STRATEGIC BUSINESS LEADER (SBL)

Strategic Modules
Chapter 6 Public Sector Governance & Reporting

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Learning Outcomes

Public sector governance

a)Compare and contrast public sector, private sector, charitable status and non-governmental
(NGO and quasi-NGOs) forms of organisation, including agency relationships, stakeholders’ aims
and objectives and performance criteria.[2]

b)Assess and evaluate the strategic objectives, leadership and governance arrangements specific
to public sector organisations as contrasted with private sector.[3]

c)Explain democratic control, political influence and policy implementation in public sector
organisations.[3]

d) Discuss obligations of the public sector organisations to meet the economy, effectiveness,
efficiency (3 ‘E’s) criteria and promote public value.[3]

Reporting
a)Discuss the factors that determine organisational policies on reporting to stakeholders, including
stakeholder power and interests.[3]

b)Assess the role and value of integrated reporting and evaluate the issues concerning accounting
for sustainability.[2]

c)Advise on the the guiding principles, the typical content elements and the six capitals of an
integrated report, and discuss the usefulness of this information to stakeholders.[3].

d)Describe and assess the social and environmental impacts that economic activity can have (in
terms of social and environmental ‘footprints’ and environmental reporting).[3]

e)Describe the main features of internal management systems for underpinning environmental and
sustainability accounting including EMAS and ISO 14000.[2]

f)Examine how the audit of integrated reports can provide adequate assurance of the relevance
and reliability of organisation reports to stakeholders.[2]

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Public sector governance
a)Compare and contrast public sector, private sector, charitable status and non-
governmental (NGO and quasi-NGOs) forms of organisation, including agency
relationships, stakeholders’ aims and objectives and performance criteria.[2]
b)Assess and evaluate the strategic objectives, leadership and governance arrangements
specific to public sector organisations as contrasted with private sector.[3]

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Different organizations-different governance issues
i. Large listed companies
They are primary accountable to shareholders and regulator. Shareholders are the
principal stakeholders. Financial statements are main methods of monitoring
performance. The board structure consists of EDs and NEDs. The appointment of
directors is a formal process. They are required to be opened and transparent.

ii. Private company

They are primary accountable to shareholders. Shareholders are the principal
stakeholders. Financial statements are main methods of monitoring performance. The
board structure consists of EDs as a result of shareholding. Limited disclosure is required.

iii. Government/Public Sector

They are concerned with providing government services to the people. Examples are
education, public transportation, healthcare etc. In government/public sector, good
corporate government means:
• Being clear about its purpose & intended outcomes to the public
• Clearly defining functions and roles
• Establishing ethical values for its organization & staff
• Taking informed, transparent decisions and managing risks
• The government officers must have skills, knowledge and experience to perform
the functions.
• Government body should be clear about the parties to whom they are accountable.
The government should have effective system of communication with the public.

Government organisation is different in term of its:

(i) aims and purpose ( i.e. to deliver goods/services for people such as public
health services, transportation, education)
(ii) sources of funding (i.e. funded by taxpayer)
(iii) accountability (i.e. answerable to the people of the nation)

Different types of public sector organisations at sub national, national and

supranational level

• Sub-national government- It a state, county or province level of government.

• National government- It is a central government based in the capital city of a
country.
• Supranational government- it is above national governments such as the European
Union (EU) or Association of Southeast Asia Nations (ASEAN)

b)The strategic objectives and governance arrangements specific to public sector

organisations as contrasted with private sector

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 • Strategic objectives of government are focusing on the local needs of people. For
example, Penang state government’s strategic objective is to make the state
becomes “cleaner and greener”
We aligned the Scottish Government around five
Strategic Objectives that underpin our Purpose and
describe the kind of Scotland we want to live in - a
Scotland that is Wealthier and Fairer, Smarter,
Healthier, Safer and Stronger and Greener. We
created a smaller, more effective Ministerial team,
and matched this with a simpler and more efficient
structure for the Scottish Government.

