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Cullen Address to Directors’ Induction Seminar

Hon. Michael Cullen

11 December 2003

Speech Notes

Address to New Directors' Induction Seminar

CCMAU, Level 2, The Treasury, Wellington

May I first of all congratulate you on your appointments and express my sincere wish as a shareholding Minister that your tenure as directors will be rewarding professionally and will utilise to the full your abilities and energies.

The SOEs, CRIs and other entities on whose boards you will serve are all in public ownership because they play important roles in the development of the New Zealand economy and the well being of our communities. They are also, in some cases, very large and complex businesses which are pivotal elements of the national infrastructure and represent very large investments of capital on the part of the Crown.

The SOEs are important to the Crown's balance sheet, with total assets of around $11 billion, representing about 9% of the Crown's total assets.

Meanwhile, Crown entities encompass a diversity of organisations, from schools and hospitals to Radio New Zealand, Te Papa and the Commerce Commission, and account for almost half of the state sector administrative budget and employ two thirds of the state workforce.

It is therefore vital that the persons we appoint to the boards of the companies are highly competent the roles and responsibilities of directors. Your charge now is to bring your management and governance expertise to bear upon the task of serving the New Zealand public in diverse ways, and I am sure you will find the experience intellectually stimulating and challenging.

Today's seminar will range over a variety of important topics, from the respective roles of the board, the Minister's office and CCMAU, through to governance processes and legal questions.

By way of introduction to this programme I would like to discuss what I see as the two key management issues across the Crown entity and SOE sector. These are:

1. The ongoing need for leadership in transparency and accountability; and

2. The implications of the government's long-term hold strategy, with particular reference to the expectations of your shareholders, and the consideration of capital requirements within the context of capital budgeting across the whole of the Crown's portfolio of assets.

First of all then, leadership in transparency and accountability. As many of you will be aware, last week I tabled the Public Finance [State Sector Management] Bill which will ensure New Zealand continues to set the world benchmark for public management.

The bill stems from the 2001 Review of the Centre and represents the first major change to state sector governance in a decade. It integrates the Fiscal Responsibility Act into the Public Finance Act 1989, amends the Public Finance Act and the State Sector Act 1988 and creates a new Crown Entities Act.

Many of the provisions of the Bill relate to the management of the Budget process, some increases in flexibility regarding management of Votes, and the reporting of fiscal forecasts and strategy. There are some provisions which will impact directly upon Crown entities:

ľ Like departments and Offices of Parliament, Crown Entities will be required to report to Parliament annually not just on their finances but also on their intended and actual performance.

ľ The bill also sets a framework for board fees, requires that fee levels and staff remuneration are disclosed in the annual report, outlines board members' duties and makes it clear that the Minister can remove them for non-compliance and that they are not entitled to compensation should they cease to hold office for any reason.

This should prevent a repeat of the large sums of money paid in recent years by the Tourism Board, the Fire Service Commission and the Lotteries Commission in circumstances which damaged public confidence in the institutions of government.

These elements of the bill are intended to give the public an assurance that there will be no recurrence, and to ensure that the very highest standards of ethical behaviour are following within the wider state sector.

Boards also need to ensure that financial controls are robust and followed at all times and be aware of both public and political sensitivity. Crown boards are inevitably more visible than their private sector counter-parts. Public displays of profligacy or poor business management both embarrass the shareholders and directors but, more seriously, distract both from the running of the venture.

The second area I want to touch upon is the implications of the government's long-term hold strategy for SOEs. I want to make it plain at the outset that we remain committed to the SOE model. It is a simple model and therein lies its strength. It is also a model that has been commended by governments of other countries.

You will be aware, however, that from its inception in the late 1980s, the SOE form was seen as a stepping-stone to privatisation, and that the possibility of a sale (the so-called "market for corporate control') was regarded by some as an essential aspect of the model, providing an added edge to the commercial incentives.

We have made it clear since taking office that we do not wish to divest ourselves of any SOEs. This does not require any radical departures from the current model; at best it means some fine-tuning to adapt it to a "hold" environment.

How then can you expect ministers in this government to behave as shareholders? First of all, I would like to put your minds at rest by assuring you that you will not find me turning up to meetings dressed as a World War I trooper and haranguing you on the issue of directors' fees.

