Chapter 4 - Corporate governance

4.1        Industry Skills Councils (ISCs) are independent, not-for-profit advisory bodies contracted by the Australian government to undertake a range of functions.[1] Employers, employees and/or their representatives form the governing bodies. Each ISC as a company in its own right has its own constitution and board structure. These arrangements are designed to meet the needs of the industry sectors they serve.

4.2        This chapter examines the corporate governance arrangements in place across ISCs, including board membership and selection as well as remuneration of directors. It also looks at whether there is a need to enshrine the roles and functions of ISCs in legislation, and whether the number of ISCs currently in operation—and their industry coverage—is appropriate.

Background

4.3        A review of the governance arrangements of ISCs was conducted in 2005–06,[2] which resulted in a program of work to improve structures, policies and procedures. The current governance arrangements follow a range of different models reflecting the needs of the industry sectors. A 2007 report by Allen Consulting Group noted:

...it can be argued that a key issue in governance is to adapt governance structures to the circumstances of the organisation, and maintain a flexible approach that is committed to continuous improvement rather than a search for an end state of good or best practice standard.[3]

4.4        ElectroComms and Energy Utilities (EE-Oz) reported that its training standards board complied with requirements following this review. Since 2007 the board voted unanimously to amend the constitution to require equal representation of employer and employee board representatives.[4]

4.5        The capacity to become an ISC has not been tendered out. AiG supported this approach:

ISCs, as currently structured and funded, are unique. They undertake an important role collecting and brokering the voice of industry in a neutral and strategic manner in relation to workforce development. Tendered or other arrangements that cut across neutrality and independence would not achieve the same level of broad stakeholder engagement and representation.[5]

Membership

4.6        ISC membership is bipartite, reflecting employee and employer stakeholders. The committee received evidence suggesting that boards, on the whole, perform well.[6]

4.7        The number of directors on ISC boards varies. ForestWorks and Service Skills Australia have the smallest boards, with six directors each.^[7] SkillsDMC has seven directors and seven alternate directors,^[8] while EE-Oz has eight directors.[9] Transport and Logistics ISC (TLISC) has nine directors, as do Agrifood Skills Australia and Government Skills Australia.[10]

4.8        While the Maritime Union of Australia told the committee that TLISC has included all sectoral interests on the board and in the supporting structures, the National Farmers' Federation, speaking in respect of AgriFood, argued that it is inappropriate for unions to have an automatic right to board membership at the expense of peak industry associations:

We are in no way advocating for our right to be on the board but rather we are of the view that Industry Skills Councils including AgriFood must have a skilled based board. Representation from relevant employer or employee bodies is more appropriately dealt with at a committee level.[11]

4.9        On this point, a joint ISC submission explained that:

...to drive real ownership and investment in skills development of the Australian workforce, employer and employee representatives must be joint partners at a strategic and operational level. This bipartite approach is a philosophy that has been supported regardless of government persuasion and continues to be mirrored today in the memberships of Skills Australia, National Quality Council, state training boards, international sector skills councils – and Industry Skills Councils.[12]

Governance arrangements

4.10      Current ISC governance arrangements follow a range of models which reflect the needs of their individual industry sectors.[13] As a company in its own right, each ISC has its own constitution and board structure which enables them to be responsive to the diverse industry conditions they operate in.[14]

4.11      ForestWorks submitted that it has best practice governance arrangements consistent with all ASIC requirements for a registered company limited by guarantee.[15] It reported that:

ForestWorks reports to ASIC annually via the company annual report to Australian accounting standards. This report is reviewed and approved by Auditors, Company Directors and by members via the annual general meeting process.[16]

4.12      TLISC reported that its governance arrangements were strengthened in 2006/07 following a review of all ISCs. The review noted several areas where improvements could be made and this formed the basis of a communiqué from the government. Changes included: reducing the size of the board; the majority of director positions occupied by industry representatives; ensuring a separation between the roles of the advisory committees and the board; establishing operational plans and key performance indicators (KPIs); a redevelopment of the constitution and board charter; separation of expenditure for DEEWR contracts and other project work; and new selection and induction processes for new directors.[17]

