CORPORATE GOVERNANCE : Hands Off – Is public sector governance a charade?

Richard Norman’s recent report on SOE directors (“When the for-sale notices are withdrawn: How should state-owned enterprises be governed?”) is both revealing and timely. Revealing, in that his research confirms what has long been known, but not articulated sufficiently – that the “boards” of public sector entities mainly comprise appointees who not only must be acceptable to the government of the day but whose appointments represent overt political favouritism, patronage and control.
It borders upon form of state-sanctioned nepotism. The latest example of overt political patronage, according to media commentators, is the appointment of Jim Sutton to the chair of Landcorp.
Sutton, unlike number of his party colleagues, may well make good job of this appointment, but the question is whether or not political appointee is the best choice for this, or any other, state sector appointment. We have had our share of embarrassing political appointees to diplomatic posts, for example.
Norman’s research is also timely, in period when the current Labour Government is moving inexorably towards more and more ownership of significant businesses and industries.
Terry Hall, one of our best business journalists, sees this Government as increasingly interventionist in business, with fondness for (or obsession with?) regulation and compliance. (See his article in the July 10 issue of the Dominion Post, “All this meddling has investors on edge”.)
Indeed, he sees these activities as “Labour reverting to its socialist [and communist?] roots in trying to re-establish government at the centre of economic power”.
There are many recent examples of this, including the foray into Telecom and policies which result in more and more Kiwis being in receipt of, and to an increasing degree, dependent on, state welfare benefits. Such dependency will presumably result in votes for continuity, as few people will be willing to forgo the assistance provided by the state by voting benevolent party from office.
So, what has this all got to do with governance bodies in state sector organisations? Firstly, appointing people to governance roles who share the appointer’s political philosophies is one sure method of ensuring that the government’s policies will be implemented, even if they are detrimental, in business sense, to the organisation concerned. The compulsory adoption of the TVNZ Charter is an example of this.
Secondly, political appointees are sure to keep their political masters very well informed about the affairs of the enterprise, particularly if there is any political fallout anticipated by the organisation’s activities, even if such information is commercially damaging or undermines the governing body.
A good example is the failure of Dame Ann Hercus, member of the TVNZ board, to abide by the principle of board collective responsibility, in disclosing sensitive information directly to her minister. If state sector entity such as the BNZ or Air New Zealand goes bust, then unlike their private sector counterparts, the state simply stumps up with bail-out package and life goes on.
The problem of course, is that state enterprises are not using private capital but taxpayers’ funds, of which there is continuous and inexhaustible supply. State entities are not as dependent upon markets and market rates of return, share prices or dividends, as are their private sector counterparts and in many cases can afford to accept lower returns and more adverse conditions under the mantra of “long-term hold strategies”. It is not at all uncommon to find the directors of failed state enterprises reappointed to other boards, time and time again.
The fact of the matter is that governance in state sector organisations and enterprises is not the same as governance in the private sector, or, for that matter, governance in the voluntary sector.
As Norman points out, using just three measures, (appointment processes, performance evaluation and rewards) there are significant differences between the two. State-appointed directors have to be politically acceptable; performance is overwhelmingly based around compliance and micro-management; and, the rewards seem to be more to do with recognition, payback and egos than with financial recompense for skilled direction.
If this is not the case, then why does the Government insist upon vetting and approving every single appointment? Why not leave it to bodies such as the Crown Company Monitoring Advisory Unit (CCMAU) to make recommendations directly to the boards themselves? Why must state sector directors’ fees be significantly lower than those in the private sector, if the responsibilities and skills requirements are similar? And why are state sector boards unable to develop and influence strategy?
The latter is somewhat easier to deal with. It is in the activities of Officials, most of whom would have no idea of commercial realities, where most public sector strategy (or is that policy?) is established.
Take for example, the ability of DHBs to actually prescribe their board’s strategies. DHBs implement policies developed by the Ministry of Health. They do not necessarily contribute to or prescribe the policies themselves. So, in reality, such boards are in fact, management committees overseeing the activities of their managers rather than setting the strategic direction of their organisations.
One method of testing this statement is to review the contents of board minutes over the past six months and compare the proportion of issues which are operational as opposed to strategic, in the minutes.
There are other aspects of governance where state enterprises and organisations, by their very nature, cannot be considered to be the same as, or similar to, their private sector counterparts. State organisations must consider their stakeholders above their shareholders, situation which is the reverse of the private sector. State organisations can incur the wrath of Parliament’s Privileges Committee. Political considerations, such as in the TVNZ case, can and do override commercial considerations.
State sector boards are in the main, “representative” of different, politically determined constituencies, and the greater the diversity, the better: never mind whether such appointees have any business skills.
Yet most governance experts agree that representative boards are in fact the very worst kinds of boards to have. The surprising thing is that in spite of their shortcomings, some representative boards work well, mainly as result of individuals and chairs making them work.
The recent demise of number of otherwise commercially-successful enterprises; the shambles that is our electricity industry which of course is 75 to 80 percent owned by the Government; the crisis in our health system, dismissed as the fault of the National government which was last in power in the late 1990s; the problems in education (again blamed on the National government); and the ever-increasing welfare trap that New Zealand is fast becoming, can all, to greater or lesser extent be fairly laid at the door of political appointees assiduously implementing flawed policies and strategies dreamed up by politicans and officials. What works well for the private sector does not necessarily work well for the public sector.
What Norman has shown is that different paradigm is needed, and the first casualty must be the present system of political patronage and interference. Appointments need to be made on the basis of skills, experience and qualifications, and must take precedence over political sycophancy, favouritism and reward. The appointments process needs to be kept quite separate from the political interference so favoured by the present Government, with appointments being made by the boards themselves and signed off by bodies such as CCMAU representing the owners. Politicians cannot be trusted to keep their fingers out of the pie.

• Professor Martin Devlin teaches

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