• Governance arrangements of government focus on governance principles of

Accountability, Leadership, Integrity, Transparency, Objectivity and Fairness
(A LIST Of Fairness). The decision making body must demonstrate how the
public money is being used appropriately to meet the provision of public services.

iv. Non Government Organization

They are a private institution that is normally independent of the government. The
important features of NGO are:
• They are independent
• They are not profit oriented
• They will not conduct any illegal activities
• The are normally addressing the social issues

The stakeholders are:

• Individuals, trusts & employees of NGO
• Fund providers
• Beneficiary
• Regulator
• General public and members.

Both financial statements and non financial statements are methods of monitoring
performance. The board structure consists of volunteer trustees, paid and unpaid
management team. The appointment of management team is through recommendation or
word of mount.

Non-Governmental Organisations (NGO) and Quasi-autonomous NGO

(QUANGOs)

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 • NGO is an organization that is neither a part of a government nor a conventional
for-profit business. It is usually set up by volunteers and may be funded by
governments, foundations, businesses, or private persons.

• A QUANGO is a body (organisation) plays the roles and functions in the process
of national government. It is not a government department or government agent. It
is an organization financed by a government but that acts independently of it.

Examples of QUANGOs
-the International Standards Organization (ISO)
- the International Federation of Red Cross
-The Forestry Commission in charge of forestry in England and Scotland

• Lobby groups are those people come together with a common interest (e.g.
business ventures) with a view to influencing government policy. They may
come under criticism if the lobby groups are seen to have large power to influence
government policy in their favour.

Examples :
-Malay Chamber of Commerce Malaysia (MCCM)
-The Chinese Chamber of Commerce (CCC)
-National Chamber of Commerce and Industry of Malaysia (NCCIM)

Summary: The differences in CG between private sector & NGO

NGO Private Sector

Legal form They are set up by TRUSTS Set by company constitutions
Lack of market Success or failure of NGOs is not easily Easy to determine success or
test defined. It is difficult to recognized good failure by looking at the
performance because their activities are profitability.
charitable.
Board to be Board members are mainly volunteers Board members are paid for
managed and they are not paid for the job. their services to the
differently Managing volunteers must be different organization.
from any paid job
Stakeholders The needs of the stakeholders are quite Mostly all the stakeholders
different are monetary motivated
Ownership NGOs are controlled by directors or They are owned by
trustees who are volunteers shareholders.
Accountability NGOs are accountable to their Board members are also
stakeholders accountable to their
stakeholders

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c)Explain democratic control, political influence and policy implementation in
public sector organisations.[3]

• Nature of the country/state. Most of the states require the following 4 “organs” to
functions:
(i) Legislature- Body of making laws
(ii) Judiciary – Body of interpreting laws
(iii) Executive- Government departments headed by cabinet ministers
(iv) Secretariat- The administration or “civil service”

• Nature of democratic control. In a democracy the government is answerable

ultimately to the electorate (voters).

• Policy implementation. At the central government level, policy implementation is

the responsibility of the Minister in charge of government departments. In the
local government, the council conducts its affairs through officers who head the
various service departments in the local authority.

d) Discuss obligations of the public sector organisations to meet the economy,

effectiveness, efficiency (3 ‘E’s) criteria and promote public value.[3]

A common way of understanding the general objectives of public sector organisations is

the three Es: economy, efficiency and effectiveness.

• Economy represents value for money and delivering the required service on budget, on
time and within other resource constraints. It is common for public sector employees
and their representatives to complain about underfunding but they have to deliver value
to the taxpayers, as well as those working in them and those using the service.

• Efficiency is concerned with getting an acceptable return on the money and resources
invested in a service. Efficiency is defined as work output divided by work input and it
is all about getting as much out as possible from the amount put into a system. It follows
that an efficient organisation delivers more for a given level of resource input than an
inefficient one.

• Effectiveness describes the extent to which the organisation delivers what it is intended
to deliver.

