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Corporate governance and accountability

Corporate governance: it’s the system of rules and mechanisms set up to ensure that those who manage an organisation do it in the interest of the owners.

In the private sector, this means that managers should be primarily concerned with creating value for the shareholder, which results, for example, in dividends or in the increase of the value of shares over time. In the public sector, on the other hand, public managers use financial and other resources primarily to implement public programmes and to deliver quality public services.

Controlling the conduct of managers, however, is problematic for at least three reasons. Firstly, managers may have goals of their own that differ from those of the owners of the organisation. For example, individual citizens (and taxpayers) – who are ultimately the owners of public sector organisations – want efficient, timely and cheap public services. Some managers of public sector organisations may just want a secure job, with a decent salary and improved career prospects.

Secondly, the owners of an organisation don’t necessarily know what managers do. Managers are entrusted with managing public sector organisations and pursuing public objectives, but an individual citizen can’t scrutinise everything public managers do. Managers are typically held accountable for their conduct by looking at their overall performance rather than at any particular act or decision that they might make.

Finally, the owners of an organisation may induce managers to commit to pursuing public objectives through pay-for-performance schemes. These incentive schemes consist of salary arrangements where managers are paid more if they deliver a ‘better’ performance. In principle, these schemes should help align the interests of public managers with those of ordinary citizens. However, a manager can’t control every aspect of the performance of a public sector organisation. And of course, a manager might be tempted to manipulate performance records for his or her own benefit.

All in all, designing good mechanisms for corporate governance is very challenging. Many countries have experimented with various forms of pay-for-performance schemes in the public sector, with mixed results. Others have explored alternative routes, such as paying closer attention to the selection, training and motivation of civil servants. Others have enforced stricter rules, with auditors scrutinising the conduct of public officers in order to prevent, detect and correct wrongdoings.

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This article is from the free online course:

Understanding Public Financial Management: How Is Your Money Spent?

SOAS University of London

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