Part 8: Governance Issues Arising from Our Inquiry

Inquiry into certain events concerning the New Zealand Tourism Board.


Our November 1996 report entitled Governance Issues in Crown Entities raised concerns about accountability arrangements for Crown entities. Our follow-up study in 1998 to determine what action had been taken on our recommendations concluded that overall there had been little change in the strength of governance arrangements in Crown entities.

This part of the report examines in more detail the governance issues that arose from our inquiry. Some issues reflect those we raised in our 1996 and 1998 reports. Others are more specific to the Board.

In this part of the report we:

  • assess the issues that arose against the relevant expectations set out in our 1996 report;
  • comment on the governance and accountability issues arising from the establishment of the OTSp and TSMAB;
  • comment on the use of purchase agreements for Crown entities;
  • assess the legal powers of the Minister under the Tourism Board Act; and
  • comment on the accountability requirements of the Board under the Tourism Board Act and the Public Finance Act 1989

Our Expectations Based on Our 1996 Report

The Governance Framework

In our 1996 report we noted that the principal parties involved in the governance of a Crown entity are Parliament, the Responsible Minister27, the governing body of the entity (referred to from here on as "the board"), and the entity’s management. The parties and their respective functions and responsibilities are presented graphically in Figure 3.

Figure 3
The Governance Framework for Crown Entities

Passes legislation establishing Crown entities and prescribing their functions and powers. Requires assurance on Crown entity performance. Annually examines the performance and current operations of many Crown entities. May undertake special enquiries through its Select Committees. Down arrow. Parliament Up arrow. Responds to questions, debates, reviews. Tables Statements of Intent and Annual Reports.
Appoints members of the board. Consults with the board on strategic direction and corporate objectives. Monitors board performance. Down arrow. Responsible Minister
Up arrow. Reports and gives periodic assurance. Determines strategic direction within parameters agreed with the Minister.
Sets goals and objectives. Determines organisational policies. Reviews management performance. Down arrow. Management Up arrow. Reports, consults and seeks direction. Develops proposals for board consideration.

Other key parties to the governance framework are the government department responsible for administering the Vote and any agent of the Minister appointed to assist him or her to meet their accountability requirements.

The Crown has both an ownership and a purchase interest in a Crown entity. The Responsible Minister is responsible for ensuring that the entity is managed in accordance with the Crown’s interests. The responsibilities of the Responsible Minister usually derive from the governing legislation of the entity and Part V of the Public Finance Act 1989.

The general role and responsibilities of the Vote Minister as purchaser of an entity’s outputs are legislatively defined in relation to the Estimates of Appropriations in section 9 of the Public Finance Act 1989.

In respect of the Tourism Board, the Minister of Tourism is both the Responsible Minister and the Vote Minister.

The board is responsible for setting the strategic direction of the organisation in accordance with the interest of the Crown as owner (which includes Government policy), and for overseeing the resources which are entrusted to it. The board must account to the Responsible Minister, and ultimately Parliament, for the discharge of these stewardship responsibilities.

The prerequisites for effective governance of a Crown entity include:

  • a role for each of the parties which is clearly understood by all parties;
  • constructive relationships based on those roles;
  • an effective board; and
  • a regime for monitoring entity performance which reflects a balance between the interests of Parliament, Crown oversight, and the autonomy of the board.

Our Findings in Relation to the Board

The Minister and the Board had in place a range of accountability and reporting arrangements, as outlined in Part 1 (paragraphs 124-135).

The Board now produces an annual statement of intent, but no separate section 8 annual statement. In July 1998 the Board submitted a draft statement of intent to the Minister as required by section 41C of the Public Finance Act 1989. The Minister approved this document in August 1998. This approval was not communicated to the Board, and despite being sent to the Bills Office the statement was not presented to the House as required by section 41F.

Reporting requirements have been specified in the purchase agreement and the statement of intent. The Board must report to the Minister quarterly. The 1997-98 statement of intent specified the reporting deadlines for various documents, and required the Board to keep the Minister informed about the Board’s performance as necessary and appropriate.

The Minister and the Board met on regular occasions. The Minister also met with members of the Board’s executive team over particular projects – e.g. the South American mission. However, no formal relationship agreement existed between the Minister and the Board.

The current Chairperson of the Board, Mr Allport, told us that the Board is now working with the Minister on a relationship agreement. We encourage them to conclude the agreement speedily.

Appointment Process for Members of Boards

As part of the process of ensuring clarity of roles and responsibilities, we expect a Responsible Minister’s expectations of a Crown entity board to be explicitly conveyed to the Chairperson upon appointment, and periodically thereafter as the Minister’s priorities change.

