University Governance and Regulations

Forum

Do universities have control

over their “Controlled Entities”

Presentation by: Michael Kern Director, Governance Services and University Secretary James Cook University Past President Association of Australian University Secretaries

Overview of Presentation

1. Setting the Scene Why a university would need a Controlled Entity Statutory powers/limitations when establishing a Controlled Entity Types of entities that can be used How Controlled Entities are controlled Advantages of 100% control

2. The Voluntary Code’s “Requirements”

3. Legislative and statutory powers and obligations of established entities

4. Use of Controlled Entities by Australian universities – a sector scan

5. Controls - examples of good practice identified across the sector

6. Pitfalls and dangers - examples identified across sector

7. Checklist to effect controls over University Controlled Entities

1. Setting the Scene

Why do universities need structural separation?

University Statutory Powers to establish an entity – a sector comparison

Types of Entities that can be used

How are Controlled Entities normally controlled?

Advantages of 100% control

1. Setting the Scene

– The need for structural separation

Nature and Purpose of the activities being undertaken

Underlying pressure on reduced government funding reliance

Commercial V public sector modus operandi

Legal separation for liability and reputation purposes

Core business activities

Non-core business activities

Commercial exploitation and “spin off” readiness

1. Setting the Scene

- Powers to establish an entity

Enabling Legislation – may contain specific power eg JCU Act

1997 - Sec 61 Forming and taking part in Corporations

Restrictions/Limitations may be imposed eg JCU Act 1997 - Sec 61(1) The university may be a member of, form, take part in forming or manage a corporation with like objects to JCU

Other powers or restrictions may be imposed under various pieces of State Legislation or related Ministerial General or Specific Approvals eg Statutory Bodies Financial Arrangements Act 1982 (Qld) (Sec 60A)

Sector Scan – comparison of statutory powers contained in university enabling legislation

1. Setting the Scene

- Types of entities used

Companies Proprietary - Pty Ltd Public – Ltd – including Limited by guarantee

Trusts Trustee Companies ATF a Trust Trusts – Discretionary or Unit

Partnerships including limited liability partnerships

Joint Ventures incorporated and unincorporated - eg CRCs

Associations Incorporated and unincorporated - eg Foundations

1. Setting the Scene - How are entities controlled?

Active control

Passive control

Policies – University and Controlled Entity

Involvement in Strategy Planning Budgetting and Appointments

Statement of Governance Responsibilities

Induction and Training of Directors, CEO and senior executives

Periodic monitoring of performance against targets and KPIs

Annual Risk Assessment of each Controlled Entity

Constitutional documents

1. Setting the Scene - Advantages of 100% control

Section 187 of the Corporations Act concession provided to a Director of a wholly-owned subsidiary company

A Director’s reliance on the Section 187 concession

The General Law requirements on a Director of a subsidiary company that is not wholly owned but which is part of a corporate group

Advantages “to be or not to be” wholly owned

2. Requirements Under the Voluntary Code

The Voluntary Code of Best Practice for the Governance of Australian Universities requires each University Council to exercise oversight and risk management of its Controlled Entities

3. Legislative and statutory powers and obligations

Relevant Act will apply

Payment/Non-Payment of Directors remuneration

Annual Audited Statutory Accounts and Statutory Returns and Disclosures

Consolidated into the University’s consolidated Statutory Accounts (where material)

Establishment and maintenance of Constitutional documents and Registers

Application of specific legislation, sometimes which is not usually applicable to the university

4. Use of Controlled Entities by Australian universities – a sector scan

% of universities with at least 1 controlled entity %?

Total number of controlled entities in existence at 31/12/2013 #?

The average number of controlled entities used by a university #?

Most common type of entity used ? and how many #?

The Total Assets in Controlled Entities across the sector was $?

The Total Revenue of Controlled Entities in the sector was $?

Total Contribution by Controlled Entities to Operating Result $?

5. Controls - examples of good practice identified across the sector Controlled Entity Establishment requires the Council’s approval Constitutional documents – include rules around Director

communications Directors - highly skilled/experienced external Council members,

executive staff members and/or external professionals Periodic ( ¼ly, ½yrly) reporting against KPIs and Business Plan

objectives Provision of indemnities for Nominee Directors Clarity of officers’ roles and responsibilities especially where staff

involved (COIs) Governance manual accessible by all entities and officers Approval of a Business Plan for each CE by 31 December Annual Risk Assessments undertaken on each CE

6. Pitfalls and dangers - examples identified across sector

Failure of entity and loss of start-up capital or investment

Failure to closely monitor financial position resulting in insolvency

Failure to appoint skilled, experienced Chair, Directors, CEO or GM

Rogue CEO

Failure to consider management response to issues and action

plans contained in the external Auditor’s Management Letter

Inadequate, deferred, deceptive reporting from Controlled Entity

Indemnity called upon by Director Loan default and a university underwriting called in Subsidies /cross subsidisation can mask operating/management

problems Permanent diminution in goodwill acquired Managing Conflicts of Interests

7. Checklist to effect control over Controlled Entities

1. Authority – understand the internal and external regulatory

regimes 2. Policy – clear articulation of various processes and delegations 3. Constitutional Documents - are in order 4. Governance Manual – clarity of roles and responsibilities 5. Board and CEO appointments – get them right 6. Training and Inductions, for the Chair, other Directors and CEO 7. Council approval of Operational Plan, Budget and KPIs 8. Periodic review and monitoring of performance against plan and

KPIs 9. Review of External Audit Report and Management Letter 10. Review of Remuneration 11. Risk Management – annual risk assessment and review of

investment, capitalisation level, subsidies, indemnities and guarantees

12. Make sure you in fact have control over your controlled entity

Who really has control?