Summary by the Controller and Auditor-General

The events affecting the issues addressed in the detailed report starting on page 15 are complex and span a lengthy period. To fully understand these events the report needs to be read in its entirety – especially the historical perspective set out in Parts 1 to 3, and Part 8 on governance issues.

I must emphasise that my role is to draw to the attention of Parliament and the appropriate authorities the answers to the questions we set ourselves in the terms of reference (refer pages 15-16). While I have jurisdiction to express opinions on the lawfulness of transactions, I have no executive, legislative or judicial powers to make other findings or to act on my findings and recommendations – it is for others to take the necessary action.

The Payments to Messrs Mogridge and Wall

Their Normal Rates of Remuneration

In May 1997, soon after the appointments of Mr Mogridge (as Chairperson) and Mr Wall (as Deputy Chairperson) took effect, negotiations took place between the Minister of Tourism and the State Services Commission regarding their rates of remuneration. The Minister wanted them to be paid at a higher rate than that which the Cabinet had agreed in 1991.

After starting negotiations with the State Services Commission the Minister, because of an administrative oversight, did not obtain the necessary approval from the Minister of State Services. Given that there was no approval from the Minister of State Services under the Fees and Travelling Allowances Act 1951 – albeit because of an administrative oversight – there is a question as to whether the Board acted lawfully in paying remuneration to Messrs Mogridge and Wall.

My legal advice is that without the necessary approval of the Minister of State Services, these payments may indeed have been unlawful. However, because Messrs Mogridge and Wall would have been unaware of any unlawfulness involved, it is probable that they would (if necessary) have obtained relief under the Illegal Contracts Act 1970. Accordingly, I do not believe that the Board needs to look to recover any amounts paid to Mogridge and Wall as remuneration in excess of the rates payable under the Fees and Travelling Allowances Act.

Why Did They Resign?

I accept that the resignations were part of an attempt to resolve the dysfunctional relationship which had developed between the Board and the Minister. These events are covered in some detail in Parts 2 and 3 of the report and I will not attempt to summarise them.

Although as events unfolded the Minister did not directly force Messrs Mogridge and Wall to resign, in December 1998 he made it clear to a number of individual Board members that – in the interests of resolving the impasse with the Board – he would accept Mr Mogridge’s resignation in lieu of looking to dismiss the whole Board.

The Board formed a subcommittee (comprising Messrs Boult, McCrae and Simm) and it negotiated Mr Mogridge’s resignation so that the Board could get on with its business at a critically important time for the tourism industry. Mr Wall decided to resign also because, in his words, "he was joined at the hip" with Mr Mogridge. Neither Messrs Mogridge or Wall nor the subcommittee accepted that there was any statutory jurisdiction for the Minister to remove them from office.

How Did They Come to be Paid?

There is no suggestion that the Minister directed the Board to make any payment to Mr Mogridge or Mr Wall. However, it seems to have been accepted by all concerned that if Messrs Mogridge and Wall were to be sacrificed in the interests of the whole Board they should be ‘compensated’ for their premature resignations.

What Amounts Were Agreed and on What Basis?

The amounts agreed by the subcommittee were $200,000 for Mr Mogridge and $140,000 for Mr Wall – both amounts to be paid on a tax-free basis.

Mr Mogridge proposed the formula on which he and Mr Wall would be ‘compensated’, not only for the balance of their existing term as members but also for the further term which each believed he had a valid expectation of being appointed to.

Were These Payments Authorised and Were They Legal?

The payments to Messrs Mogridge and Wall were made out of the Board’s own funds – acting on the direction of the Board’s Chief Executive, Mr Winter. In turn, Mr Winter had been instructed by Mr Boult who believed that he had authority from the Board and the agreement of the Minister.

I accept that Messrs Boult, McCrae and Simm considered that the payments were in concept a ‘reasonable commercial settlement’. Also, I accept that they believed that they had at least the tacit approval of the Minister (although the Minister strenuously denies this). Other Board members were not privy to the amounts paid. The Board gave no formal authorisation to payments by the Board to Messrs Mogridge and Wall.