Our Findings in Relation to the Board

Evidence from Mr Mogridge suggested that the letter he received on appointment by the Minister in May 1997 had limited usefulness in providing guidance to him as the new Chairperson, particularly to "establish the ground rules". We also noted a number of administrative errors in the letters of appointment of both Mr Mogridge and Mr Wall.

Other Board members commented to us about the limited utility and relevance of their letters of appointment.

Subsequently, in August 1997 a Cabinet Office Circular28 was released which sets out in detail information to be included in letters of appointment to members of statutory, commercial and other bodies appointed by the Crown. This circular is comprehensive and provides useful guidance to Ministers and departments responsible for the appointment process.

In 1998 the State Services Commission conducted a study of the appointment processes for a number of Crown entity boards. The results highlighted a wide range in the types of information made available to members on appointment, and the need for further improvement in meeting the guidelines for the appointment letter set out in the Cabinet Office Circular.

Induction for Board Members

We expect that members appointed to Crown entity boards will receive an induction to assist them to become fully aware of their responsibilities. In addition, we expect periodic briefings to be organised for their members on governance issues. Such briefings might cover changes in legislation, evolving board management practices, developments in the industry or sector, public policy matters, and performance reporting procedures.

Our Findings in Relation to the Board

The outcome of the events of 14-18 December 1998 (see Part 3), which resulted in the resignation payments to the former Chairperson and Deputy Chairperson (see Part 3), reinforces the concern we expressed in our 1996 report about the need for Responsible Ministers and members of Crown entity boards to be familiar with public sector legislation, procedures and practices.

The Ministry of Commerce (the administering department for Vote Tourism up to 30 June 1998) told us that in 1997 it provided the Board with a document entitled Guide to Accountability and Relationship Framework for Crown Entities. The Ministry also briefed the Board in early 1997 – as part of developing the 1997-98 purchase agreement – on the role of the Minister and the Board’s accountability requirements.

This evidence was confirmed to us in a submission on behalf of several Board members.

We re-emphasise the importance of the Minister’s advisers giving ongoing consideration to their role in assisting or offering support to Crown entity boards on these matters.29

The Role of Advisers

Our 1996 report highlighted the important role that advisers can play in assisting the Responsible Minister in monitoring board performance.

On behalf of the Responsible Minister, advisers can:

  • interpret and advise on the Crown’s interests, using their skills to analyse Crown entity issues;
  • establish a monitoring regime, support the Minister in carrying out monitoring, analyse Crown entity performance, and recommend courses of action for the Minister;
  • promote a flow of information between the board and the Minister;
  • act as the Minister’s agent in discussions on the statement of intent and other accountability documents;
  • handle the administrative aspects of matters such as the tabling of accountability documents and the appointment of board members; and
  • consult with central agencies and other departments as necessary on public policy matters.

We also expect that Responsible Ministers would:

  • have the means to carry out their own reviews of Crown entity performance; and
  • use those reviews, where necessary, to ensure continued alignment of the board’s objectives with the interests of the Crown.

It is important that the functions which a Responsible Minister expects a department or other adviser to perform on their behalf are clearly understood by the board, the Minister and the advisers themselves, and are formally documented.

Our Findings in Relation to the Board

On 1 July 1998 the OTSp took over from the Ministry of Commerce the role of providing policy advice to the Minister in relation to the purchase of outputs from the Board.

Our main observation is that there was a lack of understanding between the key parties of the role and responsibilities of the OTSp. Board members told us that they were not aware of the role and function of the OTSp, and were concerned that it might be carrying out functions that the Board itself was charged with carrying out. The Board was not consulted as to what part the OTSp should play in the Board’s governance framework, or what relationship it should have with the Board.

On the other hand, the Director of the OTSp told us that he had several meetings with the Board (when he first took up the position) where the role of the OTSp was discussed. The 1998-99 purchase agreement between the Minister and the Board also refers to the role of the OTSp in monitoring the Board and assisting the Minister to meet his accountability requirements with respect to the Board’s activities and performance.

The Minister’s requirement in 1998 for a review of particular aspects of the Board’s operations – overheads and fixed costs and the Board’s non-marketing functions – was in our view a reasonable request consistent with our 1996 recommendations.

We are aware that the transport sector, for example, requires an independent review to be undertaken of Crown entities in that sector on a three-yearly basis to assess quality management systems, output quality, and cost-effectiveness. The Minister of Transport approves the terms of reference for the audit, and clearly includes the requirement for the review in the performance agreement.

