Part 2: Setting the Scene During 1997-98
1997: A New Era of Board Membership
201
After the 1996
general election the Hon Murray McCully was given the tourism portfolio. An immediate task
was to appoint a number of new members to the Board – including a new Chairperson
– in place of those who would soon be completing two terms (each of three years) in
office.
202
The Minister appointed Mr Bryan
Mogridge as Chairperson, and Mr Michael Wall as Deputy Chairperson, with effect from 30
April 19979. Mr Mogridge had a proven background in the
corporate and commercial sector and was appointed for his ability to think strategically
and get results. Mr Wall had previously been a member of the Board, and was reappointed
because of his experience in advertising and marketing.
Letters of Appointment
203
Each new member received a
letter of appointment. The letter contained some guidance about:
- the object and functions of the Board;
- dealing with conflicts of interest; and
- accountability duties under the Tourism Board Act and the Public Finance Act 1989.
Expectation as to Reappointment
204
Messrs Mogridge and Wall were
each appointed for a term of three years. Their letters of appointment noted that, under
the Tourism Board Act, members were eligible for reappointment.
205
For reasons which will become
apparent, the question of whether there was any actual expectation of reappointment was of
importance to our inquiry. We raised this issue with Messrs Mogridge and Wall, the
Minister, and some other Board members. It was not disputed that it had become customary,
in the normal course of events, for members of statutory boards such as the Board to serve
two terms in office – but without there being in any sense a guarantee of
reappointment after the first term.
206
Both Mr Mogridge and Mr Wall
told us that they understood this, and accepted that the Minister had given no commitment
to reappoint them. However, each told us that he had accepted appointment to the Board on
the general understanding that he was committing himself to two terms. In the case of Mr
Mogridge, it would appear that there was some discussion to this effect with the Minister.10
207
We have concluded that there
was, at the time of both appointments, an acceptance by the Minister and the appointees
that two terms of office were customary. However, there was no reasonable basis on which
either member could say that he had a legitimate expectation of being reappointed. Indeed,
no minister could give a contractually binding commitment to reappoint a board member.
The Purchase Agreement Negotiations
The Background: the Strategic Review
208
After the arrival of Mr Mogridge
and a number of other new directors in May 1997, work began immediately on a strategic
review of the Board’s direction and priorities. The review was comprehensive, and
assisted by independent consultants.
209
In the purchase agreement for
1997-98, the Board and the Minister agreed to carry over the Board’s existing
programmes and strategies pending the completion of the strategic review. The purchase
agreement also mentioned the Board’s intention to seek opportunities to reduce or
eliminate expenditure in certain areas, and to seek to reduce its administrative
overheads. The Minister had raised these matters with Mr Mogridge in discussions at the
time he appointed him.
210
The strategic review was
completed by early 1998, and there is no dispute that the outcome was embraced not only by
the Board and the Minister but also by the tourism industry. The Board then took steps to
implement the new strategy, which included an internal restructuring of its operations.
211
It was at this time, it would
seem, that differences emerged between the Board and the Minister about the speed with
which the agreed strategy could be implemented. The Minister told us of a gap between
the promise and the delivery, and of growing pressure on him from sectors of the
industry for results. From this, he came to see the matter as one of poor performance by
the Board and unwillingness on its part to be accountable.
212
On the other hand, the
perspective of the members to whom we spoke about this issue was that the expectations of
the Minister and some sectors of the industry were unrealistic. It takes time, they told
us, to turn around an organisation to the extent that the new strategy required. It would
be fair to say that at least one member of the Board had some sympathy for the
Minister’s view. However, the majority of the Board were supportive of the
Board’s rate of achievement.
The 1998-99 Purchase Agreement Negotiations
213
These differing expectations
were the context for the preparation of the Board’s statement of intent and purchase
agreement for 1998-99. Preliminary discussions about both documents began early in 1998.
However, neither document was completed by the time the new financial year began on 1 July
1998. When the matter was drawn to the Minister’s attention, he wrote to Mr Mogridge
on 30 June 1998 proposing that the previous year’s purchase agreement be "rolled
over" for one month pending completion of the new agreement.
214
So began a process of
negotiation which lasted another four months and became increasingly difficult and
adversarial.11 It is unnecessary to give a blow by blow
account of what happened, because the relevant papers are now in the public arena.
Instead, we make a number of observations that may be helpful in explaining why the
process went awry.
