COVER STORY : Form Over Substance – Why state-sector governance is falling down

New Zealanders are quick to claim world firsts, and public-sector restructuring from the late 1980s was one of them. Indeed, for few years when other western governments were top heavy with bureaucrats trying to run businesses, New Zealand was the toast of the world. The trading functions of our state sector, in some cases industries that had been nationalised in another era, were placed on corporate footing and, where appropriate, sold.
Those that remained operated more like public companies than government departments. They were answerable nominally to ministers but independent of the Sir Humphrey Appleby types of Yes Minister fame. With their own governing legislation – the State-Owned Enterprises Act 1986 – and the blessing of Treasury shorn of its traditional anti-business mandarins, they set about making history and providing role model for public-sector restructuring worldwide.
From 1993, most came under the scrutiny of the Crown Company Monitoring Advisory Unit, body better known by its acronym CCMAU.
But in June this year the “miracle” of the state-sector reforms, not least the elaborate system of public-sector governance created by the fourth Labour Government and built on by successive National governments, was shattered.
A short but pithy report by Dr Richard Norman, senior lecturer in human resource management and industrial relations at Victoria University of Wellington, dispelled any complacency politicians or the public might have had about the governance of the New Zealand public sector.
Norman’s survey (see box story “What the Norman report said”) was disarmingly simple – not rant against the public sector but survey of 62 directors on the boards of the nine largest Crown companies. About two-thirds of the 28 directors who responded raised serious questions about the process of selecting directors, not least the restrictions on chair’s ability to select his or her board. There were rumblings about directors being chosen to satisfy diversity or political correctness concerns at the expense of skills and experience.
CCMAU, which identifies prospective state-sector directors for ministerial approval, was accused in the report of being slow to identify suitable replacement directors and the Government was blamed for the “long and sometimes unprofessional and embarrassing” appointment process. Worse still for the Government was widespread feeling among survey respondents that state-sector directors were underpaid.
State-Owned Enterprises Minister Trevor Mallard dismissed the survey sample as unrepresentative, pouring scorn on the findings and rejecting suggestions that state-sector boards were being stacked with Labour Party cronies.
But the damage was done: the Norman report provided evidence to support what some commentators had been saying for years, that governance in the New Zealand public sector was not what it was cracked up to be.
The report was anything but cheap shot by Victoria Management School. Although in Norman’s name it was, in fact, joint effort of Norman, who holds PhD in state-sector management, and Wellington-based investment banker Rob Cameron of Cameron Partners, who has been monitoring the state reform process for the past 20 years.
“It is … timely to review the governance and control regime [of the state sector] that has effectively remained in ‘prepare-for-sale’ place for the greater part of two decades. The current arrangements are not necessarily appropriate in ‘long-term-hold’ environment,” Cameron wrote in recent paper on the evolution of the SOE model.
His observations are timely in another sense, given that Mallard is keen for SOEs to spread their wings beyond their traditional boundaries in the way local government has done since the power of general competence was extended to it in 2002.
Cameron’s concern is that in the absence of capital market and “decent performance measures”, there is no means of monitoring accurately and transparently the performance of state trading enterprises.
“CCMAU is not set up to monitor and assess – it says it is but it is not.”
Business Roundtable executive director Roger Kerr agrees: “The performance of our SOEs is not transparent because there is no sharemarket to invest in them or investment analysts crawling all over them.”
Kerr, former director of ECNZ, is also concerned at what he says is the inability of SOEs to attract top-shelf directors these days or the government to appoint them.
“Back in the Douglas and Ruth Richardson days, the leading types in business were willing to serve on [SOE] boards. I am not aware of single Business Roundtable member on [an SOE] board now.”
He is not impressed with what he describes as Mallard’s “go forth and multiply” brief to SOEs.
“The argument should not be about whether SOEs should diversify or not. It should be whether the government should be owning them in the first place. The evidence in support of privatisation is incontrovertible.”
Kerr notes that the Australian Productivity Commission reports annually to Parliament on the performance of government trading enterprises but CCMAU refuses to report publicly on New Zealand SOEs’ performance.
“We have none in New Zealand and I have been bellyaching to CCMAU for years … It is appalling.”
Certainly, the recent scorecard of the “trading” public sector, though better than in some other western countries, is not especially attractive.
It includes:
• blunders by TVNZ, state-owned enterprise converted to Crown company, over the introduction of digital television and political interference in day-to-day management;
• alleged price-gouging by state power companies;
• substandard maintenance by national grid operator Transpower; and
• litany of poor service and questionable market behaviour by the nationalised national carrier, Air New Zealand.
But is the system to blame? “Systemic failure” was advanced as the none-too-plausible reason for the Cave Creek tragedy in 1995. Can it be used as an excuse for poor performance by individual directors?
Norman’s survey suggests it can.
“[An] overwhelming majority believed the [Treasury and CCMAU] focus on financial analysis and control adversely affects the ability of boards to focus on ‘maximising shareholder wealth’,” writes Norman. “Comments from participants suggest that the control systems have been diverting board efforts towards inappropriate measures of performance.”
CCMAU disputes that. Executive director Murray Wright, who has been with the unit since 2001, says it monitors the performance of each company on quarterly basis and reports on those performances against budget.
“From time to time we will monitor business more closely if variance to budget is cause for concern. We do have the ability to monitor more closely performance that is not as expected.”
Wright says CCMAU offers advice to shareholding ministers and boards about performance and sometimes problem directors are eased out.
“We don’t publish list of boards that are not performing but we do provide advice to ministers or boards … This would affect the frankness of our view.”
The accountability process is via the annual statement of corporate intent (SCI) for Crown Research Institutes and State-Owned Enterprises and statement of intent (SOI) for Crown Entity Companies, statutory entities and council-controlled trading organisations. These statements provide the shareholding minister with checklist of the organisation’s work to date and the work plan couple of years out.
They follow more-or-less common form – standard, “tick-the-box” bureaucratic exercise – but bear little relation to, say, an insurance rating report assessing company’s claims-paying ability or an analyst’s report on listed company. They are, largely, process driven, although CCMAU denies that too.
SCIs and SOIs are public documents like annual reports but they are prepared for shareholding ministers and Parliament and offer limited indication of directors’ abilities