is  a  dashboard  report  provided  periodically  to  the  HEP  of  appropriate  financial  /  non-­‐financial  information  and  position?

v Are  forecast  results  reported  to  the  HEP  which  reflect  changing  assumptions,  risks  and  known  variances?

v Are  there  mechanisms  for  taking  corrective  /  remedial  action  to  address  non  achievement  of  approved  strategies  and  performance  targets?

v Are  there  mechanisms  for  varying  the  HEP  subsidy  /  underwriting?v Is  information  being  provided  to  the  HEP  in  a  transparent  manner  and  

on  a  timely  basis?

Reporting and Accountability

v Are  reports  provided  in  a  timely  manner  to  meet  internal  and  statutory  external  deadlines,  including  the  Annual  Report?

v Are  the  CE’s  systems  of  financial  reporting  and  assurance  of  sound  integrity?

v Is  the  level  of  legislative  compliance  appropriate  for  the  CE?

Disestablishment / Disposal

v Are  the  triggers  for  the  winding  up  or  dissolution  of  a  CE  clearly  documented  and  appropriate  and  furthermore,  understood  and  monitored?

v Is  the  delegated  approval  authority  for  the  disestablishment  /  disposal  of  the  CE  or  a  controlling  interest  in  the  CE  clearly  documented  and  appropriate?

When the Controlled Entity is under control