How to swim: Governance lessons for new water boards

As councils implement water service delivery plans under the Government’s Local Water Done Well reforms (LWDW), the spotlight on council-controlled organisation (CCO) boards has never been brighter. From day one, directors face the challenge of delivering strong governance for water services and infrastructure in a demanding funding and operational environment.

There is significant opportunity for future water sector directors to drive positive change in Aotearoa. Based on insights from experienced directors across lines companies, regulators and regulated entities, here are some key success factors and lessons relevant for new water CCO boards.

The challenges

Strong governance will not come without its hurdles. Directors of new CCO boards will need to navigate:

• • Pressure to ensure financial sustainability, secure funding and/or raise capital
  • A clear understanding of current asset condition and implementing mature asset management practices
  • Competition for experienced personnel with relevant asset management and water sector expertise
  • A complex and evolving regulatory compliance regime
  • The demands of multiple stakeholders operating in a highly politicised environment 

Future directors will need to act quickly to set up robust governance mechanisms. With ratepayers likely to end up paying – or paying more – for water services, public expectations will be high. Any failures, however small, will attract more scrutiny and quickly erode public confidence.

While these challenges may be new to the water sector, lessons can be drawn from industries with complex regulations and geographically dispersed assets, such as electricity distribution, ports and airports and, to a lesser extent, financial services.

Lessons learned: what to focus on

• • Know who is in your waka. Joining the board of a new water CCO comes with significant risks and pressures. To make this ‘leap of faith’, it’s crucial to understand who your fellow directors will be. Do you share similar values? Is there the right chemistry to build trusted, high-performing relationships for the organisation’s success?
  • Manage board competency and diversity. New boards need a broad mix of skills – asset management, regulatory, finance and stakeholder engagement. Boards made up mainly of ‘generalist’ directors may struggle to govern water CCOs through their critical early stages. The key is striking the right balance between governance and management. Technical expertise can be valuable, but directors must know when to contribute and when to step back. Robust due diligence is also essential to attract capable board members. Several directors we’ve spoken to suggested creating a ‘water sector governance manual’ – developed by a CCO, sector groups or the Institute of Directors – to help prospective directors understand the sector, organisational strategy, risks and current health before deciding to join.
  • Focus on core competencies. Asset management sits at the heart of CCO success. Many directors we’ve spoken to recalled major failures linked to poor asset management – Auckland’s 1998 blackout (and to a lesser extent 2006), the Havelock North contamination, Aurora’s asset condition crisis, and Wellington’s ongoing water leaks. One director highlighted the value of aligning asset management practices with ISO 55001 as a benchmark for robust systems.
  • Undertake due diligence on asset compliance.  Directors must assess the scale of compliance obligations, particularly for asset portfolios and the investment needed to meet standards. The numbers are significant: about 20% of wastewater treatment plants are operating under expired consents, and more than half will need re-consenting within the next decade. For drinking water, more than 40% of water take consents will expire in the same timeframe. This looming wave of regulatory requirements will demand major capital investment and affect funding for growth and service improvements.
  • Stay on top of regulations. “If you’re not familiar with the water services regulatory framework, it’s daunting,” one director told us. The cost of compliance and the evolving nature of regulations were cited as key challenges. Lessons from the electricity sector show the importance of steady progress towards mature compliance practices. Successful organisations have dedicated teams with subject matter expertise and maintain strong relationships with regulators to ensure clarity and understanding on both sides.
  • Seek ways to collaborate. Scale matters. Smaller CCOs should explore opportunities to collaborate across the sector, such as shared procurement or joint asset maintenance services. While merging networks may be difficult, merging operations could unlock significant efficiencies and cost savings. Hybrid models may allow smaller CCOs to retain local decision-making while benefiting from economies of scale.
  • Smart risk management and assurance. Every director we spoke to stressed the critical importance of effective risk management and assurance. As one director put it: “Good brakes make the car go faster.” Advanced risk practices go beyond a basic risk register approach, which often feels like a compliance burden. Directors value a clearly defined and well-communicated risk appetite used to guide day-to-day decision-making; accurate and purposeful risk reporting to inform board oversight; and a high-quality assurance to give confidence that risks are managed within appetite.

One director emphasised the value of an assurance map, showing how various sources, such as internal or external audits, cover key risks. This helps boards identify gaps and right-size assurance activities to add real value.

Key takeaway – risk management is key

Recent KPMG Australia research shows boards are becoming more risk-averse as compliance and regulatory requirements increase – along with consequences for directors. Strong risk management and assurance gives boards confidence that compliance is being handled effectively, allowing them to be less risk-averse and focus on what’s critical. 

Our experience, supported by insights from seasoned directors reinforces this: robust risk management and assurance practices should be a priority for boards and management to set CCOs up for long-term success. 

For support or further information, contact Kirill Voronchev, Partner – Advisory, KPMG New Zealand.