TABLED : SOE select – Picking public service directors

The Labour-led Government is committed to the long-term hold of all State Owned Enterprises. That position appears to be held by all of the parties represented in Parliament with the exception of Act. National is confused on the subject as it is on few policy areas. It says it may sell off some assets – the list seems fluid and it also says it favours partial privatisation. But by and large it appears to support the Government’s position on long-term hold.
The result is that, barring major shift in the political landscape, the SOE governance framework will have to operate within the context of government ownership.
As Minister for State Owned Enterprises I am directly responsible for the appointment of directors to the boards of 19 SOEs. Each year approximately one-third of directors’ terms come up for renewal and around half of these result in new appointments.
My impression is that we are somewhat more active in refreshing our governance structures than the private sector, where extended tenures are more common.
I regard this as virtue, and as defence against so-called cronyism. In fact one of the major criticisms of private sector governance is that an old-boys club of interlocking directorships is barrier to effective shareholder democracy.
Director appointments and reappointments generally occur twice year, to coincide with term end dates in April and October.
A five stage appointment process is followed:
1. Skills Profiling CCMAU (Crown Company Monitoring Advisory Unit) continuously analyses each company’s status, performance and board composition, to determine the optimal skills and experience required and those that would be ideal in any new appointee. This is done in conjunction with the chair of each company and me.
The chair provides the vital link to the board here, and is expected to have view about what is required around the board table and what the views of directors are.
2. Candidate identification Wide ranging candidate search processes are followed to identify as broad range of candidates for consideration as possible.
And yes, there is political element in this – I, like all ministers, formally seek feedback from my caucus colleagues on candidates that they think have the skills – and I stress the word “skills” – to serve on boards. But at the same time as CCMAU requests nominations from other agencies.
CCMAU also searches its database of around 2000 CVs and all “vacancies” are listed on CCMAU’s website allowing anyone with an interest in the directorship to express it.
3. Short-listing I consider long list of applicants for each role, and – taking into account the wishes of the chair and the advice of CCMAU – short list preferred candidates that match the skill needs.
4. Due diligence Short-listed candidates go through due diligence process providing an opportunity for them to assess the possible role, and for the chair and CCMAU to form view about each candidate’s suitability and potential conflicts of interest.
5. Appointment After the preferred candidate has confirmed his or her availability to serve on board, I advise the Cabinet Appointment and Honours Committee accordingly, Cabinet considers and decides.
Underpinning this entire process is one fundamental principle: first and foremost, shareholding ministers seek to appoint the best qualified directors regardless of their political persuasion, and irrespective of their sex or race. I have an equal opportunity appointment policy for SOE boards that tends to act as tie-breaker.
We are also keen to provide opportunities for promising new directors as we recognise the “public good” associated with increasing the pool of experienced directors in order to provide better corporate outcomes for business in the private sector. This is why the Crown is big appointer of first time directors, but not at the risk of compromising the integrity and capability of any SOE board.
It is important to remember that new appointee adds at the margin while continuity and institutional knowledge are carried forward by incumbent directors.
The chair plays crucial role through the entire appointment process, and I never proceed without knowing what the chair’s views are. Of course, I may take different view – as is my duty.
There are no capital market disciplines on directors in public ownership/hold-in-perpetuity model, and we cannot give chairs any veto on appointments in case we end up with the worst of all worlds: unelected cronyism.
The single most important principle is to select the best qualified director for each position. While issues of diversity are important, they are not pursued at the expense of board capability. At the same time, I do not believe at all that diversity dilutes competence.
Diversity in our corporate governance has been sadly lacking over the last half century or more. I firmly believe that as country, we have failed to capture the full potential of more diverse perspectives being brought to the governance of our major institutions, including commercial ones.
In terms of turnover, we probably lose about 15 directors year out of the portfolio – but there’s no particular trend pursued here.
However, I am open to extending director’s tenure beyond six years if they continue to make strong contribution. Equally, I have no hesitation in not reappointing director after one term if they are not performing up to expectations or if the needs of the company have changed.
It’s good to see that recent survey found that the majority of directors see themselves as having the opportunity and capability to influence the strategic direction of their company. This is particularly significant in the context of the SOE diversification agenda and suggests that directors feel in control of the decision-making associated with any new initiatives put forward by management.
Improvements can be made to performance management and evaluation for SOEs – as is the case in the private sector.
In this regard, I note the recent initiative by CCMAU and the Treasury to appoint private sector equity analysts to assess the market performance of the three SOE electricity generators and retailers: Meridian, Genesis and Mighty River Power.
Given the absence of transparent share price, the more market disciplines we can bring to bear on their performance, the more accountable they will become and the better they should perform.
In terms of concerns over the lower level of compensation for SOE directors – there needs to be recognition of the element of public service involved. Directors go into these boards with their eyes open about the fees environment – and we have no problem finding suitably qualified directors willing to serve. CCMAU regularly reviews the fees structure, and Cabinet regularly considers adjustments according to marketplace movements.
Concluding, I am on the whole satisfied with the current SOE governance regime. The current regime has evolved over time to achieve robust and transparent process, while accommodating the constraints associated with Crown ownership. I am always open to change, and I have no doubt that the regime will continue to evolve in response to new theories, expectations and market disciplines.
Increasingly we are looking for imaginative directors who can, on the one hand, identify opportunities for diversification, but on the other discipline the enthusiasm of managers who do not face their capital market tormentors every morning. Funnily enough, this is precisely what private equity companies are seeking from the directors they appoint within their portfolios.

Director breakdown of Crown companies by gender and ethnic
origin as at 1 July 2007 (source www.ccmau.govt.nz)
Ethnic Origin – %
European male – 55.0
European female – 28.0
Maori male – 9.0
Maori female – 5.0
Pacific Island male – 0.5
Pacific Island female – 0.5
Other male – 2.0
TOTAL – 100.0

Director breakdown

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