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Malta’s Corporate Governance Failures In Desperate Need Of Reform To Avoid ‘Pronounced Imbalances’, Professor Warns

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Corporate governance in Malta has taken a backseat, to the potential detriment of everything from taxpayers’ money to the country’s entire social well-being, renowned professor Edward Warrington has warned.

“With hindsight, however, one vital aspect of management was overlooked by the reformers: corporate governance. This is evident in the growing incidence and scale of scandals involving alleged waste of public funds, fraud or corruption in public administration,” he wrote in a report for the National Audit Office.

Prof. Warrington is a specialist on governance in very small states who was also involved in governmental reform for a number of years.

 

Annual Report and Financial Statements of the National Audit Office – 2019

Annual Report and Financial Statements of the National Audit Office – 2019

Posted by National Audit Office Malta on Wednesday, May 20, 2020

 

In a piece entitled Corporate Governance – The Next Generation of Public Sector Reform, Prof. Warrington laid bare the current instabilities and inefficiencies of Malta’s corporate governance, and how this should be on the agenda for “the next generation of reforms”

Below is Prof. Warrington’s piece in full.

The reformers’ legacy: a generation later

Thirty years ago, in January 1990, the Public Service Reform Commission presented its final report to the Prime Minister. The report elaborated on an earlier set of proposals (July 1989) on human resource management in the public service. In so doing, it addressed the first of three principal themes of the wave of governmental development unleashed by the work of the Commission and of a parallel initiative, the Operations Review. The second theme was speedier, more effective management decision-making; and the third was a service-oriented public administration responsive to citizens and enterprise.

It is difficult to overstate the significance of the effects of the initiatives undertaken during the 1990s in terms of administrative capacity-building and service delivery. They remain central concerns to the leadership of the public service, as well as to the parliamentary oversight bodies, the National Audit Office and the Ombudsman, that were either redesigned or established during that purposeful and hopeful period.

An oversight

With hindsight, however, one vital aspect of management was overlooked by the reformers: corporate governance. This is evident in the growing incidence and scale of scandals involving alleged waste of public funds, fraud or corruption in public administration. Governance is also a recurring theme in the reports published by the NAO and other oversight bodies.

Media scrutiny tends to emphasise the part played by human failings in the scandals that it triggers, such as incompetence, greed, neglect, bias, partisanship and criminal intent. On the other hand, the technical analysis undertaken by the NAO’s auditors identifies the part played by failures of corporate governance. Indeed, judging by the evidence disclosed by the state audit reports, it appears that corporate governance is a systemic weakness across the entire spectrum of government operations. It is, perhaps, more serious than human incompetence or malfeasance, because poor corporate governance makes public administration endemically vulnerable to error, malpractice or criminal intent.

Competent, highly motivated and honest officials are necessary but not sufficient to secure good governance. At the summit of government, a well designed framework of governing institutions helps to create a constitutional environment that both empowers the executive branch of government and restrains it. Correspondingly, throughout the public administration, a robust corporate governance framework will both empower the staff of each organisation, and inhibit inappropriate behaviour or disclose it.

The above diagram outlines the requisites for a well-performing public administration. The three overlapping elements – leadership, staff and corporate governance – pertain both to the country’s entire administrative system, as well as to the numerous component organisations, which comprise five broad categories: ministerial offices, departments of the public service, statutory regulators, agencies and public enterprises. While the diagram usefully identifies the sub-elements associated with each of the three principal elements, it does not sufficiently convey the complexity of Malta’s administrative system.

Corporate governance

The Chartered Governance Institute, the leading international professional association in the field of corporate governance, defines the term as “the system of rules, practices and processes by which a company is directed and controlled”. The European Central Bank’s definition includes an additional element: “The corporate governance structure specifies the distribution of rights and responsibilities among the different participants in the organisation – such as the board, managers, shareholders and other stakeholders.” These and other definitions converge on four elements of corporate governance: system, structure, process and ethos.

Tensions and ambiguities in contemporary Maltese public administration

Commitment to a common mission, subordination to a coherent constitutional framework and the direction provided by stable governments are the principal factors holding the administration together. Against that, several important ‘fracture lines’ weaken both its functional coherence as well as its ethos of political neutrality, impartiality and efficiency.