It does not appear that any of the parties (including the Minister, who would have been prudent to take advice on this matter) considered whether the Board could lawfully make payments of this nature under the New Zealand Tourism Board Act 1991.

My legal advice is that the payments to Messrs Mogridge and Wall were unlawful. This is because members of the Board hold a statutory "office" under appointment from the Minister. Thus they are not "employees" of the Board and any matters of tenure are between the individual members and the Minister.

The Board has no statutory authority to pay its members remuneration beyond the provisions of clause 9 of the First Schedule to the New Zealand Tourism Board Act 1991. Consequently, neither the Board nor the Minister had authority to enter into an agreement to pay any member of the Board any amounts in remuneration (other than those expressly permitted in terms of clause 9) or any compensation for loss of office. Nor was the Board authorised to meet any liability which the Minister might have had in the event of a claim against him by Messrs Mogridge and Wall for unlawful or constructive dismissal.

To Summarise on the Payments to Messrs Mogridge and Wall

In summary, I believe that Messrs Boult, McCrae and Simm acted in good faith and were genuinely of the view that their actions were justifiable in the circumstances. In their minds their actions represented a pragmatic response to the untenable position they believed that they were in – both as to the ongoing dispute with the Minister and the proposal from Messrs Mogridge and Wall which they viewed as a "take it or leave it" one.

However, despite the submissions by the Board’s legal advisers that Messrs Mogridge and Wall would have been entitled to compensation for loss of office or for wrongful or constructive dismissal, the fact remains that the payments appear to me to be an unlawful application of the Board’s funds. Therefore, in my opinion, the Board should consider taking steps to recover the amounts from Messrs Mogridge and Wall.

I am not aware of other instances where payments on "premature resignation" have been made to members of boards in the public sector and, in my opinion, there should be no expectation of such payments.

Why Were Confidentiality Agreements Necessary?

We were told that the reason for having confidentiality agreements was to protect the reputations of Messrs Mogridge and Wall from public criticism following their resignations, and to enable Board members and staff to "get on with the job".

Although (as set out in his letter to the Board of 18 December 1998) the Minister undoubtedly accepted the confidentiality agreement, there is no suggestion that he required the confidentiality agreement in order to ‘hush’ the payments to Messrs Mogridge and Wall.

I acknowledge that all parties – including the Minister – accepted the validity of the ‘confidentiality concerns’. However, I doubt the appropriateness of this type of agreement in the public sector. Inevitably – as was the case here – confidentiality agreements cause more speculation than they avoid. In my view ‘transparency’ is a desired quality in public sector transactions, especially of this nature.

Payment to Mr Winter

His Appointment and Subsequent Renegotiation of his Employment Contract

Mr Winter took up his position as Chief Executive of the Board in January 1997. As part of the appointment process the Board was required to consult with the State Services Commission before finalising his terms and conditions of employment.

It is apparent that at the time of Mr Winter’s appointment the Board was in touch with the Commission about the terms and conditions of his appointment. It is equally clear that no final version of the proposed contract was ever referred to the Commission by the Board. Nor did the Board take any steps to consult the Commission when it altered the terms and conditions of Mr Winter’s contract on two occasions in 1998.

Advice from the State Services Commission is that Mr Winter’s employment contract was invalid because of the Board’s failure to consult with the Commission. In that event, however, it is likely that Mr Winter would have obtained relief under the Illegal Contracts Act 1970. Accordingly, I see no need for the Board to look to any recovery from Mr Winter for the amounts paid to him under his employment contract.

His Resignation

Mr Winter resigned soon after the new Chairperson of the Board, Mr Allport, had taken up office. Mr Allport had formed the view, for a number of reasons, that it may be in the best interests of the Board to have a new chief executive. Mr Winter resigned on the condition that he was paid out for the remainder of his contract – which had been renegotiated in July 1998 to go through to 31 July 2001 instead of 13 January 2000.

Under the settlement, Mr Winter was paid a gross sum of $579,423.08, which represented the amount payable to him for the remainder of the contract period. In addition, he received a payment of backpay, outstanding salary, reimbursement of expenses and allowances, and outstanding accumulated annual leave, which totalled $44,855.12. Tax was deducted at source in the normal manner.