215
The first observation is that
relationships between the Minister and the Board were already under strain by this time.
Directors told us of a number of unsuccessful attempts to redress the situation between
July and October 1998.
216
Secondly, the Minister told us
that he was satisfied that the purchase agreement was the appropriate vehicle with which
to progress matters with the Board. He said that he also considered exercising his powers
under the Tourism Board Act to direct the Board (see paragraph 125). However, he took the
view that some of the matters at issue were beyond the scope of any policy direction
– for example, the level of the Board’s administrative overheads and the
effectiveness of its financial systems. Such matters were, in the Minister’s opinion,
of a nature which the purchaser and the provider should agree upon as a prerequisite to
the release of funds.
217
The Board’s expectation, on
the other hand, was that the purchase agreement should have more limited scope and be
confined to the particular purchase interests of the Crown, and that governance matters
should be addressed in the statement of intent.
218
Thirdly, the monthly
"roll-overs" to the previous year’s agreement, and the corresponding
"drip-feeding" to the Board of the funds which Parliament had appropriated,
became a major bargaining tool for the Minister and his advisers. And were, at the same
time, a source of frustration for the Board. We make this observation regardless of the
rights and wrongs of the respective parties’ positions in the negotiations.
219
Fourthly, it needs to be borne
in mind that the OTSp began operations on 1 July 1998. The Minister’s aspiration for
the new Office was that it would bring a new focus to the purchase advice functions
formerly undertaken by the Ministry of Commerce. The OTSp was able to start advising the
Minister on issues relevant to the purchase agreement process by the middle of August
1998. Its advice to the Minister conveyed almost immediately that the Director of the OTSp
had serious misgivings about the Board. His concerns related both to the performance of
the Board and to its attitude to the purchase agreement negotiations.
220
Fifthly, the prospect of one or
more Board members being removed from office became an issue during the last month of
negotiations. This soured relationships even further. The Minister first raised the
prospect of removal when, with the consent of the Chairperson, he contacted each Board
member individually in October 1998 to discuss his misgivings about the Board’s
attitude to his requests concerning the purchase agreement. The Minister suggested to some
Board members that if the deadlock over the purchase agreement was not resolved then some
members, especially the Chairperson, might have to go.
221
The Board was sufficiently
concerned about the situation to seek legal advice from Russell McVeagh McKenzie Bartleet
and Co. The advice confirmed to the Board that none of its members had acted outside any
of the functions and powers of the Board.
222
When news of this step reached
the Minister it had a compounding effect, convincing him more than ever that the directors
were unwilling to be accountable for their actions. From this time, and with the
Minister’s knowledge, the OTSp actively sought its own advice on ways for the
Minister to remove Board members from office. It is clear that Board members were aware,
informally, of these steps.
223
Finally, the absence of any
formal relationship agreements or dispute resolution mechanism between the Board, the
Minister and the OTSp meant that the deteriorating relationship had to be managed in a
vacuum. Members of the Board complained to us about the lack of information about the role
of the OTSp and the TSMAB, and their perception that the OTSp was attempting to involve
itself in the management of the Board as well as its governance arrangements.
224
The Director of the OTSp told us
that he took steps to explain his Office’s role, and to develop a working
relationship with the Board’s Chief Executive. He was not aware of any tension
between the OTSp and the Board in a policy sense. However, he acknowledged that the OTSp
did not consult the Board in the course of developing its role and mission statements,
which happened during the period in question. Those documents did not come to the
Board’s attention until 14 December 1998. The reaction of several members was that
the OTSp’s functions appeared to overlap in several respects with those of the Board.
We do not express a view on this. However, the lack of consultation and the absence of a
pre-existing relationship agreement between the Minister, the OTSp, and the Board must
have increased the risk of overlap.
225
Moreover, no readily
identifiable means were available to any of the parties to resolve the impasse in any
formal way. None of the Board’s accountability documents provided any guidance on how
either the Minister’s concerns about the performance of the Board, or the
Board’s concerns about ministerial interference in its operations, should be
addressed. The OTSp did not play any facilitative role, because of its duty to act as the
Minister’s agent in the negotiations.
226
We return to these governance
issues later. Suffice to say at this point that by the time the purchase agreement
negotiations were concluded the situation had reached a point of no return. All the
parties recognised that, in the interests of the tourism industry, the problem had to be
resolved.
