Auditor-General's overview

Maintaining a future focus in governing Crown-owned companies.

The work of my Office has been focused on the theme of Our future needs: is the public sector ready? This report focuses on the ability of Crown-owned companies' governance systems to support "future thinking" and to realise and adjust strategies accordingly.

It has been more than 25 years since New Zealand's State-owned enterprise model for governing and delivering certain public services was set up. Since then, other types of Crown-owned companies, such as Crown research institutes and other Crown companies, have been formed, and individual entities have changed. For example, while we were preparing this report, the decision was made to wind up Learning Media Limited and to sell Orcon Kordia's retail service provider to private investors.

Crown-owned companies provide strategically significant services, such as electricity infrastructure and assuring meat quality, and have considerable public resources – about $28.3 billion in assets and $5.1 billion in annual revenue.

In this report, I describe how Crown-owned companies are preparing for the future. I set out for Parliament and the public:

  • the challenges in maintaining a focus on the future that were described to us; and
  • insights and lessons from Board members working within the commercial model.

My staff were told that there are inherent tensions in the governance arrangements for Crown-owned companies, and these tensions can be significant problems for Boards, raising questions such as:

  • How is seeking profit balanced with long-term strategic interest and social responsibility?
  • What benchmarks are useful to compare the performance of Crown-owned companies against?
  • Should one public sector entity compete against another, possibly resulting in duplication of infrastructure or capability?

Managing these inherent tensions is an integral part of being able to focus on the future. Sometimes these tensions can be, and are being, managed at the entity and Board level. There were also examples where these tensions were not being managed as productively as they might. Managing these tensions requires shared understanding between key people inside and outside entities.

Three practices appear fundamental to managing these tensions productively – mutual respect, good information, and a shared understanding by the Board, the Minister, and monitoring agents of the Crown-owned company's purpose, role, and contribution to the public.

My staff found examples where Boards and other agents had productively used these tensions to focus on the future. In my view, the Crown-owned companies that were innovating and communicating with a wide range of stakeholders appeared more likely to be preparing well for the future. My staff saw evidence of:

  • better asset planning and condition than the rest of the State sector;
  • longer-term thinking, such as MetService taking early advantage of technology to improve services and Scion extending wood-processing technology to help sewage disposal; and
  • increases in Crown-owned companies' financial resources, allowing them to better manage uncertainty or invest in the future, such as maintenance and investment programmes at KiwiRail.

The quality and usefulness of planning information reported to Parliament about the performance of Crown-owned companies has also been a long-standing concern for my Office. In my view, planning information would be improved through shared understanding of, and expectations about, that information.

In working to maintain an eye on the future while governing, many Board members we interviewed acknowledged that it was easy to get too focused on details to manage rather than govern. They told my staff that it took discipline to stay focused on strategy and to take a long-term outlook.

Some of the suggestions made in this report about how to stay focused on the future might seem to be – and are – common sense. Common sense is not always put into practice, but it works when it is. As one person put it: "There are no ‘neat tricks' … [future-focused governance] requires ongoing focus and commitment."

In my view, Boards dealing with the challenge of staying focused on the future within the public sector environment can learn more from each other and so improve their performance.

I thank the governance consulting business that helped with our interviews; the chairpersons, directors, chief executives, and monitoring agents of Crown-owned companies; and those involved in commercial model governance who took the time to share their views.

Signature - LP

Lyn Provost
Controller and Auditor-General

5 February 2014

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