4.13      ISCs also undertake internal governance reviews over time. The Community Services and Health ISC (CS&HISC), for example, conducted one such review in late 2006 and another in 2010.[18]

4.14      The Innovation and Business Skills Australia (IBSA) advised that it has a Governance and Nominations Committee 'to establish and monitor transparent processes for Board appointments and oversee the company's governance framework'. The IBSA constitution includes 'stringent requirements around the skills and expertise of its directors and its uses 'contemporary best practice in finance and governance policies and procedures'.[19]

4.15      Government Skills Australia (GSA) advised that its board members are guided by a Governance Charter, a Governance Handbook and a Code of Ethics. Its principles of good governance are underpinned by:

• policies and procedures that are regularly reviewed and audited;
• transparent financial management and reporting;
• informed decision making with information sought from Board subcommittees, senior
• management and external expertise;
• strategic thinking; and
• regular self review, continuous improvement and enhancement of skills.[20]

4.16      ISCs submitted that their corporate governance arrangements were transparent and open to scrutiny. Manufacturing Skills Australia (MSA), for example, submitted that:

All of these processes are quite open and transparent and available for scrutiny by any party. Industry is deeply engaged in MSA processes, governance and decision making and this engagement continues to support an industry led system.[21]

Representation on ISC boards

4.17      ISCs seek to ensure that their board of directors are representative of the industries they cover, as well as union and employer sectors. AgriFood, the only ISC which does not have specific representational requirements, instead has a strict merit and skills-based selection process.[22] 

4.18      As outlined, some ISCs draw board directors from across industry sectors, and directors are nominated or elected by members. Members can include representative industry organisations, individuals, companies and/or a mix of employer and employee groups such as unions. Examples include ForestWorks, MSA, Service Skills Australia (SSA) and GSA.[23]

4.19      Other ISCs draw their boards from employer groups and unions. Examples include CS&HISC, the Construction and Property Services ISC (CPSISC), EE-Oz, IBSA, SkillsDMC and TLISC.[24]

4.20      Directors are generally nominated by a mix of employer and employee groups, which are specified in the constitution:[25]

Our board, through the constitution of the company, is structured on a representative model. The organisations that own the company have nomination rights to the board. It is a complex set of arrangements, but essentially somebody like the Australian Industry Group, the Chamber of Commerce and Industry or a union will nominate a person accordingly. We have a governance charter that we use, which has been in place since quite early—in 2005.[26]

4.21      The WA Government pointed out that membership of ISC boards is often not representative of the diverse range of stakeholders and in some cases some industry sectors appear to have more influence than others.[27]

4.22      The Housing Industry Association also noted the ongoing criticism that ITABS should have a larger say in the governance of the ISCs and be represented on their boards. It argued:

This desire for more control is not unexpected, given that the States see themselves in competition with the Commonwealth for control over education policy. And that ISCs compete with and to some extent  have taken over the role of such ITABS.[28]

Remuneration of board directors

4.23      The 11 ISCs have inconsistent approaches to the remuneration of board directors. Some ISCs specifically prohibit the payment of remuneration to their board directors, while others pay their directors 'reasonable' expenses and reimbursement. Information on some ISC's remuneration practices is not readily available to the public.

4.24      Some ISCs board directors receive no remuneration. These include CSHISC, where directors are formally volunteers,[29] EE-Oz,[30] SkillsDMC,[31] GSA[32] and SSA.[33]

4.25      Constitutions typically stipulate that directors may be reimbursed for reasonable costs incurred, such as travel and accommodation. Although the company 'must not pay fees or other remuneration to a Director...with the approval of the Board the Company may pay to a Director: reasonable expenses (including travelling and accommodation) incurred in carrying out duties as a Director; reasonable reimbursement for any service rendered by the Director to the Company; reasonable reimbursement for goods supplied by the Director to the Company in the ordinary course of business; and reasonable rent for premises leased by the Director to the Company'.[34]

4.26      In this vein, the committee heard that IBSA and MSA also reimburse directors whilst not remunerating them. [35]

