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Principle 3

Principle 3: Governance systems

The board is ultimately responsible for the success of the organisation it governs. Each board should clearly define its role in discharging this responsibility.
An effective organisation should have the following systems:

  • a strategic planning framework identifying core organisational values, goals and performance management indicators
  • clearly documented board/management interaction, including appropriate delegations and authority of all parties
  • a thorough process for identifying and monitoring legal, compliance and risk management requirements
  • a thorough system of audit, including internal and external processes
  • a performance management system to provide evidence and ensure monitoring of legal compliance and performance against plans.

Principle 3.1: That the board should determine the process by which it oversees and develops the strategic direction, key objectives and performance measures as well as core values and ethical framework for the organisation.

Commentary and guidance
It is important that a board regularly reviews its strategic priorities to ensure it maintains its competitive advantage and is clear about on what it wants management to focus. The board’s agenda should reflect the strategic objectives of the organisation (see Principle 2.2)
The ASC considers it important that all key stakeholders are consulted through the strategic planning framework to ensure future strategies address the most pressing issues within the industry.

Principle 3.2: That the board should develop a protocol outlining expectations for board–management interactions. This will normally include:

  • expectations regarding the use of a board member’s networks/contacts
  • expectations regarding provision of advice to the chief executive officer and management
  • a protocol for individual directors to acquire all information required for decision making and control (see Principle 4).

Commentary and guidance
The relationship between management and the board is critical and must be supported by a clear segregation of responsibilities. At all times the board must be in control, however management must be accountable, operate with delegated authorities, have appropriate levels of skills, and perform against the established key performance indicators.
Directors should not approach management directly, but rather should channel all additional information requests through the chair and chief executive officer, unless specifically approved within the protocols.

Principle 3.3: That the board should have in place an effective and efficient monitoring and evaluation system. This will include financial and non-financial monitoring. In particular, each board should monitor outcomes of the implementation of the strategies as the basis for the evaluation of overall performance and reporting to members (see Principle 5).

Commentary and guidance
It is essential that the performance indicators are clear and concise and, more importantly, can actually be measured, are aligned to strategic objectives, and comprise both lead and lag indicators where possible.
It is also imperative that an organisation understand where they currently stand in relation to key performance indicators so a comparison can be achieved between past, current and future result targets.

Principle 3.4: That the board should have in place an effective risk management strategy and process. This will require the board to take actions to identify key risks facing the organisation and ensure that risk management strategies are developed and actioned. The risk management system should comply with the Australian Risk Management Standard HB 246:2010.

Commentary and guidance
It is essential that an organisation regularly reviews its risk exposure across all facets of the organisation.
An organisation should establish its risk appetite and assess risk in line with this.
In line with HB 246:2010 an organisation should review the likelihood and impact of all possible incidents and assess the actions required to minimise, avoid or eliminate potential risks. An organisation should ensure it also assesses the opportunities forgone as part of its risk assessment and evaluation process, as risk is not only a negative element; the opportunity cost of not doing activities should also be considered.
In addition, some events or activities often need a specific and comprehensive risk assessment to be done (for example, the hosting of a large sporting event). In this situation a business case should be developed as part of normal risk management processes to assess the impact and potential outcomes, negative or positive, of such an event.

Principle 3.5: That the board should implement an effective compliance system. It is recommended that this system comply with Australian Standard AS3806:2006 and require, at a minimum, that:

  • the organisation complies with all relevant statutes, regulations and other requirements placed on it by external bodies
  • effective internal controls exist and there is full and accurate reporting to the board in all areas of compliance
  • the organisation is financially secure and is able to meet all its financial obligations when they fall due, in the normal process of business.

Principle 3.6: That the board should develop and document a regular (annual/six-monthly) performance review process for the chief executive officer.

Commentary and guidance
While the detail of the performance review may be undertaken by the nomination and remuneration committee or another board committee, at some point in the process all directors should have an opportunity to review and comment on chief executive officer performance.
The performance indicators for the chief executive officer should be clearly linked to the strategic goals and objectives set by the board and should be measurable. In addition the chief executive officer should have performance measures linked to staff performance and key stakeholder relationships.

Principle 3.7: That the board must ensure an effective audit system and process is in place. The audit process may include internal and external processes and systems.

Commentary and guidance
An effective audit process should ensure there are adequate controls and systems in place to alert management and the board to potential risks associated with the operation of the sport.
Given the heavy financial focus on audit processes, management and board directors should have basic financial literacy that enables them to understand and actively challenge information presented.

Principle 3.8: That the board should establish an audit committee and that its role be set out by formal charter/terms of reference.

Commentary and guidance
The existence of an audit committee is recognised as an important feature of good corporate governance. The committee should be structured with at least three people who should be financially literate, and include at least one who has financial expertise (that is, a qualified accountant). The audit committee should only comprise persons who are not directly involved in the management of the organisation, however the chief executive officer and chief financial officer or equivalent should have standing invitations to provide clarification where necessary.
The chair of the audit committee should be independent from the chair of the board.
The audit committee should take prime responsibility for, but not be limited to:

  • reviewing the organisation’s annual financial accounts and recommending them to the board for approval
  • overseeing the relationship, appointment and work of external and internal auditors
  • reviewing compliance-related matters
  • overseeing the organisation’s risk management framework
  • regularly reviewing the organisation’s ongoing financial accounts, systems and delegations.

The audit committee charter should clearly set out the committee’s role, responsibilities, composition, structure and membership requirements. The committee should be given the necessary power and resources to meet its charter. This includes rights of access to management, and to auditors without management being present, and rights to seek explanations and additional information.
If approved by the board, an audit committee can extend their mandate beyond purely financial and audit matters to include compliance and risk management as areas of focus.

Principle 3.9: That the board should establish a nomination committee and that its role be set out by formal charter/terms of reference.

Commentary and guidance
The existence of a nomination committee is recognised as an important feature of good corporate governance. It is important that boards are comprised of members with a variety of skills and experience, and who act in the best interests of the organisation as a whole.
The committee should be structured with at least three people and may be a combination of directors and external appointments. The nomination committee should only comprise persons who are not directly involved in the management of the organisation; however the chief executive officer and human resources manager or equivalent should have standing invitations to provide clarification where necessary.
The chair of the nomination committee should be independent from the chair of the board.
The nomination committee should take prime responsibility for, but not be limited to:

  • reviewing the board’s skill mix and identifying gaps
  • identifying potential directors for appointment to the board or to be put forward as preffered nominations for elections
  • reviewing director nominations and providing the members with the board’s preferred nominees based on needs identified in the skill gap analysis

The nomination committee charter should clearly set out the committee’s role, responsibilities, composition, structure and membership requirements. The committee should be given the necessary power and resources to meet its charter.

Principle 3.10: That since ultimate decision-making power rests with the board, the board should clearly document all delegations of authority to the chief executive officer and other individuals, committees or groups. This document, or delegations register, should be regularly reviewed and updated. It should be the subject of a formal board resolution.

Commentary and guidance
To ensure the delegations document is not limiting and restrictive on the operations of the organisation, it is often better to articulate the limits of management authority as opposed to trying to articulate every possible approval item. This approach will provide a framework in which management can operate, without unnecessarily burdening the board with items management should clearly deal with.

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