Corporate Governance and Change Management in Public Sector - Assignment Example

Public Sector Management Q1. In a public sector organization (or environment) with which you are familiar, critically evaluate the approach to corporate governance. Your answer should describe both the structures and the process that support governance, and discuss their effectiveness, using illustrative examples where possible. CORPORATE GOVERNANCE The fundamental elements of governance are well-known throughout the public sector in Saudi Arabia. Good governance requires a holistic, integrated approach and has become challenging as the public sector operating environment becomes complex. The government initiatives and developments in information technology and communication, and greater demands of stakeholders for both assurance and results is responsible for this. The lessons that emerge are diversity of organizations in the public sector and the wide-ranging scope to achieve similar outcomes or results in different ways. This paper will evaluate the approach to corporate governance in one of the public sector corporations in Saudi Arabia --Saline Water Conversion Corporation (SWCC) What is corporate governance? Corporate governance encompasses how an organization is managed, its corporate and other structures, its culture, its policies and strategies, and the ways in which it deals with its various stakeholders. Corporate governance concerns the relationships among the management, the board of directors, the controlling shareholders, minority shareholders and other stakeholders. Good corporate governance contributes to sustainable economic development by enhancing the performance of companies and increasing their access to outside capital. Corporate governance further represents the relationship among stakeholders which determines and controls strategic direction and performance of organizations. Fundamentally, corporate governance is about power, accountability and the rules of the game and includes strategic planning, leadership, organization design, stewardship, risk management, and assurance. Key principles to Enable Effective Corporate Governance Six main principles that public sector entities must adhere to in order to effectively apply the elements of corporate governance to achieve better practice governance. Three of these elements – leadership, integrity and commitment - relate to personal qualities of those in the organization. The other three elements – accountability, integration and transparency – are mainly a product of strategies, systems, policies and processes in place. Principles of good governance in public sector entities Source: Corporate governance in public sector organizations One of the ways managers can come to grips with corporate governance concepts is through a model such as the Governance Loop. The Governance Loop is a model of the factors and forces involved in corporate governance. In the case of state-owned enterprises, one needs to consider the respective roles of not only the board and management, but also the role of government as shareholder. The government has to understand its leadership role in directing and guiding the state-owned enterprise. The principles of corporate governance include: Principle 1 Lay solid foundations for management and oversight Principle 2 Structure the Board to add value Principle 3 Promote ethical and responsible decision making Principle 4 Safeguard integrity in financial reporting Principle 5 Make timely and balanced disclosure Principle 6 Respect the rights of Shareholders Principle 7 Recognize and manage risk Principle 8 Encourage enhanced performance Principle 9 Remunerate fairly and responsibly Principle 10 Recognize the legitimate interests of stakeholders Application of Corporate Governance Principles in the Public Sector Government Owned Corporations: It is true that best practice corporate governance models from the private sector may have application to public sector agencies. However, the requirement that public officers be accountable to the public means cannot be a direct translation of practices. This is because a broader concept of accountability is required for the public sector. As in the private sector, the managers should be made accountable by ensuring that boards are not dominated by managers and by ensuring that managers make proper disclosure and financial reports to allow independent assessment of their decisions. All types of government organizations must have an overriding commitment to the public interest. As many government agencies are moving to a more commercial framework susceptibility to questionable ethical practices increases. This calls for application of the principles of Corporate Governance in Public Sector. A study of the Saline Water Conversion Corporation (SWCC) reveals the anomalies in its governance. SALINE WATER CONVERSION COROPORATION (SWCC) SWCC is a government sector organization responsible for production of potable water through desalination for entire kingdom. Its headquarters is located in Riyadh. History of SWCC Since Saudi Arabia lacks natural water resources, the government of Saudi Arabia during 1974 had established an independent entity SWCC to be responsible for production of potable water through desalination. In 1983, SWCC assumed the total responsibility of operations, Maintenance, procurement, projects management etc. (see annexure—1 for details) SWCC Water & Electricity production As on date SWCC has 30 plants (some of them are dual purpose) in 15 different locations all over the kingdom along the coasts of Red sea and Persian Gulf. The total installed production capacity of water – 3.35 million M3/day and electricity – 5,114 MW. SWCC produced potable water serves 22 million population all over the kingdom. (See annexure -2 for details). SWCC Organization SWCC delivers desalinated water to the various local water authorities, but does not itself distribute, purchase, sell or receive payment of the water. SWCC is an independent entity under the jurisdiction of the Ministry of Water and Electricity. SWCCs funding comes solely form the Government allocated yearly budget with a small contribution from sales of excess electricity to the Saudi Electricity Company. SWCC is a governmental organization and does not operate on a commercial basis. SWCC does not enjoy an exclusive concession in this sector, and does not enjoy any other special rights or privileges. In its purchases, SWCC follows market-based