Part 2: Setting the Scene During 1997-98

Inquiry into certain events concerning the New Zealand Tourism Board.

1997: A New Era of Board Membership

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.

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

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

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.

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.

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

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

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.

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.

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.

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.

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

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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

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

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.

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

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)...

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.

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:

  1. operational systems – finance, administration, information technology, communications;
  2. cost structure – human resources, premises, equipment, administrative overheads, contract management etc;
  3. management framework – success criteria, decision making processes, authorisation and empowerment, strategy development and management, performance assessment, governance issues.

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.

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.

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.

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.

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.

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

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.

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.

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.

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.

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

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.

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.

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.

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.

The PWC consultant told us that in his view the report did not justify the recommendation referred to in paragraph 246.

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.

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.

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.

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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