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Following is a speech on "Corporate governance in subvented non-governmental organizations" by the Secretary for Health and Welfare, Dr E K Yeoh, at the Luncheon Meeting organized by the Social Welfare Department and the Hong Kong Institute of Directors today (May 11):
Ladies and Gentlemen,
I am delighted to be here today to speak about "Corporate governance in subvented NGOs" and would like to begin by thanking the Hong Kong Institute of Directors for working with the Administration on a series of projects to promote this subject.
Other speakers have earlier today shared with you their knowledge and experience on this important subject. In turn, I should like to highlight a number of issues and to share with you some of my thoughts. To begin with :-
(a)what is corporate governance and why is it important?
(b)the historical background and the international perspective;
(c)developments in Hong Kong, covering the private sector and the public sector;
(d)the relevance to the welfare sector; and
(e)the objectives and ways of pursuing corporate governance in the welfare sector.
Corporate Governance
Corporate governance is the system by which corporations are directed and controlled. It provides the structure through which the objectives of a corporation are set, the means of attaining these objectives and of monitoring performance.
Often, the interests of those who have effective control over a corporation differ from the interests of those who supply the corporation with external finance. The problem, commonly referred to as a principal-agent problem, grows out of a separation of ownership and control and of outsiders and insiders. Without the protection that good corporate governance supplies, asymmetries of information and difficulties of monitoring mean that fund providers who lack control over the corporation will find it risky and costly to protect themselves from opportunistic behaviour, if any, of the management. Also, good corporate governance is a key element in improving economic efficiency and fostering financial stability.
At the center of the corporate governance system is the board of directors with its primary duty to protect the interests of the corporation. Its overriding responsibility is to ensure the long-term viability of the corporation and to oversee management. In most cases, it is responsible for approving the strategy and major decision, and for hiring, monitoring and where necessary, replacing management. In some cases, it has fiduciary responsibility for ensuring compliance with laws and regulations, including accounting and financial requirements.
Corporate governance is an important step in building up confidence in corporations and encouraging a more stable, long-term injection of funds. Corporations must operate within a framework that keeps them focused on their objectives and accountable for their actions. Given the diversity in nature and evolution over time, there is no single model of corporate governance applicable across-the-board. However, certain principles, such as accountability, transparency, responsibility and fairness, are universal in their application.
Historical Development
Corporate governance has a long history dating back to the 1700s and the South Sea Bubble episode which resulted in fundamental changes in business laws and practices in England. However, in the past, the subject only received attention when corporate failures or crises occurred and resulted in calls for enhanced corporate governance. Recent examples include the collapse of the Bank of Credit and Commerce International and Barings Bank. But gradually since the 1980s, the importance of good corporate governance has become increasingly recognized worldwide, with major initiatives undertaken by many countries to improve standards and practices. In the 1990s, globalization forced many companies to tap into domestic and international financial markets and to face greater competition. The need to access financial resources and to seek economic and social progress has brought corporate governance into even greater prominence.
The International Scene
Enhancement of corporate governance is a global trend. In this part of the world, the recent Asian financial crisis showed that improving corporate governance is an essential component of reforms, which help organizations to handle the difficult times and to reposition economies for robust and sustained growth.
The APEC Initiative on Corporate Governance, launched by Finance Ministers at their 1998 meeting, was undertaken to help member economies respond to the challenge of achieving global best practice in corporate governance. Leading the development of principles of corporate governance and the monitoring of their implementation, OECD Ministers adopted the OECD Principles of Corporate Governance in May 1999 and the World Bank developed an assessment template as the basis for a module on corporate governance in mid 2000.
Local Scene
In his Budget Speeches in 2000 and 2001, the Financial Secretary stressed the importance of corporate governance and outlined a number of practical measures designed to strengthen our local regime. While the standard of corporate governance in Hong Kong is among the highest in Asia, we should not be complacent, but should continue to seek improvements. Our aim is to establish Hong Kong as a paragon of corporate governance. On this basis, the Administration is taking a number of steps to strengthen the corporate governance regime in the business sector.
