Shaping The Future State Sector - Upton Speech
Legal Research Foundation Conference 21 September 2000
Shaping The Future State Sector: Balancing Service, Accountability And Efficiency
Accountability of Crown Entities
By Rt Hon Simon Upton MP Member of Parliament
You have asked me to speak, today, about Crown Entities - their role, ministerial control and accountability, and the accountability of chairpersons and boards. This seems a rather dry prescription when compared with the wide, sweeping perspectives this morning's commentators were invited to address - or, indeed, in comparison with the Minister's brief. Only Mr Franks and I, it seems, must apply ourselves to the narrow task of describing one class of exhibits in the great gallery of public sector art works.
I am happy to do this but should warn that I intend to make some wider comments since there are few opportunities for a former minister of state services to utter on the range of subjects being explored today.
The first point to make about Crown Entities is that there is no single exhibit to which we can relate our analysis. We are not looking at a gallery of institutional McCahons. Rather, we are exploring an eclectic collection of contemporary creations. There are no modern day Michaelangelos down at the State Services Commission - just a mass of competent studio assistants working with ministers to give shape and form to the ever-fertile whims of the political mind.
At the time I was State Services Minister, our stocktake of Crown Entities had thrown up three large classes of organisation that came under the Crown Entities umbrella. There were Companies (that were not SOEs); Crown Agents (whose task it was to carry through the policy bidding of the government of the day, working closely with politicians in the elaboration and execution of policy); and Independent entities (whose task it was to do a job, almost always mandated by statute, without reference to the sensitivities and policy predilections of the Executive).
But even then, not every entity could be made to fit into one of these categories. There were all sorts of institutional flotsam and jetsam that the flood tide of state sector reform had left behind in its wake. There were trusts (like Asia 2000 and AGMART) and all manner of curiosities like Te Papa and the Hillary Commission. And even where one's intuition about classification left little room for doubt, there were often particular characteristics that didn't quite 'fit'.
Take the Law Commission, for instance. Anything chaired by a distinguished judge would immediately be assumed to be beyond the taint of political interference. But in reality, the Minister of Justice has considerable influence over the Commission's work programme.
The first point I should like to make is that the sheer diversity of the Crown Entity phylum should not worry us. At the time we announced the tentative conclusions of the Crown Entities programme, it became commonplace to pronounce gravely about the way in which Crown Entities had been spawned willy-nilly in the absence of any coherent blueprint of what a Crown Entity should look like.
I thought then - and I continue to think today - that that is a very pompous view. There are a plethora of organisational forms in our community that have arisen organically in response to particular needs. Why should governments deny themselves access to a wide range of institutional forms merely out of a sense of tidy-mindedness?
The real issue is not whether Crown Entities should or should not all conform to a template. It is whether ministers and boards are clear about the mandate of the entity and the precise powers and responsibilities of the parties in respect of the organisation. There are well established principles of corporate governance that can apply to the wide variety of agencies in the Crown Entity stable. They are well understood and there is nothing problematic about their application. Any Minister proposing to establish a new Crown Entity should be able to state clearly why she has chosen not to locate the activity within a government department or, if the activity looks distinctly commercial, why she has not gone so far as to create a full-blown SOE.
The reasons why the Crown Entity form may be preferred will usually include all or some of the following:
* A desire to remove the entity from some measure of direct political control * A desire to engage non-government and/or private business knowledge and expertise in the governance of the entity * A desire to attract staff who for one reason or another do not wish to include service as a bureaucrat on their c.v. * A desire to give the entity a public 'face' that is distinguishable from the machinery of the core state sector * A desire to fence off discrete areas of political or operational risk within a dedicated vehicle that has can be more responsive in developing a clear sense of strategic direction than it could within a much larger, pre-occupied and slow moving bureaucracy
Understanding the role of the organisation - and the Minister's role in relation to it - is vital if any sort of effective governance regime is to work. This sounds obvious to the point of banality, but in my experience it is frequently blurred.
I do not intend to provide chapter and verse on the formal accountability documents that link ministers and boards. If anyone wants to explore the finer points of the liturgy - and it is as dry as dust - then I suggest they consult one of the priests at the Commission. Most of the important relationships tend to be spelt out in legislation (some of which will soon be amended to remove ambiguities that crept into some statutes). And depending on the entity, there will be statements of intent and/or purchase agreements (shortly to be output agreements, I am told) that formally record agreed expectations. These should make the nature of the relationship between ministers and boards clear including the extent to which discretionary judgement is left in the hands of the Board and its servants.
