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The role of SOEs in economic transformation

24 August 2006 Speech Notes

SOE changes: The role of SOEs in economic transformation
Speech to Institute of Directors in NZ breakfast, Northern Club, Auckland

Thank you for the opportunity to address you this morning. I would like to acknowledge the very important role that the Institute of Directors plays in establishing best practice governance across the New Zealand corporate world, and in particular the assistance it provides to the government (via the Crown Company Monitoring Advisory Unit and other agencies) with respect to governance advice and training programmes for State Owned Enterprises and other Crown-owned company directors.

What I would like to do this morning is to summarise the announcement I made earlier in the year - inviting State Owned Enterprises to broaden their scope of business - in the context of the broader government's economic transformation agenda, and relate this to issues of direct relevance to the institute and its members.

I hope, too, that we can have a bit of dialogue about the things that may be on your mind. The reality is that I don’t have as much opportunity as I would like to talk directly to directors, so I look forward to your questions and comments.

No doubt you are already aware of the announcement I made on 2 June, encouraging SOE's to consider expanding their scope of business, into adjacent products, markets or technologies. You may have read at least some of the subsequent media coverage which, it is fair to say, has not been entirely complimentary.

The rationale for the policy change is the government's economic transformation agenda – a key theme of Labour's third term in government. Economic transformation is about making our economy more dynamic and productive, to improve economic growth and export receipts. It is heartening to find support for the policy change from the New Zealand Institute's recent research programme focussed on "creating a global New Zealand economy."

The institute notes the paucity of large New Zealand companies that are well placed to expand their operations overseas, and the constraints traditionally placed on SOEs' ability to invest in foreign markets. To quote the institute "some of the large SOEs are in a good position to undertake significant international expansion. There are companies that have substantial assets and experience, that have developed real competitive advantage in some areas" (from Developing Kiwi Global Champions: Growing Successful New Zealand Multinational Companies, August 2006).

The policy change provides SOEs with a greater opportunity to expand overseas - as well as into adjacent products and technologies - and thereby make a more significant contribution to the economic well being of New Zealanders.

Note however, that any international expansion cannot be at the expense of domestic operations. We don't want Transpower investing overseas for example, because it would mean a decline in their ability to build new domestic electricity transmission capacity. As a result of this and other constraining factors, it is obvious that some SOEs are better placed than others to respond to the policy change.

In contrast to the institute's support for the policy change, you are no doubt aware that it has also been subject to a number of criticisms. Rather than respond to each of the criticisms in detail, I would like to take this opportunity to make some key points.

The government is committed to long-term ownership of crown companies, therefore selling off or selling down its core shareholding is not an option, as advocated by some media commentators. However, the government has indicated a willingness to consider new sources of private sector capital, as long as it doesn't dilute the government's shareholding in SOEs.

This could extend to the sell-down or sell-off of discrete new investments by SOEs, for example a new wind farm or new technology company, if this was mutually acceptable to the SOE and government. I expect that SOEs will also get involved in partly owned subsidiaries in order to leverage both capital and expertise.

The announcement comes with risks and therefore places a greater emphasis on accountability and performance monitoring of SOEs, particularly their boards. SOEs are at times subject to intense public scrutiny – this will intensify as a result of the announcement.

For these reasons, diversification proposals will be subject to strict evaluation criteria and once a track record is established, the success or otherwise of previous initiatives.

Given the risks and opportunities associated with the policy change, it also places greater currency on the decision-making abilities of SOE boards and senior management.

While the government understands the potential for failure of some new ventures, we – as any shareholder of a company – obviously want SOEs to minimise, identify and analyse this risk and maximise the upside potential of new investments.

While shareholding ministers are fortunate to have many experienced and committed directors on the boards of SOEs, we are always on the lookout for new talent. More on this later.

I want to touch on the commentary about the quality of board appointments to government-owned companies. I consider much of this to be at best ill-informed, and at worst indicative of political agendas that have no real interest in adding value to the debate around the value of crown ownership.

You will have your own view about the quality of crown boards. Of course there are incumbent directors with overt, and well known, political associations. It does not automatically follow that such people are not good directors. I can assure you that, whatever your views, anyone appointed by the crown is there because we, as shareholder, believe that they have the skills required to do the job.

Our focus is always on identifying the skills needed at board level and finding people that we believe have those skills. Of course, we don't always get it right and we have our share of problems as a result. But that's no different from the private sector.

My challenge to anyone making comments about the qualities of the boards is to actually take the time to have a look at the membership of the boards and then form a view – it’s easy enough to do, they are all listed on the Crown Company Monitoring Advisory Unit’s website. I’m actually pretty proud of some of the appointments we’ve made in recent times.

When I look at the list and see names like Sir John Anderson, Richard Bentley, Jim Bolger, Wayne Boyd, Rob Fenwick, John Goulter, Richard Janes, Warren Larsen, James Ogden, Alison Paterson, Sam Robinson, Francis Small, and Michael Stiasnny, to name a few, I am confident of two things. First, that crown company assets are in good hands, and secondly, that a significant proportion of incumbents don’t vote for Labour.

Briefly, let me discuss the number of director positions available on crown company boards, and outline some of the parameters of the crown board appointment process, to give you a better sense of the opportunities available to you, as a member of the Institute of Directors.

There are around 380 boards that the crown makes appointments to, with approximately 2,500 directors on those boards.

At the commercial end of the crown’s activities, where I suspect most of you would naturally gravitate to, there are 228 director positions across 37 boards.
As Minister of SOEs, I am directly responsible for the 114 directors who serve on the boards of the 19 SOEs.

Appointment processes are ongoing, and managed on my behalf by the Crown Company Monitoring Advisory Unit. Every year across the SOE portfolio there are approximately 40 positions considered, and about half of these will end up being new appointments.

This represents a significant opportunity for the director community – but be warned, interest in these roles is competitive. I always have a wide range of skilled people to consider for each vacancy.

Directors have until recently normally served a maximum of two terms of three years each, although I have adopted a more flexible approach in this area – it is becoming less unusual for directors to serve longer than six years.

On the other hand, I have no hesitation in not reappointing directors after one term, if that is in the best interests of the company.

For some people a crown directorship will be their first major governance role, and this includes a number of people who are now really experienced and respected directors. In this regard the crown provides a valuable service to the wider governance community.

I believe that as the pool of experience continues to grow and more people recognise the demands on SOE directors, these people will become seen as a great source of talent for private sector board roles.

In conclusion, I challenge you to think more seriously about the opportunities available on crown company boards, and invite those of you who don't already sit on such boards, to consider putting your name forward. I am always on the lookout for well-qualified and motivated directors. It is an exciting time for SOEs in particular, and this coincides with a need for more director talent on those boards.

If you wish to pursue this offer, it’s a simple matter of going to and following the instructions there. Don’t expect things to happen overnight, or be disappointed if it doesn’t, but do expect that your interest will be taken seriously and that we are a dedicated shareholder committed to strong governance and improved performance of the companies we own.

Thank you for your attention this morning. I welcome any comments or questions.


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