procurement policies consistent with customary business practices. SWCC with its headquarters in Riyadh has 30 plants in 15 locations spread all over Saudi Arabia. In total It has over 10,000 employees. Since it is a government organization it mainly follows a hierarchical type of administration with many levels in the execution and due to this there is a possibility of over employment of manpower. (see annexure-3 for SWCC organization structure) Approach to corporate governance in SWCC SWCC is governed as below: Board of Directors: Establishes general policies under which all corporation activities are carried out and monitor Corporation’s affairs and progress. Board Composition: The Minister of Water and Electricity is the Chairman of SWCC Board of directors. However, operational decisions are made by SWCC management. The Ministry of Water and Electricity and the Ministry of Finance provide regulatory and procedural oversight of the organization. Currently the board does not contain any private sector or community or employee representation. The board has a normal term of 4 years and government if required could reconstitute the board every 4 years. No individual or group of individuals dominates the Board’s decision-making. Since the members are drawn from various government ministries, they collectively bring a valuable range of experience and expertise as they all currently occupy or have occupied senior positions in industry and public life. The role of the Board: The Board has responsibility for the overall management and performance of the organization and the approval of its long-term objectives and commercial strategy. It is responsible for monitoring and ensuring necessary corrective action to ensure the attaining organizational objectives. Governor (CEO) of the organization who is also the member of the board is responsible for implementation of strategies and day-to-day functioning. The Chairman provides close support and advice to the governor and participates in the ongoing dialogue between the Company and its major stakeholders. The board delegates to the CEO and through him to other senior management, the authority, and responsibility for managing the everyday affairs of the corporation. .Executive administration The governor of SWCC is its CEO who is responsible for providing leadership to, and working with, the Committee in planning, developing, implementing, and managing business strategies of the organization. The governor also serves on the board in the capacity of one of the directors. Three main sectors of the corporation each headed by a deputy governor who assist the CEO are technical affairs and projects, Administrative and financial affairs, and Operations and maintenance. Apart from these, Research & Development (R&D) and computer departments are also set up to conduct research into desalination technology, and to computerize SWCC activities by implementing latest computer software, hardware, and networks. Discussion on approach to Corporate Governance in SWCC Effective corporate governance requires a proactive, focused state of mind on the part of directors, the CEO and senior management. Since SWCC is not a commercial organization with selling, revenue collection and profit /loss accounting system, it lacks in customer focus. Today flatter hierarchies are preferred where employee empowerment leads to accountability. SWCC has too many levels of management with no accountability. UK has a series of corporate governance reports, which have been practiced and applied globally. Disasters like Enron would occur anywhere and contingency plans have to be in place. SWCC is already being considered for privatization. The board members are from different ministries, which make their approach orthodox and detrimental to growth. They are neither inducted, trained or developed as they are ministers. Further it has no community stakeholder on the board. All stakeholders are from the government hence the information decimation to the public on its functioning is in bits and pieces. Due to non-involvement of either community or the private sector the stakeholder representation lacks in due representation. Non-executive directors would be able to have an impartial and independent assessment of the reports and situation. The top management has to focus more on the strategic issues, but they keep themselves busy with day today tasks, and usually intervene in their subordinates job creating more frustration and confusion. This leads most middle managers to be very reactive dealing with day-today issues rather than being proactive. The reason for the wrong focus is that either most of these executives are promoted from a line manager position without proper training or they lack proper executive skills. Successful line managers cannot be successful executives. Some management executives struggle as top management even though they were successful line managers. Internal and external Control The Kingdom is producing over 25 percent of the worlds total desalinated water. Under the circumstances, it is surprising that SWCC does not have any internal auditing system to audit its performance. The annual report does not contain any financial disclosures as SWCC is not responsible for Profit and loss accounting. Matters of public interest should be subject to State National Audit Offices (Vinten, 2002). This does not mean merely the financial auditing but includes auditing of the various departments. Auditors should have a stakeholder orientation. The board members have responsibility for the organization’s system of internal control that covers all aspects of the business. The Directors set policies and seek regular assurance that the system of internal control is operating effectively. Strategic, commercial, operational and financial areas are all within the scope of these activities, which also include management of the related risks. However, the board members are aware that such a system cannot eliminate risks and thus there can never be an absolute assurance against the Group failing. Since SWCC is not a commercial organization and has no profit and loss reporting responsibility the external control is minimal. The external control is only through the other ministries like finance, environment agriculture etc. Public and business interests can only be protected if solutions and strategies are multi-dimensional. SWCC lacks coherence and an integrated approach. This can be incorporated when principles of corporate