But it is the elements of the relationship between the Minister and the Board that aren't captured that matter. Obviously, the division of labour between the two parties will be broadly prescribed in law. But no statute or relationship document can prescribe exactly when the judgement of one party starts and the other stops. So it is essential that the two talk to one another so that there is no doubt about where each party stands.
Ministers have to sit down and talk to their chairpersons and give some colour and life to the documented expectations. Boards should not be seeking to enfold ministers in responsibility for board decisions. Neither should ministers be seeking to encroach on board responsibilities. But both are entitled to know where each other's comfort zones start and stop, and what a surprise amounts to for the purposes of a 'no surprises' policy. The reason the parties need to talk is that it is often all but impossible to generalise about judgements that will only be brought into sharp relief by the particular facts of the case.
And where appointments are at the pleasure of the Crown (as distinct from being for a statutory term where immunity from ministerial pressure goes to the heart of the office), it goes without saying that Board appointees must be in no doubt that where, notwithstanding the best efforts of both parties, there is fundamental disagreement about a matter of judgement that is a matter of legitimate concern for the minister, the Board must either yield or resign.
This in turn raises the critical importance of the Board appointment process. If it is not diligently and professionally conducted, there is a high chance that any value the Crown Entity model can deliver will be wasted. To be able to understand their own role, the role of the minister, and the relationship between the two requires more than a rudimentary set of governance skills. While it may be appropriate to appoint people whose skills are initially deficient - (indeed, the Crown can play a useful role in adding to the pool of citizens with experience in corporate governance) - such appointees have to have the ability to acquire a clear understanding of their role swiftly.
In the Board Appointment and Induction Guidelines that I issued last year, I included a Foreword which I should like to read out in full. It opened with an aphorism from the indispensable Edmund Burke:
It is therefore our business carefully to cultivate in our minds ... every sort of generous and honest feeling that belongs to our nature. To bring the dispositions that are lovely in private life into the service and conduct of the commonwealth ...
When the government asks experts from the private sector or a particular community of interest to serve on a board in the wider State sector, it does so in the expectation that part of the reward for such people is the performance of public service which advances the interests of New Zealand. Further, service to the public is likely to encompass duties and obligations that might not be exercised in private life or in a private business setting.
Thus, appointments to such boards are - from the very first step - predicated on the values and ethos of public service.
The purpose of these guidelines is to spell out more clearly what 'public service' means in this regard for board members. The guidelines also set out how the Government expects Ministers, and the departments that assist Ministers, to operationalise public service values, reinforce them, and, where necessary, ensure that disciplines are applied.
Further, these guidelines make clearer who is responsible for what - that is, the respective responsibilities of Ministers, departments, and boards.
Overall, the government is setting out its expectations of boards that manage New Zealanders' interests. In turn, the government recognises that it is drawing upon the personal skills of board members in order to improve and maintain services to the community. That is precisely the spirit encapsulated by Sir Edmund Burke 230 years ago.
If Ministers are going to expect their appointees to exhibit the sort of discriminating and civic-minded judgement that the Foreword adverts to, then they will have to choose their appointees with care. This imperative has, in the past, collided not infrequently with another imperative - the use of patronage to buy political advantage.
This is one of those matters that is not generally talked about - a slightly distasteful subject that is grimly acknowledged to be inevitable and therefore to be reluctantly tolerated. One of the most important new requirements of the Guidelines is the certification that is now required of Ministers in respect of each appointment for which they seek Cabinet endorsement.
While it is no guarantee of good process (only requiring certification that "an appropriate appointment process has been followed), it is at least a guarantee of transparency. If a Minister chooses not to set about a responsible search for the best possible candidate(s), his certification (which must include a description of the process followed) is open to scrutiny under the Official Information Act.
Unless a Minister takes responsibility for running the appointment process through his office, the department responsible for the Crown Entity runs the process according to a default formula. There will be circumstances where appointment processes are run by Ministers, but the political consequences of that are now transparent and Ministers must be prepared to account for their actions. Even where Ministers take over the process, departments should be prepared to advise their Ministers of any deficiencies that place the process at risk. They will have to live with the consequences and, in the event that things end in tears, they will have protected the independence and integrity of the public service.
I do not imply, from this, that it is a sin to be a politically sympathetic appointee to a Crown Entity board. On the contrary, it will sometimes be appropriate (as it will be inappropriate for such a person not to offer their resignation should there be a change of government). But the temptation to use appointments to solve quite unrelated problems and deliver favours in return for service rendered can place Crown Entity governance at risk and should be handled much more carefully than it has been in the past.