The PricewaterhouseCoopers Review
227
The Minister and the Board
finally reached agreement on the terms of the 1998-99 purchase agreement at a meeting on
26 October 1998. The documentation was completed in the following days, and the Minister
signed the agreement on 30 October 1998. This allowed the remainder of the Board’s
appropriated funds to be released, with the exception of a portion which was
"quarantined" pending further discussions on how those funds were to be used.12
228
One significant obstacle in the
negotiations had been the Minister’s concern – which was shared strongly by the
OTSp – about the level of the Board’s administrative overheads. These were
considered unacceptably high in comparison with equivalent bodies in other countries. The
issue had previously been referred to in the 1997-98 purchase agreement (see paragraph
209). The Minister was not prepared to commit himself to a new purchase agreement without
assurances that the issue would now be addressed.
229
At the meeting on 26 October
1998 the parties agreed to seek an independent review; identify an appropriate operating
overhead for the Board; and formulate some broad policy statements which the Minister
could make on behalf of the Government for the Board to follow. The purchase agreement
reflected what was agreed as follows:
The Board executive will undertake a comprehensive independent review of the Board’s cost and overhead structure in partnership with the Office of Tourism and Sport and make recommendations, separately or conjointly, to [the Minister] and the Board of Directors on proposals for reducing the level of fixed costs within the organization in the current and subsequent financial years. This review is to be completed within three weeks of completing this agreement.
The Status of the Review
230
The Director of the OTSp, Mr
Morrison, clearly regarded the issue as one of the utmost importance and urgency. In an
e-mail communication on 29 October 1998, he told the Board’s Chief Executive, Mr
Winter, that:
As discussed earlier today … In order to fulfil my responsibilities to the Minister and the process that has been agreed between the Minister and the Board I have decided to commission PricewaterhouseCoopers (PWC) to conduct a management review of the Board to provide independent advice on the cost structure currently employed within the Board and make recommendations for change that will boost the productivity, cost efficiency and performance of the Board.
I intend that this review be undertaken quietly and discreetly. I believe that such a report will greatly assist the task we have been given and will ensure we are dealing with facts and experienced advice, rather than arbitrary judgements.
PWC have indicated that such a review can be undertaken within the time frame requested by the Minister and your Directors (two to three weeks)...
231
Mr Morrison had met with a PWC
partner on 29 October 1998. The terms of reference for the review were settled by letter
from him to PWC the following Monday, 2 November 1998. This followed discussions between
Mr Morrison and the PWC consultant who was to undertake the review, and an invitation by
Mr Morrison to Mr Winter to add any items the Board wished to have included in the terms
of reference. Messrs Morrison and Winter also met with the consultant on the following
day.
232
PWC representatives told us
that, in the initial meeting with Mr Morrison, the sole focus of the review (as PWC
understood it) was to examine the Board’s cost structure with particular reference to
its overhead costs. This was confirmed in a letter from PWC to Mr Morrison on 30
October 1998. However, by the following Monday the terms of reference had broadened
considerably, to include:
- operational systems – finance, administration, information technology, communications;
- cost structure – human resources, premises, equipment, administrative overheads, contract management etc;
- management framework – success criteria, decision making processes, authorisation and empowerment, strategy development and management, performance assessment, governance issues.
233
The OTSp letter of 2 November
1998 stated that the review was to be undertaken on behalf of the OTSp with the
co-operation of the Board.
234
It is important to set out this
detail because Mr Morrison asserted to us that the PWC review (as it became known) was not
in fact the independent review referred to in the purchase agreement. It was instead, he
told us, a report commissioned solely by the OTSp as its contribution to that review. This
is consistent with what the consultant was told when he first met with Mr Morrison.
235
Mr Morrison’s explanation
came as a surprise not only to Mr Winter and Board members but also to the Minister
himself. These people had regarded the PWC report as the review referred to in the
purchase agreement.
236
Mr Winter told us that the
reasons for his view that his agreement was sought to the commencement of the exercise, to
the appointment of PWC as an "independent" party, and to the terms of reference.
A close reading by Mr Winter of the terms of reference might have signalled otherwise. But
it does not appear that anything was said to Mr Winter which caused him to realise this.
237
Moreover, the timetable (2-3
weeks) was consistent with the review being the one referred to in the purchase agreement.
