Part A: Corporate governance in the public sector
Introduction to corporate governance in the public sector
Key takeaways
- Corporate governance is the system of rules, practices and processes by which an organisation is directed and controlled; in the public sector it balances operational independence with public accountability.
- Its five principles are accountability, transparency, fairness, responsibility, and independence of the board from undue interference.
- A public body has no single owner: it answers at once to Parliament, the executive, the public, oversight bodies and the Constitution, so a fair and lawful process is what gives its decisions legitimacy.
- Good governance protects public resources, builds public trust and supports service delivery; weak governance is consistently linked to corruption, service delivery failures and reduced public trust.
- The main challenges are political interference, weak enforcement of standards, capacity gaps among board members, and the pull between commercial performance and public-service mandates.
Overview of corporate governance in the public sector
Corporate governance is the system of rules, practices and processes by which an organisation is directed and controlled. In the public sector it governs how state corporations, agencies and other public institutions are run, balancing operational independence with public accountability, since public boards answer to citizens and government rather than private shareholders.
Principles of corporate governance
- Accountability, to government, oversight bodies and the public
- Transparency in decision making and reporting
- Fairness to all stakeholders
- Responsibility for the institution's own conduct and performance
- Independence of the board from undue interference
Importance of corporate governance in the public sector
Good governance protects public resources from mismanagement, builds public trust in institutions, and supports the effective delivery of the public services and mandates those institutions exist for.
Impact of good governance on society and the economy
Strong governance in public institutions supports investor confidence, efficient use of public resources, and better development outcomes, while weak governance is consistently linked to corruption, service delivery failures and reduced public trust.
Public sector governance differs from corporate governance in one respect that shapes everything else: there is no single owner whose interest defines success. A company's board answers to shareholders. A public body answers simultaneously to Parliament, to the executive, to the public it serves, to oversight bodies, and ultimately to the Constitution, and those principals do not always want the same thing. That is why public sector governance leans so heavily on process, since where outcomes are contested, a fair and lawful process is what gives a decision its legitimacy.
Judicial Service Commission v Mutava & another [2015] KECA 741 (KLR)
A judge facing removal proceedings argued that the Judicial Service Commission had denied him a full report and reasons and had relied on untested evidence. The Court of Appeal addressed whether a constitutional commission, exercising a power the Constitution itself confers, is bound to accord fair administrative action under Article 47. The case shows the principle this chapter rests on: in the public sector even the most senior bodies are accountable for how they decide, not only for what they decide.
The cases in this chapter are genuine, reported Kenyan authorities; none is invented for illustration.
Challenges facing corporate governance in the public sector
- Political interference in board appointments and decisions
- Weak enforcement of governance standards
- Capacity gaps among board members
- Competing pressures between commercial performance and public-service mandates
Exam tip
The five principles above recur as the standard this entire paper's later chapters (board conduct, ethics, financial crime prevention) are measured against, when evaluating a governance scenario, check it against these principles explicitly.
Self-check
(a) State the five principles of corporate governance in the public sector. (5 marks)
(b) Explain why public sector boards balance operational independence with public accountability differently from a private company board. (3 marks)
(c) State two challenges facing corporate governance in the public sector. (2 marks)
Show worked answer
(a) Accountability; transparency; fairness; responsibility; independence (5 marks).
(b) A public sector board answers to citizens and government rather than private shareholders, so its accountability runs through political and public channels rather than purely commercial ones, while still needing genuine operational independence to manage effectively, a balance a private board, accountable only to shareholders, does not have to strike in the same way (3 marks).
(c) Any two of: political interference in board appointments and decisions; weak enforcement of governance standards; capacity gaps among board members; competing pressures between commercial performance and public-service mandates (2 marks).