Reporting

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a)Discuss the factors that determine organisational policies on reporting to
stakeholders, including stakeholder power and interests.[3]
⚫ Factor 1- The need of information by the most powerful and high interest stakeholder.
⚫ Factor 2- The requirement of reporting framework, for example, Global Reporting
Initiative (GRI).
⚫ Factor 3- The awareness of management to protect the different stakeholders.
⚫ Factor 4- The objective of reporting. (I.e. What to achieve after reported?)

b)Assess the role and value of integrated reporting and evaluate the issues
concerning accounting for sustainability.[2] c)Advise on the the guiding principles,
the typical content elements and the six capitals of an integrated report, and
discuss the usefulness of this information to stakeholders.[3].

“An integrated report is a concise communication about how an organization’s

strategy, governance, performance and prospects lead to the creation of value
over the short, medium and long term."

Integrated reporting is built around the following key components:

1. Organisational overview and the external environment under which it operates.

2. Governance structure and how this supports its ability to create value

3. Business model

4. Risks and opportunities and how they are dealing with them and how they affect the
company’s ability to create value

5. Strategy and resource allocation

6. Performance and achievement of strategic objectives for the period and outcomes

7. Outlook and challenges facing the company and their implications

8. The basis of presentation needs to be determined, including what matters are to be

included in the integrated report and how the elements are quantified or evaluated.

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⚫ The Integrated reporting framework establishes principles and concepts that govern
the overall content of an integrated report.

⚫ An integrated report sets out how the organisation’s strategy, governance,

performance and prospects, which lead to the creation of value.

⚫ There is no benchmarking for the above matters and the report is aimed primarily at
the private sector but it could be adapted for public sector and not-for-profit
organisations.

⚫ The primary purpose of an integrated report is to explain to providers of financial

capital how an organisation creates value over time.

⚫ An integrated report benefits all stakeholders interested in a company’s ability to

create value, including employees, customers, suppliers, business partners, local
communities, legislators, regulators and policymakers, although it is not directly aimed
at all stakeholders.

⚫ IR focuses on the process (not product), using a series of capitals to illustratee how
an organisation creates value for all stakeholders (not just shareholders).

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c)Advise on the the guiding principles, the typical content elements and the six capitals of
an integrated report, and discuss the usefulness of this information to stakeholders.[3].

Six Capitals
Financial capital = How to use the financial resourse ?
Manufacturing capital = How to use building, equipments and infrastructure to produce
products/services?
Human capital= How firm uses human capital to create values?
Intellectual capital= How firm creates innovations?
Natural capital = How firm uses natural resources?
Social capital = How firm utilises social relationship?

Environmental Reporting
Since environmental reporting is purely voluntary activity, it is necessary for companies
to establish some business case to report. Benefits of reporting are:

• Demonstrates the management strategies, systems and policies relating to the

environment to its stakeholders on its holistic approach to sustainability.

• Strengthens stakeholder relations. Confidence and trust of stakeholders are

improved. Issues of sustainability can be addressed in the environmental report.

• Increases competitive advantage (the “first mover” effect) over competitors who
are not open and transparent about the sustainability issues.

• Public recognition for corporate accountability and responsibility.

• Effective self regulation minimises risk of regulatory intervention.

• The reporting may improve access to lists of “preferred suppliers” of buyers with
green procurement policies.

• It reduces corporate risk (i.e. increase the compliance rate and decreasing
liabilities) which may reduce financing costs and broaden range of investors.

• Enhances employee morale and improves profitability.

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Components of Sustainability Report
• Organisation profile (Describe the overview of background information about the
organisation)

• Environmental policy statement

• Targets and achievements (Describe the target to be achieved)

• Performance and compliance (Describe the detailed results or achievement)

• Management systems and procedures (Describe the environmental management

system in place, acknowledge the external accreditations achieved such as ISO
14000/EMAS)

• Independent verification statement (Describe the independent verification by

external assurance firm)

Usefulness /Advantages of this information to stakeholders

• Provide a balanced and understandable assessment of the company’s

performance. It can strengthen accountability to shareholders and demonstrate
the accountability to future generations.