If this was not the case, we would have expected Mr Morrison to have drawn Mr
Winter’s attention to the duty of the Board – if it was to discharge its
obligations under the purchase agreement – to commission its own
"independent" review. It seems that at no point did Mr Morrison do so.
238
Our inquiry, and comments on our
draft report, revealed completely divergent views on the status of the PWC review.
However, the purchase agreement did not provide for the OTSp to commission its own
independent review. In our view Mr Winter and the directors were justified in assuming
that the review was the one which had been agreed to with the Minister, and subsequently
mentioned in the purchase agreement. The divergence of views is symptomatic of the state
of the relationship between the parties at the time.
The Process Followed
239
The terms of reference (as set
out in the letter of 2 November 1998) required the review to be undertaken without there
being any contact with the Minister, the Minister’s office, members of the TSMAB, or
individual members of the Board. Mr Winter told us that he had been comfortable with this
approach. We understand the reason to have been to enable the reviewer to focus on the
terms of reference rather than the other issues outstanding between the parties.
240
This restriction became
problematic as the review progressed, especially as it became clear that aspects of the
report would be critical of the Board and members of the Board.
241
The PWC representatives told us
that they were uncomfortable with – but did not object to – the requirement to
produce a report in these circumstances, without giving either the members or the
Board’s staff an opportunity to comment on it. The PWC consultant told us of a number
of efforts he had made to brief the staff – both before and immediately after the
completion of the report – as to what the report would contain. These efforts were
intended to reduce the impact of the restriction on comment. But the consultant was
precluded by the OTSp from making a copy of the draft report available, even to Mr Winter,
in advance of its completion.
242
Mr Morrison, on the other hand,
did have access to the report in the course of its preparation, and made both written and
oral comments on it. It is apparent that these comments influenced the shape of the
report.
243
The PWC representatives conceded
to us that what occurred was not acceptable practice for a firm of management consultants.
The Use Made of the PWC Report
244
PWC delivered its report to Mr
Morrison on 20 November 1998, as a final report. It was critical of the Board and the
members in a number of respects. Particular criticism was directed at the Board’s
communication and governance practices, and included a claim – which is disputed by
the Board – that the Board was operating in a tactical rather than a strategic way.
245
On 25 November 1998 Mr Morrison
sent copies of the report simultaneously to the Board and to the Minister. Before doing
so, he gave copies to members of the TSMAB.
246
In a covering letter to the
Minister, Mr Morrison described the shortcomings which the report had identified as extremely
serious. He encouraged the Minister to take direct and immediate action to
rectify them. In respect of the governance issue, he recommended that the Minister request
the Chairperson to provide reason within seven days as to why he should continue in his
position and that, in the absence of satisfactory reasons, he should be dismissed.
247
We were surprised by the
vehemence and timing of this advice. Mr Morrison was aware that the Board’s directors
(including the Chairperson) had deliberately been excluded from the review process, as
part of the terms of reference. He was also aware that the report had not been shown to
either the staff of the Board or to the members in draft form.
248
The PWC consultant told us that
in his view the report did not justify the recommendation referred to in paragraph 246.
249
The OTSp subsequently received
legal advice from the Crown Law Office that caused it to recommend a more cautious
approach. Consequently, the Minister wrote to each member of the Board on 27 November
1998, seeking their personal views on the report before he formed a view on it. A number
of members responded by saying that they wished to discuss the report with their
colleagues before commenting in any depth.
250
When the report was eventually
seen by the Board staff from whom information had been sought, they were unanimous that
their views – especially on governance issues – had been misrepresented. On 2
December 1998 they wrote to the consultant, with copies to the Minister and the OTSp,
informing him of their concerns and seeking an urgent meeting.
251
For their part, the Board
members felt justifiably aggrieved that their performance had been criticised without
foundation or an opportunity to comment. The contents of the report were not made known to
them until after it had been completed. When it turned out that the report was to be used
by the OTSp and the Minister as a basis for considering their removal from office, they
came understandably to the view that the process agreed with the Minister in the purchase
agreement had been hijacked.
252
Matters then came to a head in the week beginning 14 December 1998.
9: We discuss aspects of the appointment process in Part 8 (at paragraphs 816-820). As to the remuneration arrangements, see Part 4.
10: This issue is discussed further in Part 3 (at paragraphs 315-317).
11: The statement of intent was signed by the Minister in August 1998.
12: The funds were released to the Board on 4 December 1998, following further discussions between the Minister and the Board.
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