4.27      A small number of ISCs remunerate directors. ForestWorks' annual report does not offer specific information on remuneration,[36] but ForestWorks CEO, Mr Michael Hartman, told the committee:

Board members are voluntary, and they are elected. They volunteer their time but we do meet their travel costs. We also offer them a per diem rate for their time, and some directors claim that rate and some do not. It usually depends on the status of their employing organisation—their real job.[37]

4.28      Asked why ForestWorks chose to remunerate board members, Mr Hartman offered:

Our industry is not a wealthy industry and particularly in the last few years a lot of industry organisations are struggling. The directors make a significant contribution through their time and expertise, and what we want to ensure is that the organisations that employ them are not out of pocket through the commitment that those individuals make to the organisation called ForestWorks Industry Skills Council.[38]

4.29      AgriFood board members also receive remuneration, details of which are publicly available.[39]

4.30      The information received by the committee regarding TLISC's remuneration practices was not immediately clear. The TLISC constitution states that 'the Company must not pay fees or other remuneration to a Director', but goes on to say that 'with the approval of the Board the Company may pay to a Director: 'reasonable expenses', 'reasonable remuneration for any service rendered by the Director to the Company', 'reasonable remuneration where the Director is an employee of the Company and the terms of employment have been approved by the Board', 'interest on money lent by the Director to the Company at a rate not exceeding the rate charged by Australian banks for overdrawn accounts', reasonable remuneration for goods supplied by the Director to the Company in the ordinary course of business', and 'reasonable rent for premises leased by the Director to the Company'.[40] At a public hearing Mr Geoffrey Gwilym, CEO, explained that directors were not remunerated but that travel and accommodation were paid for when required.[41]

Recommendation 5

4.31             The committee recommends that DEEWR’s contract with each ISC requires that directors receive no remuneration but that reasonable costs incurred for travel, accommodation and incidental expenses incurred while exercising the role of director be reimbursed.

Conflict of interest

4.32      The committee heard of a number of ways in which ISCs deal with potential conflicts of interest. Their contracts with DEEWR stipulate that all activities must be complementary with the core role of the ISC, which means they cannot engage in activities which would present a conflict of interest, such as being registered as a training organisation.[42]

4.33      The committee heard, for example, that a person from Qantas is also a member of the MSA board, raising concerns of a potential conflict of interest. Mr Robert Paton, CEO of MSA, told the committee that the board had processes in place to satisfy itself and others that the interests of all industry sectors was being observed, protected and respected:

I think it would be quite fair to say that the board deals with those sorts of issues with a high degree of maturity. They have a high consciousness about the need for good governance and their responsibilities in that area. The processes that we use assist that. The information—any inputs and requests such as those you mentioned—is processed by staff under my direction and management, and we will come up with some recommendations for the board. They are considered absolutely objectively, and I believe that the board also makes that consideration. As an example, with Qantas, there is tension, if you like, in the market around who is going to employ who, and how many apprentices and so on. The Australian Defence Force is a huge employer of aerospace engineers but is not represented on the board. We have a committee that looks after the aerospace industry and all players sit on it: regional airlines, small ones, plus the nose-to-nose competitors with people like Qantas. So they are all involved in that decision making.[43]

4.34      The committee also heard evidence about a number of other ways in which ISCs, in this case MSA, manage potential conflicts of interest. These include ensuring that there is extensive consultation with stakeholders, and advertising the availability of funds widely. There is also a set of criteria against which all applications for funding are matched:

We make recommendations and the decision is made by the minister. If the decision making is within the control of the industry skills council, we have very open and very transparent and comprehensive processes, including the records of outcomes, which are available for people’s scrutiny.[44]

Committee view

4.35      The committee appreciates that individual ISCs are for the most part able to manage potential conflicts of interest. The committee remains concerned, however, that the potential for indirect conflicts of interest remains and that these may not always be readily apparent to the outside observer.

Recommendation 6

4.36             The committee recommends that any new contracts between DEEWR and the ISCs from June 2011 explicitly require ISC board directors to declare any simultaneous membership of RTO boards, regardless of whether there is potential for any conflict of interest. 