• The environment in external report is able to help to reduce the negative impacts
to the natural environment and wastage because through the reporting, the company
will always seek to improve the efficiency.

• This report is important to investors and stakeholders because the disclosure of

social and environmental information is seen in the context of risk management
and strategic decision making. (Those companies engage full disclosure will be
seen as low risk companies for investment)

• Improve reputation. The report can enhance the organization reputation for
ethical and competent behaviour, leading to marketing opportunities as green
companies.

• Provide assurance to stakeholders to minimize the impact of environmental

damage.

d)Describe and assess the social and environmental impacts that economic activity
can have (in terms of social and environmental ‘footprints’ and environmental
reporting).[3]

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Social and environmental report

⚫ The social and environmental reporting can be explained as the process of

communicating the social and environmental effects of the organisations’ economic
actions to particular interest groups with society and to the nature environment at
large. It is the public disclosure by an organization of its social and environmental
performance information.

Contents of a social and environmental report

⚫ The reports generally include the production of narrative and numerical information
on an organisation’s environmental impact or ‘footprint’ for the accounting period
under review.

⚫ In most cases, narrative information can be used to convey objectives, explanations,

aspirations, reasons for failure against previous years’ targets, management discussion,
addressing specific stakeholder concerns, etc.

⚫ Numerical disclosure can be used to report on those measures that can usefully and
meaningfully be conveyed in that way, such as emission or pollution amounts (perhaps
in tonnes or cubic metres), resources consumed (perhaps kWh, tonnes, litres), land use
(in hectares, square metres, etc) and similar.

Examples of performance indicators (for your knowledge)

Environmental Aspects Typical Environmental Indicators

Energy and Resource Use
• Material, water, other
renewable resources
• Energy
• Weight of raw materials used per unit of production
• Amount of recycled or reused materials used in the
production process
• Volume of water conserved per head of staff compared
to the previous year
• Reduction in materials per unit of production
• %substitution by sustainable or non-damaging
materials
• Amount of energy consumption per year, per head or
per unit of product
• Fuel consumption per vehicle in fleet
• Amount of energy saved due to energy conservation
programmes

Pollution Prevention • Volume of discharge per year or per unit of production

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 • Water Pollution • Weight of effluent of a specific substance per year, per
service or per unit of production
• Amount of energy released to water
• Volume of specific emissions (e.g. carbon dioxide,
nitrogen oxides) per year, per service or per unit of
production

e)Describe the main features of internal management systems for underpinning

environmental and sustainability accounting including EMAS and ISO 14000.[2]

Environmental Accounting
The objective of environmental accounting is to support the integration of environment
performance measures. It builds on social and environmental auditing by providing
evidence of the achievement of social and environmental objectives. Without social and
environmental auditing, environmental accounting would not be possible.

There are 3 systems relates to environmental accounting system.

i. EMS. Environmental management system is a systematic approach

adopted by organizations to control the impact of their economic activities
on the natural environment.

Objectives of EMS
• Monitor and control environmental impacts arising from activities,
product/service.
• Ensure organization complies with all the laws & regulations
relating to the environment
• Improve and exhibit high environmental performance.

Benefits of an EMS

• It ensures shareholders & stakeholder about the organization’s

commitment to environmental management and becomes a
responsible corporate citizen.
• It ensures maintaining good public / community relations &
government.
• It enables conservation of resources
• It leads to reduced cost of waste management.

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ii. EMAS. Eco- Management and Audit Scheme (EMAS) is a voluntary
initiative designed to improve companies’ environmental performance.
EMAS focuses on the standard of reporting and auditing of that reported
information.
The objective of EMAS is to recognize and reward those organizations that
go beyond minimum legal compliance and continuously improve their
environmental performance.