The Minister was not involved in either Mr Winter’s departure or the severance payment made to him.

Confidentiality Agreement

Mr Winter was an employee of the Board and the terms of his resignation amounted to a severance package that was negotiated and agreed within the context of his employment contract. The settlement agreement contained a clause which stated that the terms of settlement would be strictly confidential to the direct parties (the appointed members of the Board and Mr Winter) and the Minister (who declined to become privy to it). Strict limitations were imposed on how statements about Mr Winter could be made publicly or to prospective employers.

I accept that the reason for this confidentiality arrangement was to avoid possible damage to Mr Winter’s reputation and that the arrangement was both lawful and appropriate in the circumstances.

Promotional Activities in South Africa and South America

I am satisfied that the expenditure by the Board on promotional activities in South Africa and South America during 1998 was authorised in terms of:

• the Tourism Board Act; and
• the Board’s Statement of Intent under the Public Finance Act 1989.

The expenditure was also consistent with the applicable purchase agreement. I was unable to determine whether the expenditure was authorised in terms of the Board’s annual section 8 statements, because no such statements existed.

The Cabinet approved the Minister’s travel in accordance with the procedures specified in the Cabinet Office Manual. None of his own travel costs, or those of his staff, were met from the Board’s funds.

Governance Issues Arising from Our Inquiry

The governance section of this report (Part 8) is long and (perhaps) arcane. However, read together with the historical perspective in Parts 1 to 3, it addresses many of the issues relating to this affair that have been the subject of much conjecture by the press. For instance, it covers issues such as:

• who are the major players in the game and what are their relative roles? and
• has there been any, so called, political interference or "ministerial meddling" in the running of the Board’s affairs?

In the course of this inquiry we have received a considerable amount of evidence relating to the issue of the Minister’s control over the Board. It is not possible to summarise the extent of the Minister’s involvement – I can only urge readers to study Parts 1 to 3 of this report to gain the necessary perspective.

In addition, the different relationships between the key players have not been helped by the confusing formal accountability arrangements – mainly because of the differing requirements of the Tourism Board Act and the Public Finance Act 1989, and the development of the purchase agreement regime.

The Board has taken the view, supported by legal advice from its solicitor, that it is an independent statutory entity responsible to Parliament for carrying out the Board’s statutory object.

On this view, the role of the Minister is limited to:

• approving the Board’s section 8 annual statement, its statement of intent, and its "purchase agreement"; and
• giving formal policy directions to the Board under section 9 of the Tourism Board Act.

The Minister, on the other hand, has taken the view that he is responsible for ensuring that taxpayer funds are spent appropriately. And he therefore has the power – especially through the purchase agreement process – to control the policies and operations of the Board. In adopting this approach the Minister has acted on advice from his officials, particularly the Office of Tourism and Sport (OTSp). The OTSp has in turn relied on advice from the Crown Law Office in relation to aspects of the requirements for purchase agreements.

I accept that all of those involved have proceeded on the basis of advice and their genuine perception of what is in the best interests of New Zealand’s important tourism industry. But the fact that such different approaches have been adopted is not in the best interests of good governance or the tourism industry.

In my view, the governance issues between the Minister and the Board – which are ongoing – should be resolved quickly. This could be achieved either:

• by the parties accepting an independent analysis of the statutory requirements, and establishing an appropriate relationship agreement (including a disputes resolution mechanism) in light of that analysis; or
• by legislative amendment to the relevant Acts clarifying Parliament’s (or the Government’s) intentions.

The governance issues that arose between the Minister and the Board may be an extreme example of the sorts of problems that can arise. And, no doubt, some of those issues relate to the personal styles and interests of the individuals involved.

However, I continue to be of the view that leadership is required from the central agencies if some of the fundamental problems with governance arrangements for Crown entities are to be resolved. My November 1996 report entitled Governance Issues in Crown Entities (which was used as a benchmark for this report), and its update in 1998, set out the issues that require resolution.

D J D Macdonald
Controller and Auditor-General

19 April 1999