Is there a need to legislate for improved corporate governance?

4.37      The National Quality Council suggested that corporate governance and accountability arrangements might benefit from being made more explicit in agreements between each ISC and DEEWR, adding that there would be value in incorporating the new arrangements as part of the transition from the NQC to the National Standards Council for Vocational Education and Training.[45]

4.38      AiG went a step further in advocating legislation as the way forward, stating that 'the best way to deal with structural and governing issues, as recommended by Skills Australia, is the recognition of the role and function of Industry Skills Councils by declaration through legislation.'[46]

4.39      The committee also heard a number of other views on the question recognising and defining the role of ISCs through legislation.

4.40      Ms Janice Andrews, Chair of GSA, elaborated on the evolution of ISC corporate governance arrangements and the prospect of introducing legislation:

I think the governance arrangements for industry skills councils has developed iteratively since their creation five years ago—not surprisingly, given that that was a new idea. We have worked through concepts of bipartite representation as well as industry voice. How governance is best structured to frame and represent the industry voice and do so fairly and transparently has been a progressive task along those five years.[47]

...I am not sure that I would jump to legislation as the answer. I think there is scope for DEEWR in our funding agreements to specify accountability requirements coming on top of that five-year learning curve—to require certain things about governance, transparency and reporting iteratively itself over future years.[48]

4.41      GSA CEO, Ms Jan Weir, added:

...I think it is a development process. There is a maturing of industry skills councils now. I think there may come a time, dependent upon the government view of the day of the measures around accountability and transparency, that some of those measures may need to be embedded in a form of legislation. At this stage, yes.[49]

4.42      TLISC did not specifically argue against legislating to recognise the role and function of the ISCs, but said it was not critical or a priority in terms of pursuing the overall agenda.[50]

4.43      IBSA, on the other hand, expressed its belief that legislating 'would provide a stronger focus for ISCs' and may also 'provide the basis for enhanced capability to engage with industry.' But when asked whether legislating to this effect was of critical importance, IBSA replied in the negative.[51]

4.44      By and large, the viewpoints the committee heard erred on the side of caution when considering legislating to cement the role and function of ISCs. ACCI pointed out that legislation, in general, is best only pursued 'where there is a real mischief to be rectified':

The risk of legislation is that you may have reasonable legislation in the immediate sense but amending legislation can be a tortuous process, as you senators know more so than I. Also, the labour force and economic circumstances in which ISCs operate are changing at a fast pace. They do need to act with some agility. And it is not just a domestic issue; this is about making our skills system globally competitive. So there are some risks with legislation, which I have outlined. I would tend to the view that, on the material that we have seen, we do not need a legislative response; we can just improve the quality of those head contractual arrangements.[52]

Committee view

4.45      The committee believes that corporate governance arrangements would benefit from increased oversight by the government, and that, as stated in the previous chapter, one contract mandating requirements for all work contracted with government agencies should be put in place.

Groupings

4.46      The committee received considerable evidence questioning the division of industry sectors between ISCs.

4.47      The Australian Racing Board submitted that the decision to replace the 29 industry advisory board with 11 ISCs 'has resulted in a much better structure'.[53] The CEPU echoed this view, stating that the ISC structure is a most effective way of developing national training packages.[54]

4.48      Mr Lloyd Driscol, Chair, Financial Services Sector Advisory Committee of IBSA, noted the groups as a challenge:

IBSA consists of six quite distinct SACs [Sector Advisory Committee] with activities spread across banking, commerce, education, IT and the arts and printing sectors. It will accordingly always be difficult for IBSA as an entity to identify areas of common interest; with the result that discussions involving SAC chairs can only be high level and relatively unfocussed. Obvious structural differences meant here will be very little common ground when considering labour force and skill issues. At the ISC level issues of legitimate importance to a particular SAC may not receive deserved consideration.[55]

4.49      ForestWorks, which covers a 'small, but incredibly diverse industry', explained:

More than 500 units of competency describe a vast array of work functions, often carried out to enterprise and machinery standards in regional and sometimes remote areas. The forest, wood, paper and timber products industry is a vertically integrated industry, in which the industry's resource sectors are closely linked with the processing, manufacturing, wholesale and retail sectors.[56]