I say that as someone who, in eight years as Minister of Crown Research Institutes, was scrupulous to avoid party political appointments to boards that I considered had to access business and scientific skills which needed no overlay of partisan wisdom. I may have carried it too far, in deliberately steering away from people with known National Party connections. It is not, yet, a sin to belong to a political party. Parties are an established and important vehicle through which citizens can play a part in the functioning of our democracy. But the excessive use of politically friendly appointees over many decades has made political appointments a riskier business in a much more transparent age.
Not everyone will agree with me on this point. But I would hope that there is no debate about the cardinal importance of appointees to Boards - and in particular chairpersons - being of the highest calibre. Crown Entities sink or swim on the calibre of the Chief Executive, and whether or not the right person is appointed depends to a large extent on the judgement and wisdom of the Board. If the Minister (and her colleagues) appoint a weak, divided or indecisive board, all manner of plagues and pestilence will flow from it.
Which raises one further point. Do we have enough people of sufficient calibre to grace all the Crown Entity boards we have brought into existence? This is the ultimate constraint - as it is a constraint on the size of government itself and indeed all entities, commercial or otherwise in New Zealand. We are a very small country. Our skill base is perilously thin. It is increasingly difficult to attract people to live here. And a significant (and, one fears growing) percentage of our best skills now live abroad - part of a talented diaspora for whom New Zealand retains a warm place in their hearts but a cooler place in their heads.
Are there enough people out there with the corporate governance skills to make a difference? As CRI Minister I was constantly aware of the fact that if calibre was the yardstick, we found ourselves coming back time and again to the same band of over-worked (and often over-appointed) individuals. This is a real constraint and I believe the health system and the local government system both show the signs of strain.
But if there is a weak link in the system, it is not the boards of Crown Entities - who in my estimation generally work beyond the call of duty for very little reward - or the public servants who administer and monitor the formal accountability 'system'. Rather, it is politicians - both within the Executive (holding ministerial warrants) and in Select Committees - where scrutiny of ministerial oversight of Crown Entities is supposed to be focussed.
I'd like to finish by saying a few words about this problem since the opportunity may not present itself again. Since the late 1980s we have set about one of the most thorough-going reforms of the way in which ministers and public servants in turn must account for the use of taxpayers' money ever attempted. By and large I think it has been a hugely positive initiative and I find myself feeling quite impatient with those who intone about excessive contractualism and fragmentation.
Of course there have been problems and from time to time 'the model' has triumphed over practicality. But when everything is weighed in the balance, we know far more about how resources are used and we have a much more transparent and accountable system - which the forthcoming Crown Entities Bill will help to entrench. In my view, it is the accountabilities of the re-vamped public finance and state sector legislation that have changed the world for the better. And they have also shown up the inadequacies of politicians in all their various roles.
The fact is that MPs - whether they are Ministers or Select Committee members - have precisely defined jobs to do and it is now possible to see much more clearly how they do them. My experience on both sides of the fence leaves me underwhelmed. There were - and are - Ministers who haven't read purchase agreements properly or asked about the consequences of their purchase decisions for the fabric of the department or entity in their charge for the time being.
The tendency to demand action on politically high profile matters but leave chief executives or boards to take responsibility for the trade-offs is as alive and well today as it ever was. Guidelines notwithstanding, there are still Ministers who don't really understand the Crown Entities with whom they have a relationship. And there are still Board members grappling to gain access to Ministers who cancel meetings because more 'urgent' political priorities intervene.
I have often been embarrassed by the way in which MPs treat public servants. The recruitment of external boards to Crown Entities and SOEs has led to some improvement in civility, but only some. There are courtesies and basic businesslike practices that are routinely ignored by politicians who look - and act - in a very amateurish way.
It is no different in select committees. All manner of exciting inquiries are being pursued while MPs haven't the time or inclination in many cases to really get inside the accountability documents that give committees unparalleled insights into the quality of both ministerial and corporate governance. Holding Ministers to account for their stewardship of public money is often secondary to the pursuit of current political headlines.
None of this is new. And in speaking as generally and as bluntly as I have, I will no doubt have left some colleagues feeling aggrieved. It goes without saying that there are many MPs and Ministers who valiantly try to do their best - and some do it rather well. But performance is patchy and the system is not attuned to providing the time to do justice to these tasks that are of fundamental importance but rarely of headline catching profile.
The sophistication and transparency of modern public sector accountability arrangements demands a more sustained and serious engagement by all of us in the political arena if they are going to provide maximum value and retain the confidence of those board members and executives who are required to go through the often arduous process of complying with them.
Someone - the Audit Office possibly? - should be asked to provide a much more searching induction process for Ministers and MPs alike. And we should all have to attend. I think we've built a pretty transparent system. The challenge now is to see whether the last largely unreformed part of the system - the Executive and the Parliament - can come to grips with it in a serious way.
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