Effective PAO Governance: Key Foundation for Impactful Accountancy Profession
Patrick Kabuya | January 9, 2020 |
Professional accountancy organizations (PAOs) require effective leadership at the board (or equivalent) level to design and implement bold, innovative and impactful initiatives that address global challenges, improve citizens lives and contribute to the achievement of Sustainable Development Goals (SDGs).
The findings of my reviews and observations of PAO governance arrangements and practices in Africa indicate that more needs to be done to strengthen governance—especially within boards.
There are five fundamental principles and practices that PAO boards should adopt to enhance governance structures that will ultimately improve the accountancy profession across Africa. These principals are based on the principles and practices of the King IV Report on Corporate Governance for South Africa (2016), a globally recognized governance code, and my experiences and knowledge acquired supporting PAOs and serving on boards over the past 15 years. These principles and practices should be applied proportionately based on the level of maturity of the profession and country circumstances.
Board Roles and Responsibilities
Boards should understand their role, which is to provide effective and ethical leadership.
The key functions include: guiding the development of the PAO’s long term value creation; transformative and thought leadership strategy; formulating policies; providing oversight in strategy implementation and policies implemented by management; and communicating with stakeholders. The medium-term strategy should consider and incorporate the three elements of sustainable development (society, environment and economy), the country’s National Development Plan, and take into consideration technological advances. This is in addition to incorporating PAO enablers like human capital, infrastructure (technology), and a sustainable funding model, amongst others. The medium-term strategy should be implemented over a specified period. Appointment of a new board chair should not automatically result in preparing a new strategy, as is the case in some PAOs.
Boards should not be involved in PAO operations, as is the case in several PAOs where board members are involved in approving day to day transactions and staff appointments. This result in conflicts with the CEO and, ultimately, negative PAO performance. This role should be fulfilled by a CEO appointed by the board in a credible, transparent and fair process. The board should also have in place a CEO succession plan and regular evaluations of the CEO’s performance using pre-agreed performance measures.
Board members should receive proper training to better understand their responsibilities and stay up to date on the latest and best practices. This could be achieved by offering board orientation, mentorship arrangements, and continuous learning opportunities, e.g., enrolling and supporting members to attend Institute of Directors trainings, inviting guest speakers to board meetings to share the latest relevant issues, and requiring board members to declare their continuing professional development annually.
To fulfill their roles, boards should consider establishing board committees, for example an audit and risk committee, nomination committee, etc.. Each committee should have its terms of reference.
These requirements, as well as other rules and regulations on topics such as meeting protocols, addressing conflicts of interest, and appointments and official duties of the Board Secretary, should be explicitly detailed in the board charter.
The board should comprise members with diverse knowledge, skills, experiences, gender, age and culture. The makeup of most current boards are too homogenous—enhancing diversity of ideas within the board helps enrich the profession. For many boards, their composition is prescribed in their countries’ accountancy laws, and in some instances the members are representatives from specific job roles such as the auditor general or accountant general. Nevertheless, considering the role of the profession to protect the public interest, the board benefits from diverse representation, including independent members (who are not from the accountancy profession).
Boards and/ or nominating committees should put in place nomination practices that ensure that members, even those representing specified institutions, have diverse backgrounds and skills. Before replacing members, boards should conduct diversity assessments to identify gaps to aid with nominations.
New member elections should be free and fair following a credible, open and transparent process that is widely communicated. Using electronic voting is ideal as it offers an opportunity for all PAO members to vote.
The board charter should specify members’ terms of office. It is important to ensure there is regular board member rotation considering the need to maintain continuity and retain institutional memory. A common good practice is a three-year term that is renewable once with at least 1/3 of the members retiring at each annual general meeting. Board succession planning is critical. I have noted incidents where terms are too short while in others there is no term limit.
Boards should have a chair with an extensive wealth of experience, leadership capabilities and the ability to commit a significant amount of their time to the PAO. A chair’s appointment should be based on some eligibility criteria. For example, having served on the board or PAO committees for a specific period.
The chair should play a non-partisan role of leading the board to make collective transformative decisions, fulfil their mindful role, ensure members act in the PAO’s best interest, ensure all members actively contribute in the board’s value creation activities, and help ensure cooperative teamwork of the members. The chair should not be involved in the PAO’s operations.
The chair’s term should be defined. A common practice is a term of two years. In addition, the board should have power to replace the chair if s/he is not performing or has unethical behaviors.
In order to determine whether the board and all its members are performing their functions effectively, the board should regularly evaluate members and take appropriate actions to address any shortcomings. Common practices include conducting annual self-evaluation through an online survey completed by all board members, annual evaluations by the chair of all members, annual evaluation of the chair by members, and bi-annual external assessments.
Board evaluation results (annual and bi-annual), which should be consolidated by the board secretary, should be discussed by the board to determine corrective actions. The chair should provide performance feedback to individual members. The deputy chair or a designated board member should provide feedback to the chair on his/her performance. The PAO’s annual report, published and circulated to membership, should disclose whether a board evaluation was conducted and the actions implemented to improve board’s performance, if any. Currently, only a few PAO boards conduct board evaluations.
It is important for the board to maintain communication with all PAO stakeholders, especially PAO members. This will contribute to building trust and legitimacy. The board should prepare and issue regular communication to members on its decisions using communications tools and platforms, such as a note from the chair, annual general meetings, published audited financial reports, and, ideally, an integrated report. The board should have a stakeholder management plan that includes seeking regular feedback and input from stakeholders.
I challenge all PAOs to evaluate how they currently apply these principles and practices. If there are gaps, PAOs should take appropriate actions to build a stronger, more sustainable and relevant PAO that contributes to improving people’s lives and achieving SDGs. PAOs should leverage governance capacity building initiatives—guidelines, tools and trainings—offered by IFAC and regional PAOs like Pan Africa Federation of Accountants.