4.50      The Civil Contractors Federation reported that SkillsDMC has brought together the five sectors it represents very effectively. It explained that civil construction is in many ways disadvantaged in the current training system as a number of their occupations do not receive the same recognition as other like trades. It reported that it has found Skills DMC equally concerned to ensure appropriate support for its occupations.[57]

4.51      In 2008 the Nous Group undertook a forum with the ISCs on behalf of Skills Australia. Its report stated:

In a number of forums comments were made about occupations not being confined to an industry covered by a particular ISC. The comment was made that the ISC configuration was developed in relation to the training package development process. The additional comment was made that the arrangement limits the ability to identify skills needs and address skills shortages because these occur in enterprises not aligned with the ISC industry areas. Skills Australia would be advised to consider the implications of the current ISC industry configuration.[58]

Is there a need for more ISCs?

4.52      Some submissions noted the broad industry groupings under the coverage of some ISCs and questioned whether they are appropriate.[59] In particular, a number of submissions called for new ISCs to be created to serve particular industries, stating that broad groupings of industry sectors result in some sectors overpowering others. The Air conditioning & Mechanical Contractors' Association (AMCA) for example called for a new ISC to service the air conditioning and mechanical services industry exclusively, arguing that the size and importance of the industry warranted such a move.[60]

4.53      The NSW Aboriginal Land Council also called for a separate ISC to provide '...a direct focus on Indigenous skills and workforce development and planning' as 'job roles and work outcomes of Indigenous workers have not been defined nor described as appropriate qualifications within the relevant Training Packages.'[61]

4.54      The Construction Industry Training Advisory Board NSW, submitted that the current scope of the CPSISC does not cover the needs of their constituents and that construction should be separated from the current property and construction ISC:

Historically, the Building and Construction Industry covered Civil Construction, but currently Civil Construction has been moved into the Resources ISC. Many construction workers move across commercial, residential and civil sectors performing identical tasks and this flexibility is essential for the industry to cope with the inevitable peaks and troughs of activity in each of the sectors. Also many of the specialist contractor companies, e.g. painters, plumbers, electricians, concreters, etc, can be engaged on work in all of the sectors concurrently. Conversely there is almost no link between the work in the property industry and that in the construction industry. At best the two industries have a client/provider relationship. There is a very strong need for the Civil Construction industry to be amalgamated into a Construction and Infrastructure ISC.[62]

4.55      This view that the current coverage of property services by CPSISC is not appropriate was supported by the Victorian Building Industry Consultative Council Industry Advisory Body (BICCIAB):

BICCIAB is concerned about current industry coverage arrangements that see CPSISC covering the property services industry and Skills DMC covering civil construction. The two types of construction should be covered by the same ISC and property services could be covered by another ISC, as they have been in the past.[63]

4.56      It added:

In terms of training package development, there are many imported units and commonalities within the construction training packages and there is not a lot of commonality with property services (other than both dealing with buildings and land). There was never a clear and logical case made for the current arrangements: they were a matter of convenience and continue to grate.[64]

4.57      Mr John Hart, CEO of Restaurant and Catering Australia, also expressed the view that some ISCs might be spread too thinly:

With the amalgam of industries that we have across Service Skills Australia, there are a lot of issues and a lot of industry concerns to be addressed. Really, we do not have the time to address them in an organisation that is looking so broadly. I believe that if we had a skills council that was simply focused on tourism and hospitality issues, which apply to about 10 per cent of the workforce, then we would be more likely to solve some of the problems that I have highlighted today.[65]

4.58      While in essence recognising the important role ISCs play in fostering innovation and productivity, the Fisheries Research and Development Corporation (FRDC) expressed its view that ISCs 'will never have sufficient capacity to undertake activities within all enterprises or regions.' FRDC attributes this to the complexity and diversity of the industry sectors the ISC it works with, AgriFood, covers.[66]

4.59      ACCI noted that the decision to group industries together is based on streamlining training package arrangements, not necessarily on what was the best fit for the industry.[67]