Requirements for EMAS registration

• Establish an environment policy containing commitments to comply

with legislation and achieve continuous environment performance
improvement.
• Conducting on site environmental review
• Setting up an environmental management system that is based on the
environmental review and the company’s environmental policy.
• Conducting environmental audits at sites at least every 3 years.
• Audit results to form the basis of setting environmental objectives and
the revision of the environmental policy.
• Detailed disclosure about environmental policy, management system
and performance of environmental protection.

iii. ISO 14000. It is a series of standards dealing with environment

management and a supporting audit program. ISO 14000 focuses on
internal systems although it also provides assurance to stakeholders of
good environmental management.
The objectives of ISO14000 are to guide the usage of EMS specifically and
to provide the standards (the benchmark) against which it can be audited
and certified.
Key elements of ISO14000 series.

• Environmental policy. It sets the environmental policy towards

reduction of environmental footprint.
• Planning. It consists of the systematic planning process of
analyzing the environmental aspects of the processes, products and
services of the entity.
• Implementation. It guides the implementation process to control
the environmental footprint.
• Checking and corrective action. It includes checking that the
policy is being conformed to and taking corrective action where it is
not.

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 • Management review. It includes a review of the environmental
policy and its implementation by the top management.
• Continuous improvement. It ensures continual improvement
towards reduction of the environmental footprint.

f)Examine how the audit of integrated reports can provide adequate assurance of
the relevance and reliability of organisation reports to stakeholders.[2]

Environmental Auditing

Definition: Environmental audit is a systematic, documented, periodic and objective

evaluation of how well an organization, its management and production process are
performing in relation to preserving the environment and compliance with the
regulations.

The objective of environmental auditing is to assess the impact of the organization on the
environment. It involves the implementation of standards such as EMAS and ISO14000. It
also provides raw data for environmental accounting.

Environmental audits may cover the following areas:

a. Environmental impact assessment (EIA). This assessment is to determine the
impact of a certain project to the environment such as construction of hydro-
electricity dam.
b. Environmental surveys. It involves by observe how the organization views the
protection of environment in general.
c. Environmental SWOT analysis. Organization looks at the SWOT in preserving
the environment.
d. Environmental Quality Management (EQM). EQM is part of TQM system
where it manages the waste disposal.
e. Eco-audit. It is to promote improvements in company environmental
performance and to provide the public with information about these
improvements.
f. Eco-labelling. Eco labelling developed by Germany to label those products
meet the highest environmental standards. It is the result of EQM system. Eco-
audit must come first before eco-labelling.
g. Supplier Audits. They ensure that raw materials purchased by the organization
meet the environmental standards applied by organization.

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Audit procedures for social environmental audit.
Step 1 - Define scope of environmental audit. Review evidence of the organization’s
environmental interactions. Obtain a copy of the organization’s environmental policy

Step 2 - Appraise available data and information for environmental audit. Assess whether
the policy is likely to achieve corporate objectives, meet legal requirements, meet
environmental standards and satisfy key customers/suppliers.
Step 3 - On site inspection and investigation on the environment. Testing for employee
environmental awareness by observation, questionnaire and interview. Sampling may be
used to test the degree of environmental awareness. Involvement of employees in the
environmental friendly projects would also indicate how strong of the environmental
awareness among the employees.
Step 4 - Review findings with management. Review the enforcement of environmental
policy by discussing with management, observing the operational process.
Step 5 - Agree actions needed to improve the environment. Formation of discussion
group and the creation of a suggestion scheme on environmental issues are part of the
awareness program.
Step 6 - Determine costs and resources required to implement actions
Step 7 - Ranks actions and establish priorities for each action proposed.
Step 8 - Prepare program of work to take action.
Information needed when planning the social and environmental audit.
i. Accounting records on energy usages such as heating and lighting costs in
relation to number of employees, floor space and size of building.
ii. A good practice of energy conservation such provision of wall and roof
insulation and temperature control system.
iii. Information on usage of renewable resources such as re-cycled materials.
iv. The efficiency of usage of energy such as consumption of water and electricity.
v. The environmental audit framework such as ISO14000 that provides a general
framework that the auditor will wish to consider in the audit.

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