Corporate governance and the Council
Royal Pharmaceutical Society Council member Christine Glover, who chairs the Council's corporate governance steering group, describes the development of the principles of corporate governance and the steps taken by the Council to implement it
Today there can be few people who have not heard of corporate governance.
Although some may not be too clear about what it entails, everyone understands
the term “accountability”.
What is corporate governance?
In October 2003 the Government’s Audit Commission published a paper
on corporate governance in local authorities. This report defined corporate
governance as “the framework of accountability to users, stakeholders
and the wider community within which the organisation take decisions
and lead and control their functions to achieve their objectives”. Why do we need corporate governance?
To appreciate its importance one only has to look at problems of the
1980s and ’90s such as Maxwell, insider dealing, Polly Peck,
cash for questions, Leeson and Andersen and, more recently, Enron and
Worldcom. Public concern over these scandals has focused minds on how
companies work, how transparent the systems of working are, and exactly
who is accountable in the event of failure.
In 1992, the way companies were managed was examined by the Committee
on the Financial Aspects of Corporate Governance, chaired by Sir Adrian
Cadbury. Throughout the 1990s a series of further reports highlighted
various aspects of corporate behaviour and made various recommendations.
Among them were the Turnbull report, “Internal control: guidance
for directors on the combined code”, published by the Internal
Control Working Party of the Institute of Chartered Accountants in England
and Wales, which appeared in 2000, and in 1995 the first report of the
Committee on Standards in Public Life, then chaired by Lord Nolan. The
Nolan report outlined seven principles that apply to all aspects of public
life: selflessness, integrity, objectivity, accountability, openness,
honesty and leadership.
Nolan’s committee, now chaired by Sir Nigel Wicks, has gone on
to produce further reports. The recent publication of the seventh report
perhaps illustrates the evolving nature of governance.
In July 2003 the Financial Reporting Council published a new Combined
Code on Corporate Governance covering the governance of management as
well as financial governance. It rolled into one code the Turnbull guidance
on internal control, the Smith guidance on audit committees and suggestions
on good practice from the Higgs report. This combined code is now the
gold standard for companies.
The principles that govern public life and companies can also be applied
to a third, overlapping, sector — the “not-for-profit” sector.
This is where the Royal Pharmaceutical Society fits in. Although the
new Combined Code on Corporate Governance is meant for companies, its
principles can be applied to not-for-profit organisations such as the
Society. Indeed, the Better Regulation Task Force report on independent
regulators (October 2003) highlights the need to take most of the recommendations
from the new combined code and apply them to independent regulators. What has the Society done about it?
Every responsible organisation has to look at all aspects of its governance,and
the Society’s Council has worked hard to ensure that its own
systems of governance are appropriate.
In the past the Charter was the starting point and much of the system
of working was based on custom and practice that had evolved over years,
along with the standing orders for Council. In today’s climate
this sort of arrangement is no longer appropriate.
In 1999 the Council began to work on its own governance. Initially three
working groups, with different members of Council in each group, looked
at transparency, election of officers and committee selection. There
was also a series of Governance seminars from outside experts to help
everyone understand what was needed in a modern organisation and what
was personally expected of Council members and where their accountability
lies.
From this the corporate governance steering group was formed with a remit “to
provide a framework for corporate governance for the Society and its
Council which is transparent and which fulfils the requirements for legal,
commercial, professional and financial probity and accountability”.
The group includes an expert on corporate governance and one of the Privy
Council-appointed members of Council to ensure the public interest is
represented.
So it is against this background that the Council has for the past five
years worked to produce a framework of corporate governance along with
the code of conduct for Council members.
Two other governance committees have been formed since the start of this
work: one is the Audit Committee (which includes
outside expertise) and the other is a Remuneration Committee for determining
senior staff pay.
Monitoring is achieved in a range of ways. For example, to monitor policy
implementation, committee minutes are seen by all members of Council
and a monthly progress report of all activities is sent to Council members. Council governance handbook
Every recommendation made by the corporate governance steering group
has been taken to Council for debate, sometimes to be sent back for reconsideration.
When agreed and accepted by the Council, each recommendation is incorporated
into the governance principles. This framework now forms the Council
governance handbook. The handbook includes the roles of the various posts
within the Council, Officers, chairmen, etc. It also covers the criteria
used for committee and chairman selection. The processes are robust and
transparent and they are open to scrutiny and challenge. The handbook
consists of: the code of conduct; a statement of undertaking; conduct
procedures; roles and accountabilities; Council; Officers; committees
and chairmen’ and monitoring.
The code of conduct is based on the Nolan principles. It is currently
voluntary, although the Council has agreed that it will be incorporated
into the Byelaws and that candidates for election to the Council will
have to give an undertaking to sign it upon becoming a member of Council.
They will have to sign it as agreed by the Council and the opportunity
to annotate the code, to put in variations, will not be acceptable and
certainly falls outside good corporate governance.
Each June (the beginning of the Council year) the whole Council accepts
the updated version of the handbook and agrees to be bound by it. Members
of Council also have to sign a declaration of interests and a register
of gifts and hospitality, which is updated and amended through the year. Complaints procedure
In the event of a Council member breaking the code of conduct, the
Council may pass a motion of censure naming the member concerned. The
complaint
is then referred to a conduct panel, whose members are all non-pharmacists
but people with the appropriate expertise (this is defined as quasi-judicial/
magisterial experience, council/board experience and significant public
service). This group is now in place and has a remit “to receive,
consider and adjudicate on complaints that a member of the Council
is guilty of a serious breach of the code of conduct”.
(By the way, some other health profession regulators are now showing
considerable interest in using such a panel for similar referrals and,
indeed, sharing the Society’s conduct panel.)
Following a complaint, a tight procedure ensures that it is dealt with
in a timely way and that it is not mischievous. The panel decides whether
there has been a serious breach of the code. Sanctions range from an
apology to being reported to the Statutory Committee or, in extreme circumstances
and with suitable legal advice, the police.
The Audit Committee has both internal and external auditors reporting
to it. The internal auditors are testing systems and setting benchmarks
within an audit plan. The external auditors (a different company) do
the annual audit and the final accounts.
The internal processes and controls can be split into three parts: (1)
financial, this covers standing financial instructions, scheme of delegation,
and financial procedures; (2) organisational processes and controls,
procedure manuals; (3) risk analysis covering risk assessment and the
steps taken to manage them. Current issues
The evolving nature of governance has kept the steering group busy,
and issues that need clarification and a process for dealing with them
are always arising. Recently the group has considered matters such
as the non-attendance of Council members at meetings and whether
abstaining
from voting is appropriate where there is no obvious conflict of
interest.
The Council is always looking for ways to improve its governance
and the membership should be assured that the Council and its ways
of working
conform to best practice. The steering group is happy to have matters
referred to it for consideration. |
The
Pharmaceutical Journal