governance are adopted from the private sector which includes making the managers accountable. Relationship-based corporate governance has to be applied in SWCC. The managers at each level have to make proper disclosure and financial reports so that the board can make an impartial assessment. Non-executive directors and private stakeholders are essential in the best interest of the public as well as proper governance of any organization. Power and authority concentrated in the hands of the ministers does not give it the right dimension. Fragmented approach has to be avoided. Global principles covering corporate governance, auditing, accounting and independence have to be applied. With the adoption of these measures, including strategic planning, the risks can be minimized and sustainable economic development can be expected. Reference: Vinten G (2002), The corporate governance lessons of Enron, Corporate Governance Volume 2 Number 4 2002 pp. 4-9 Public Sector Management Q2. The Government is attempting to modernize public services. Using supporting theoretical material, and suitable examples, identify and discuss the change management issues that may be involved in this type of initiatives. How can an organization’s culture facilitate or impede the process of change management? Change management is about enabling people to undergo change process in such a way that at the end they are more effective, productive, and satisfied than they would otherwise have been. It requires that the facts in the situation are acknowledged and understood, the issues made as clear and unambiguous as possible, that problems are anticipated, faced and dealt with, that risks are discussed, assessed and managed. Change management is a mixture of strategy (e.g. purpose, goals and desire outcomes) and tactics (e.g. communication plans, manning levels, and changed structure). There are two types of change that challenge and impact organizations: Internal: changes may be undertaken to avoid deterioration of current performance or to improve future performance of a process or system. External: environmental changes in business, this could mean shifting economic tides, new competitors, or radical technology developments. In government, it can mean changes in the whole situation, the administration, legislation, budgetary issues, or management reform etc... Some of the change management issues that might be involved in public service modernization: Change can be particularly difficult in public sector organizations already contending with multitude of performance targets and limited resources. Complex issues around workforce (recruitment and skills), interpreting the evidence on what works, competition, inadequate internal accounting systems, incentives and lack of clear aims. Other important issue that mangers had to deal with is the resistance to change. Not involving the staff in the process of change from the beginning might increase their refusal of the change process. Employees may resist change for many reasons like: Self-centeredness Lack of communication and channels for feedback Not all management levels were engaged in the change Inadequate resources or budget Shifting focus or changing priorities too soon Executives out of touch with those affected by the change Management behaviors are not supportive of the change Executives not directly involved with project Different goals and assessments Insecurity The employees level of involvement in any reform initiatives, will determine the amount of effort and commitment they will put in the reform initiative, as illustrated in the following table: Key to developing a strategy for involving staff in change will be recognition that different group’s reception to change will vary, as illustrated in the following figure: Source: stoking, B. (1992). Promoting change in clinical care. Quality in health care 1:56-60 For different groups, varying strategies and resources need to be employed at different points of the process. Change will not come about rapidly. It might take years to change values and reconstruct an organization because a lot depends upon the culture of an organization. Culture can be defined as the set of key values, beliefs, understandings, and norms shared by members of an organization. Organizational culture has a significant impact on performance. In comparing 18 companies that have experienced long-term success with 18 similar companies that not have done so well, James C.Collins and Jerry I. Porras found the key determining fact in successful companies to be culture in which employees share such strong vision that they know what is tight for the company. Their book, Built to last: successful habits of visionary companies, describes how companies such as Disney and Procter & Gamble have successfully adapted to a changing world without losing sight of the core values that guide the organizations. Organizational Culture Kotter and Heskett of the Harvard Business School define organizational culture, "as an Interdependent set of values and ways of behaving that are common to a community and tend to perpetuate them, sometimes over a long period of time". These beliefs and expectations shared by members of an organization produce norms that shape the behavior of both individuals and groups within an organization. Culture is usually long-term, strategic, and difficult to change. It is rooted in beliefs and values. Kotter (1996), states that corporate culture has a significant influence on human behavior. Kotter believes that organizational culture is powerful because: (1) individuals are selected and indoctrinated so well; (2) the culture exerts itself through the actions of hundreds or thousands of people; (3) the effects happen without conscious intent and thus are difficult to challenge or even discuss. According to Edgar Schein, an MIT Sloan School of Management professor, culture is the most difficult to change organizational attribute that exists, outlasting organizational products, services, founders and leadership and all other physical attributes of the organization. Handy (1985) popularized a method of looking at culture which some scholars have used to link organizational structure to Organizational Culture. He describes: A Power Culture which concentrates power in a few pairs of hands In a Role Culture, people have clearly delegated authorities within a highly defined structure. In a Task Culture, teams are formed to solve particular problems. A Person Culture