The most important fracture line is that separating the political and professional officials. Numerous official reports and scholarly studies attest to the disproportionate authority wielded by political officials, both those elected and those appointed by ministers. Their authority rests on overblown claims to democratic legitimacy; it is used to justify operational instructions that override the expertise and judgment of the professional officials. Furthermore, there is a widespread perception that political officials cannot and should not be held to the ethos of political neutrality, impartiality and integrity that holds for professional officials.

The next most important is the fracture line separating departments of the public service from non- departmental bodies. While departments of the public service are subject to the full rigour of the legislation and instructions that regulate public administration, the non-departmental bodies were created to allow greater latitude to managerial discretion. The legislation governing these bodies makes scant provision for sound corporate governance.

Quite the contrary, by giving the responsible ministers virtually unfettered discretion to appoint boards and senior management, Maltese legislation tends to open non-departmental bodies to undue political influence. This is a recurring finding of investigations into major corporate scandals in the public sector.

The net effect of these ruptures within Maltese public administration is to create pronounced imbalances in the distribution of power and, consequently, in the effectiveness of checks and balances, and in the standards of conduct to which different classes of officials and different organisations are held.

While several important sets of rules exist to regulate corporate operations, they do not amount to a recognisable corporate governance framework: in the absence of well-designed structures and a powerful ethos, the regulations governing financial administration, human resource management, procurement, decision-making and operations do not cohere as a system.

In the absence of a functioning corporate governance framework, attempts at improving governmental performance and administrative integrity have tended to adopt two simplistic and contradictory tacks. One standard response has been to centralise decision- making authority in the Office of the Prime Minister, or the Ministry of Finance, relying on the omniscience and capacity of these nodes to maintain standards.

Excessive centralisation is symptomatic of inadequate corporate governance. Since the late 1980s, in the wake of the Public Service Reform Commission’s reports, another standard response has been to decentralise operational authority, relying on the expertise and integrity of line management to improve efficiency, without, however, a robust corporate governance framework that will both empower and restrain the managers. Decentralisation that is unaccompanied by countervailing corporate governance unleashes the corrosive influence of bias, pique, self-interest and incompetence on public administration.

An agenda for corporate governance

The burden of evidence suggests that the next generation of reforms should establish a coherent, robust, functioning corporate governance framework for the Maltese public sector. While it will, of course, be necessary to adapt the framework to the mission, resources and operating environment of individual organisations, one set of principles and standards must apply across the entire spectrum of the state apparatus: there must no longer be one set of standards for professional officials and another, looser standard for political officials; one set of standards for departments of the public service, another for ministers’ offices and yet another for non-departmental bodies.

The framework must conform to internationally acknowledged standards of good corporate governance in public administration. In particular, it will:

  1. safeguard the effective autonomy of boards of directors and senior management against inappropriate political intrusion in their lawful operational jurisdiction;
  2. establish the fiduciary duty of directors, advisors, political staff and senior management, and a corresponding liability for tort;
  3. subject the appointment, remuneration and private interests of ministers, advisors, political staff, ministerial appointees on non- departmental bodies and senior management to close, systematic parliamentary scrutiny;
  4. enhance the investigative authority and capacity of oversight bodies, such as the NAO and the Ombudsman, as well as internal scrutineers, such as internal audit, information management and data protection;
  5. edefine the disciplinary jurisdiction of the Public Service Commission by extending its standards of conduct and disciplinary procedure to the most senior positions in non-departmental bodies, and to non-career officials in ministers’ offices; and establish standards of institutional design applicable across the entire public sector.

Many of the building blocks of an effective corporate governance framework already exist. They are embodied in statutes, regulations, operating systems and codes of conduct. They are, however, scattered; some have been discredited by years of abuse, while others have expired from neglect.

It is the task of leadership to assemble them into a functioning framework that will help to resolve endemic failures of performance that waste taxpayers’ earnings, burden businesses and vulnerable people, distort decision-making and, in the final analysis, threaten the country’s economic viability and social well-being.

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