4.60      ACCI also pointed out that in the UK there are 25 equivalent sector skills councils and in New Zealand there are 39 equivalent industry training organisations. It concluded that there does not appear to be any evidence supporting the current number or configuration of ISCs. ACCI recommended that DEEWR undertakes an evaluation of the current configuration of ISCs to ascertain its effectiveness.[68] AAIA also noted that greater number of bodies in the UK and New Zealand and supported a review of the scope of coverage of the ISCs to ensure it promoted participation and ownership from industry in VET, ensure engagement of industry and what can be done to improve the relationships between the ISCs and the state arrangements to ensure industry intelligence is accurately captured and products are utilised.[69]

4.61      While suggesting that the number of ISCs needs to be evaluated and possibly increased, ACCI also cautioned against increasing their number without proper review:

We have 11 ISCs at the moment. We have tended to view that that is probably on the side of being a few too few. Somewhere between 11 and 20 is probably the right sort of number, but that needs to be properly and objectively evaluated. One of the caveats I bring to this discussion, though, is that with our labour force changing the way it is there are many cross-industry and cross-career skills that need to be developed. One of the advantages of having a larger ISC and training packages and modules developed by a larger ISC is that there is attention given to the cross-fertilisation of skills in occupations across sectors.[70]

4.62      Dr Tom Karmel, Managing Director of the National Centre for Vocational Education Research, discussed both sides of the argument with the committee and drew attention to some of the potential drawbacks of a larger number of ISCs:

It seems to me that you always have a trade-off between having a skills council that is very coherent and having a very large number of skills councils. If you look at the ABS industry classification or occupation classification, it is very easy to come up with hundreds of industries and hundreds of occupations. At that finer level, each industry or each occupation makes a whole lot of sense. But the problem with that, of course, is that if you had too many industry skills councils it would be bureaucratically very inefficient. So you always have this trade-off between having too many and having too few.[71]

4.63      Mr Robin Shreeve, CEO of Skills Australia, acknowledged calls for a greater number of ISCs but drew attention to the cost effectiveness of having a smaller number of them and cautioned that opening this up for discussion would be akin to 'opening a Pandora's box' because 'every industry worth its salt always wants its own special advisory arrangements'.[72]

4.64      DEEWR advised the committee that all of the ISCs' contracts with the department expire on 30 June 2011.[73] The committee also heard that the number of ISCs and their spread were reviewed in 2007 and found to be adequate, and that a similar review was not being planned currently. However, should the ISCs and industry clearly express the view that a further review of the number of skills councils is needed, DEEWR would 'take that on board at that time.'[74]

Committee view

4.65      The committee believes that ensuring that the nation meets its current and future skill development needs is of vital importance to national productivity. On the basis of evidence received, the committee recognises that most submitters are broadly satisfied with ISC effectiveness, despite some areas in need of improvement having been identified. All the same, the committee is concerned by the level and intensity of dissatisfaction among some—albeit a minority—of industry stakeholders. The committee acknowledges that ISCs and the training packages they develop are constantly evolving both in response to, and—by necessity—ahead of recognised industry needs, and that it is to a certain extent an inexact science almost certain to generate some dissatisfaction. However, strong stakeholder engagement is vital for ISCs to function to their potential and provide value for money. To this end, transparency, clarity and credibility in governance arrangements are paramount, as is accessibility and effective consultation. These may in some cases need improvement.

4.66      The committee is not completely satisfied that current industry configurations under the 11 ISCs are the best way to adequately meet the needs of diverse industries which find themselves under one ISC umbrella.

4.67      Furthermore, the committee believes that DEEWR's practice hitherto of signing different contracts with each ISC is potentially confusing for stakeholders and has the potential to impinge on transparency.

Recommendation 7

4.68             The committee recommends that DEEWR include a clause in its new contracts with the ISCs permitting the renegotiation of industry coverage and potential splitting of ISCs during the term of the contracts, were this considered desirable and necessary to better fulfil the role of the ISCs concerned.

Recommendation 8

4.69             The committee recommends that contracts between DEEWR and the ISCs be standardised and made publicly available on the DEEWR website.

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