Putting Your Faith in Directors of the State

Directors rely fundamentally on their own competencies and personalities when they meet and consider the information provided by company management. A board might meet for 50 to 100 hours a year. During those limited hours of group behaviour and decision making the board has to govern and guide a company for an entire year. Notwithstanding preparation time, it is in the boardroom where an effective board manifests its talent for making good decisions by concentrating on the right issues, at the right time and in the right fashion.

Modern behavioural research argues that conventional definitions of good governance (for example, board and committee composition, compliance regimes, audit oversight, charters and codes of conduct) have little to do with superior decision making. Rather, good board performance is differentiated from bad by a superior culture of trust, candour, ability and diligence. This culture is nourished by rigorous self-examination and continuous reinforcement, by careful selection of new directors and by an effective chair. In this way thoughtful dissent is encouraged, opinions are more honestly and openly communicated, data is more thoroughly probed, options more deeply examined and responsibility more equally shared. In short, better decisions are made.

In 2006 the Minister for State Owned Enterprises (SOEs) announced that, subject to specific criteria, SOEs were to be encouraged to get into new business areas to help build New Zealand's wealth. Indisputably, success or disaster here will be driven by the quality of decision making. In the same year research from Victoria University suggested that significant director dissatisfaction existed in the nine largest SOEs over matters including selection process, board composition policy and levels of board capability. This appears to raise an issue for the Crown and taxpayers when these same boards have to make optimal investment decisions.
The shareholding ministers, on behalf of the government of the day, are responsible for SOE governance . A rational private shareholder will always try to maximise shareholder value. So too SOEs are currently required to be as profitable as comparable private sector companies, to be good employers and to exhibit a strong sense of social responsibility by having regard to the interests of the community in which they operate. Selection of SOE directors, their evaluation and the definition of what constitutes good performance, is therefore entirely and properly under the shareholding ministers’ control.
However, heightened SOE business risk will require the government (as guardian of the public purse) to manage any trade off between a boards’ ability to make quality decisions and its composition as it may reflect factors unrelated to quality decision making. Director remuneration to attract and retain the best decision makers is a separate but relevant issue.
Directors are appointed to SOE boards by the shareholding ministers after advice from the ministers’ advisers (principally the Crown Company Monitoring and Advisory Unit (CCMAU)) and input from cabinet. The process is designed to be more transparent than that for nearly all private sector companies. CCMAU canvases widely for qualified candidates (in addition to ministerial canvassing) and due diligence is conducted to assess mutual candidate and SOE suitability. Chairs are always consulted though they hold no veto. The responsible minister creates the final shortlist. However criticism in terms of board composition remains and appears to draw support from the VUW research.
If one accepts that decision making is the key barometer of board success and that the board is best placed to judge and improve its own performance and culture then one possible way to tune the process is to devolve greater recruitment and evaluation capability to Chairs and the board. It has been suggested by respected participants that the shareholding ministers continue to appoint the Chair with advice and input from officials and cabinet. Thereafter however, the Chair and the board, equipped with rigorous self-evaluation, take on a much larger role to decide on recruitment and reappointments.
CCMAU would continue to identify a wider pool of potential directors and work with the Chair to ensure that shortlists for the board contain qualified candidates as opposed to cronies of the Chair. The boards themselves would create the shortlists for new directors and would make final recommendations to the minister. CCMAU as a stakeholder in the boards’ evaluation processes would continue to provide independent assurance to the shareholding ministers on board effectiveness.
If effective decision making is the key for SOE boards assisting in New Zealand’s economic transformation, then the decision to trust SOE boards could be the most effective decision of all.