The Welfare Sector
At this stage, you could ask what this has got to do with the welfare sector. As shown by worldwide trends and local developments, non-profit-making non-governmental organizations (NGOs) like their private sector peers, should not be immune from pursuing vigorous corporate governance.
Allow me to quote a few authorities to illustrate the point. In a World Bank publication, Sir Adrian Cadbury says that Ӥcorporate governance is concerned with holding the balance between economic and social goals and between individual and communal goals. The governance framework is there to encourage the efficient use of resources and equally to require accountability for the stewardship of those resources. The aim is to align as nearly as possible the interests of individuals, corporations and society. The incentive for corporations is to achieve their corporate aims and to attract investment. The incentive for states is to strengthen their economics and discourage mismanagement." Another document on improving governance and accountability in Canada's voluntary sector says that "voluntary organizations are first and foremost self-governing. Specifically, an organization's leadership is responsible for effective governance of the organization. The ultimate goal of good governance is to ensure the effectiveness, credibility and viability of the organization."
In Hong Kong, the introduction of the new funding system for welfare services (the Lump Sum Grant) has made enhancing the corporate governance of NGOs providing subvented welfare services all the more pertinent. The new funding system carries with it increased responsibility for the careful management of resources provided by the Government and the stewardship of the services thus funded.
The Lump Sum Grant system emphasizes the effective use of public resources, innovation, responsiveness and performance management to meet changing community needs in a timely manner. This has in effect generated new demands and posed new challenges to the management ability of NGOs. At the same time, it has made the roles and leadership position of the Boards much more important than ever before, especially in terms of corporate governance. The Boards have two key sets of responsibilities, the first, to act and operate in ways which can assure all their stakeholders that the funds and programmes entrusted to them are well managed and appropriately supervised through good governance practices and the second, to ensure that the services meet the changing needs of the community. Individual members of the Boards must possess and use their strategic abilities and independence to monitor the performance of management and to make changes when deemed necessary.
While there is no single model of good corporate governance, certain underlying principles, including trust, honesty, integrity, fairness and responsibility, are needed to assure the key stakeholders that the organization is being managed effectively and with appropriate probity. The corporate governance framework should ensure the following from the Board, namely the provision of strategic guidance for the NGOs, the effective monitoring of management, and the accountability to its stakeholders”Vits clients (in the delivery of services), the Government (in the provision of funds) and the community (in gaining their trust and respect).
The Boards of NGOs are held ultimately responsible for the overall performance of their organization. In general, they are tasked to -
(a) set the mission and goals of the NGO;
(b) determine service delivery modes which can meet the changing needs of the community;
(c) ensure that public money is properly used for its designated purpose and that the service performance meets the requirements of the Funding and Service Agreements;
(d) assume responsibility for programme planning and budgeting, as well as for human resource management; and
(e) establish a community network and support system.
To enhance transparency and obtain feedback from relevant stakeholders, it is extremely important that they involve staff and service users in the management process.
Specifically, under the Lump Sum Grant system, it is imperative for the Boards to -
(a) have a clear understanding of their responsibilities;
(b) undertake strategic planning aimed at carrying out their mission;
(c) develop appropriate structures for the organization;
(d) maintain fiscal responsibility especially, in the longer-term;
(e) ensure an effective management team is in place and oversee of human resource development strategies; and
(f) implement assessment and control systems for the purpose of public accountability.
Conclusion
I am sure that the discussion at the Seminar has provided a useful and constructive insight into how to achieve and sustain corporate governance in NGOs. This is, of course, equally relevant to those of you who are not part of an NGO organization. But this must be an on-going process and one in which, we all continue to learn and strive to improve the governance of our organizations.
Thank you for your attention.
END/Friday, May 11, 2001 NNNN