exists where all individuals believe themselves superior to the organization. Survival can become difficult for such organizations. Apart from these, there are the strong and the weak cultures. Strong culture is said to exist where staff respond to stimulus because of their alignment to organizational values. Conversely, there is Weak Culture where there is little alignment with organizational values and control must be exercised through extensive procedures and bureaucracy. How organization’s culture impedes or facilitates the process of change management. Deeply-embedded and shared beliefs and assumptions, even when they are positive, can cause an organization to become non-adaptive and resistant to change. Strong cultures, attached to past strategy, can create difficulties that might put at risk any initiative for business changes. For example IBM had a strong culture during the 70s and 80s, and by the 90s, that same culture constrained business insight and strategic action. Given the rate of change in organizations today, it is critical that leaders understand how organizations cultural strengths sometimes impede adaptability, flexibility, and responsiveness. The organizational culture has great effects on the change management process in any organization, and in particular the public sector. A strong positive culture might help speed up the implementation process of new practices, or the automation of the business processes, and innovative ideas. In contrast, a week culture might delay the change process, which in turn might severely impact the organization capability to perform properly. For instance a survey of organizations that have implemented an Enterprise Resource Management system (IT application) shows that how an organizational culture hampers the change management process because of the lack of leadership. Sustained, focused, and demonstrable leadership is imperative to bring change in any organization Adaptive cultures: A research conducted by Harvard on 207 U.S. found that a strong corporate culture alone did not ensure business success unless the culture encouraged healthy adoption to the external environment. As illustrated in the following Exhibit, in adaptive cultures, managers are concerned about customers and those internal people and process that bring about useful change. In the un-adaptive corporate cultures, managers are concerned about themselves, and their values tend to discourage risk taking and change. Thus, unhealthy culture may encourage the organization to march resolutely in the wrong direction. Adaptive Corporate Cultures Unadaptive Corporate Cultures Visible Behavior Managers pay close attention to all their constituencies, especially customers, and initiate change when needed to serve their legitimate interests, even if it entails taking some risks. Managers tend to behave somewhat insularly, politically, and bureaucratically. As a result, they do not change their strategies quickly to adjust to or take advantage of changes in their business environments. Expressed Values Managers care deeply about customers, stockholders, and employees. They also strongly value people and processes that can create useful change (e.g., leadership initiatives up and down the management hierarchy). Managers care mainly about themselves, their immediate work group, or some product (or technology) associated with that work group. They value the orderly and risk-reducing management process much more highly than leadership initiatives. Source: John P. Kotter and James L. Heskett, Corporate culture and performance (New York: The free press 1992), 51. Type of cultures: Studies have suggested that the right fit between culture, strategy, and the environment is associated with four categories or type of culture as illustrated in the following Exhibit. Needs of Environment Four Types of Corporate Cultures Source: Daniel R. Denison and Aneil K. Mishra, “Toward a theory of organizational culture and effectiveness. The adaptability culture emerges in an environment that requires fast response and high-risk decision making. The achievement culture is suited to organizations that are concerned with serving specific customers in the external environment but without the intense need for flexibility and rapid change. The clan culture has an internal focus on the involvement and participation of employees to rapidly meet changing needs from the environment. The bureaucratic culture has an internal focus and a consistency orientation for a stable environment. This culture supports and rewards a methodical, rational, orderly way of doing things. In todays fast-changing world, managers are shifting away from bureaucratic cultures because of need for greater flexibility. Tools for changing people and culture: Training is one of the most frequently used approaches to changing the organization mindset. Training and development programs aim at changing individual behavior and interpersonal skills with the idea that this would influence people throughout the organization and lead to culture change. Organizational development (OD) is a planned, systematic process of changes that uses behavioral science knowledge and techniques to improve an organizations health and effectiveness through its ability to adapt to the environment, improve internal relationships, and increase learning and problem solving capabilities. OD also could smoothen the integration of firms during mergers\acquisition since the two firms may have widely different values, beliefs, and practices, which might have negative effect on future performance. Conclusion: Management of change and managing for change requires a strategy. Organizations which manage changes successfully have a strategy and a vision. This provides the anchor which will helps to stabilize the organizations during the turbulence that change brings. Management of change requires frequent reference back to the strategic objectives of the organization. Cultural change might involve improved performance through improved communication, industrial relations and improved customer relation. True culture change requires underlying value structures change first. Training in new skills, including managerial skills will enable the organization to release its new values. In the public sector, these values encompass notions such as putting the customers first, providing values for money and assessing quality of services. Hence, change in culture can impede the process of change management. Read More