Corporate Governance in the spotlight

All the bruhaha about RTE, has brought the spotlight onto corporate governance. The reality is that all State Sponsored bodies are required to “do” corporate governance. This article list what they are required to “do” by way of corporate governance. In short, they are supposed to be implementing all of provisions of the relevant codes of practice. Specifically, that requires State Bodies to implement the systems, the principles, and the processes by which government requires companies to be directed and controlled. There are now two relevant codes in place.

a) 2016, Code of Practice for the Governance of State Bodies

The 2016 Code sets lofty standards of corporate governance for Ireland’s State Bodies. The introduction to the Code states clearly that- “State bodies and their subsidiaries are required to confirm to their relevant Minister that they comply with this Code of Practice for the Governance of State Bodies in their governance practices and   procedures.”  The Code did not start on a blank page in 2016. It was built on earlier codes. The first set of guidelines on corporate governance, entitled “State Bodies Guidelines,” was published by the Department of Finance in March 1992. The guidelines were updated in October 2001 and May 2009. The 2016 Code was further updated to take account of governance developments, public sector reform initiatives and stakeholder consultations. This new Code provides an up-to-date framework for the application of best practice and is intended to take account of developments in respect of oversight, reporting requirements and the appointment of Board members. It is based on the following principles of good governance:

• Accountability, i.e., acceptance of responsibility for honest and ethical conduct in business.
• Transparency, i.e., companies operating in an open manner that follows rules and regulations, and
• Probity, i.e., displaying honesty and integrity in business.

The code contains ten specific chapters, running to over seventy pages, and covering a wide range of actions and activities. The chapters are listed in Box A.

As well as the main text, the 2016 Code has seven appendices and four accompanying documents. The latter deal with:

• Business and Financial Reporting Requirements.
• Audit and Risk Committee Guidance.
• Remuneration and Superannuation.
• Board Self-Assessment Evaluation Questionnaire.

When these four documents are added to the main text, the whole document runs to over 140 pages. So, there is plenty of specific directions for State Bodies as to what they should be doing to achieve good corporate governance. It is their responsibility to ensure that there is delivery of good corporate governance. There have been two sets of additions to the 2016 code in recent years. Specifically, a new annex on gender balance, diversity, and inclusion was published in September 2020. And, in June 2021, changes were made in relation to superannuation and remuneration proposals.

b) 2022: Framework for the Commercial Semi-State Sector to address climate action objectives

The Climate Action Plan 2021 set a target of a 51% reduction in overall greenhouse gas emissions by 2030 and a target of net-zero emissions by no later than 2050. The commercial semi-State sector have, in turn, been set targets within what is called a ‘Framework.’  The New Economy and Recovery Authority (NewERA) is overseeing the Framework. This Authority already provides financial and commercial advice to Government Ministers and Departments in relation to State companies across a range of sectors. https://www.ntma.ie/business-areas/newera

The Framework applies to all commercial semi-State companies and their subsidiaries. It comprises of the following five commitments:

• Governance of climate action objectives
• Emissions measurement and reduction target
• Emissions valuation in investment appraisal
• Circular economy and green procurement
• Climate-related disclosures

With a view to informing the development of the climate action framework, NewERA engaged individually with each of the twenty-two companies. The objective was to gather information on their climate action objectives and to undertake research on best practice approaches to various aspects of corporate climate action objectives. Box B lists the State Bodies.

There is clearly a significant volume of work that commercial semi-State companies must undertake. That volume can be gauged from the fact that there sixteen targets (that are components of the five commitments). NewERA have the responsibility of checking that the sixteen targets are being tackled. There are also funding implications for the companies in implementing this new framework. NewERA states that – “It is expected that the CSS companies will fund the cost of meeting the commitments in the Framework, and of the investments required to achieve their climate action objectives, from their own resources.” Climate Action Framework for the commercial semi-State sector

c) Some conclusions

In themselves, codes are good tools to have. But, by themselves, they are not enough. To be a success, each State Body must be seen to be fully implementing the codes.

In the case of the 2016 Corporate Governance Code is the responsibility of each State Board to ensure that efficient systems and procedures are in place to ensure that good governance is achieved. And corporate governance is not confined to the boardroom. Corporate governance extends to management, shareholders, and employees. It also extends to the communities in which State Bodies operate.

The advent of the 2022 Climate Change Code puts even more pressure on State Bodies. And reporting on progress will not be done behind closed doors. The framework specifies that there will be reference to climate action objectives, including how each company is meeting its general obligations under climate legislation alongside overall company performance reports in annual reports. Moreover, companies will be expected to publish their progress towards emission reduction targets. Companies will also be expected to provide evidence of carbon pricing used in appraisal of relevant investments for which Ministerial consents are sought under statutory or Code of Practice requirements. All the commitments listed in the Framework are not easy to achieve. A considerable body of work is required from each of the twenty-two companies and their subsidiaries.

Tom Ferris, Consultant Economist.

^{Tom Ferris is a Consultant Economist specialising in Better Regulation. He lectures on a number of PAI courses and blogs regularly for PAI. He was formerly the Senior Economist at the Department of Transport, Ireland.}