I am a quiet shareholder, but a demanding one. My objective is to maximise the value of SOEs and Crown entities for the benefit of all New Zealanders. In this regard I expect that all funds that are surplus to a company's investment and operating requirements should be distributed to shareholders.

As well as seeking adequate rates of return, shareholding ministers expect that the companies are committed to the fulfilment of their corporate and social responsibilities.

I would stress however that shareholding Ministers do not want to get involved in day-to-day decision-making or the management of balance sheets. We are well aware of the "deemed director' problem, and seek to manage our communications with boards scrupulously to avoid it.

The relationship is normally a fairly formal one, involving periodic meetings structured around the reporting schedule. However, I am also prepared to be sufficiently flexible to ensure that commercial deadlines can be met. I acknowledge that commercial realities may require decisions to be made outside the budget process and this can be accommodated.

The major proviso is the "no surprises' principle. All surprises are unwelcome, regardless of whether their actual content is good, bad or neutral. They have the capacity to seriously undermine shareholder confidence. This is especially so with state owned organisations such as yours, because those surprises often provoke media controversy and have political implications. You need to remember that shareholding ministers are in turn accountable to Parliament and to the voters. This is a fact of life for us, and board members need to be sensitive to that.

So as part of their decision-making, boards need to be politically aware and understand the wider Government policy issues. They need to maintain rigorous ongoing risk assessment processes and to ensure that shareholding Ministers are informed of all major issues for political safety and ownership protection. This is a point I cannot stress strongly enough.

We have seen recent events, such as conflicts between companies and Select Committees (such as Transend) that have been damaging to companies and individuals alike. With consultation and political awareness, a lot of this could have been avoided

It is important that I am introduced early into board planning on issues of public sensitivity so that I can manage the inevitable political debate. You may think you are doing your Minister a favour by engaging in pre-emptive efforts to manage political fallout from some decision or issue. This is not the case.

Shareholding Ministers do not expect boards to make political decisions. Equally, we do not expect you to compromise the shareholding Ministers' political decision-making or your legal responsibilities to your companies.

I want to finish with some comments on shareholder investment in value adding projects (acquisitions, growth, diversification and so on). An implication of the long-term hold policy is that, as a long-term investor and owner, the government is asking boards to consider the long-term direction of companies or crown entities and to develop business strategies that match that kind of timeframe. We do indeed seek to maximise both the value of the companies and the stream of dividends we receive over the long-term.

Inevitably the question arises regarding major expansions to capability and options to diversify into new lines of business and new markets. The first thing I would stress is that, where a sound business case can be provided, shareholding Ministers may be prepared to invest substantial amounts in projects. One such example is Kiwibank.

I also acknowledge that with the trend towards globalisation, some SOEs businesses performance are directly related to offshore commodity markets (Landcorp is an example), and several SOEs are now actively involved in offshore ventures, mainly through acquisitions.

This has led to a debate on core vs. non-core activities. Generally offshore investments are non-core and higher risk. Consequently they should only be considered where they will enhance rather than adversely impact the core business and will add value. Examples include: Meridian's purchase of Power Facilities Pty Ltd - an Australian hydro business, and Airways Corporation's partnership with Lockheed Martin.

This does not mean open slather for any and all projects and/or investments. Now that the Government's balance sheet has been consolidated, it is my job to consider the overall capital requirements across the broad range of the government's investment activities. The expansion plans of SOEs and Crown entities need to be seen in this context. The government has constrained resources and must out of necessity allocate these sparingly after careful consideration of the merits of the many calls on them.

As a result, we need to move beyond the one-off presentation of business plans, however competently those may be prepared and however enthusiastically presented. What we are seeking is for SOEs in particular to participate in a longer-term conversation with the government about overall capital requirements. We for our part need to develop better methods for comparing alternative uses for capital across the whole of the portfolio. Moving to a credit rating benchmark provides government with a useful basis for comparison.

This is not that different from the scrutiny you might expect from a private sector shareholder with competing investment priorities, or a large holding company with diversified interests.

There may inevitably be some tension between individual business strategies with their capital requirements and the shareholding ministers' need to engage in cohesive capital budgeting across the whole of the Crown's portfolio of assets.

I believe however that that tension is creative, and that the dialogue between boards and shareholding ministers is an essential component in finding ways of adding value and minimising risk.

I very much look forward to engaging in that dialogue with you, and congratulate you once more on your appointments.

Thank you.

ENDS


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