The Minister and the Board should consider whether periodic performance reviews of the Board should be undertaken by an independent person.

Administrative Governance and Accountability Arrangements

Public Service Accountability Framework

The State Sector Act 1988 and the Public Finance Act 1989 are the cornerstones of the accountability framework for the public service.

Section 32 of the State Sector Act makes the chief executive of a government department responsible to the appropriate Minister for:

(a) The carrying out of the functions and duties of the Department (including those imposed by Act or by the policies of the Government);

(b) The tendering of advice to the appropriate Minister and other Ministers of the Crown;

(c) The general conduct of the Department; and

(d) The efficient, effective, and economical management of the activities of the Department.

Section 41 of the State Sector Act permits the chief executive to delegate to any other person (being a member of the senior executive service or an employee) any of his or her functions or powers under the Act or any other Act. However, the chief executive remains responsible for the exercise of those functions or powers.

Section 33 of the Public Finance Act 1989 makes the chief executive of a department responsible to the Responsible Minister for:

  • the financial management and financial performance of the department; and
  • compliance with the financial reporting requirements of the Public Finance Act or any other Act.

In the case of the OTSp the Cabinet agreed to its establishment as a semi-autonomous body, alongside the Department of Internal Affairs (DIA). While the minute of that decision does not specify the reporting and accountability relationships, the accompanying paper states that the head of the OTSp will have a direct working relationship with the Minister. That paper (prepared by the Ministry of Commerce and signed by the Minister) did not discuss whether the proposed roles and responsibilities were consistent with the accountabilities envisaged by the State Sector Act. We are not aware of these issues being otherwise drawn to the Cabinet’s attention.

The Office of Tourism and Sport

Figure 4 on page 80 sets out the governance and accountability arrangements for the Board and the place of the OTSp in those arrangements. It also compares these arrangements to the departmental model as envisaged by the State Sector Act 1988 and the Public Finance Act 1989.

The OTSp has its own purchase agreement with the Minister. The parties to the 1998-99 purchase agreement are the Minister of Tourism, the Minister of Sport, Fitness and Leisure, the Director of the OTSp, and the Secretary for Internal Affairs. The agreement was also noted and signed by the Chairperson of the TSMAB.

The parties’ respective responsibilities are:

  • The Director of the OTSp is responsible for the operations of the OTSp and reports directly to the Minister. The Director is accountable to the Minister for the delivery of the outputs specified in its purchase agreement to the quality, quantity, and cost specified.
  • The Secretary for Internal Affairs is the employer of the Director under the State Sector Act 1988. He is accountable to the Minister for the appropriations in Vote Tourism and Vote Sport, Fitness and Leisure.
  • The Director of the OTSp acts as the Minister’s agent in negotiating the purchase agreement between the Minister and the Board, and assists the Minister to monitor the Board’s delivery of outputs.
  • The Director of the OTSp is responsible for providing advice to the Minister on tourism and sport. Despite this arrangement, the Secretary for Internal Affairs remains responsible under the State Sector Act 1988 for carrying out the functions and duties of the department, including tendering advice to the Minister.
  • In terms of section 33 of the Public Finance Act 1989 the Secretary for Internal Affairs is responsible to the Responsible Minister for the financial management and financial performance of the department (including the OTSp), and for compliance with any relevant statutory financial reporting requirements. This includes the role of administering the relevant Votes. The Responsible Minister is in turn accountable to Parliament for the financial performance of the department.

We expected that the Secretary for Internal Affairs (given his responsibilities under the State Sector Act 1988 and the Public Finance Act 1989) would, at the very least, have had some oversight of the process involved in the Board’s accountability documentation. This was not the case.

The Secretary told us that in terms of his Public Finance Act responsibilities the DIA acted to ensure that a "purchase agreement" existed before any money was paid to the Board. He also said that his staff were responsible for the advice that the Minister "roll over" the 1997-98 purchase agreement from July 1998 until the new agreement was signed. In addition, when the monthly financial schedule changed significantly his staff obtained the Minister’s agreement before paying the additional money to the Board.

In our view there is an inextricable link between:

  • providing advice on the accountability documentation under the State Sector Act; and
  • supplying funding to the Board, being accountable for Vote Tourism, and meeting the requirements of the Public Finance Act 1989.

Figure 4
Administrative Governance and Accountability Arrangements for the New Zealand Tourism Board

Figure 4.

We do not question the Government’s decision to transfer the tourism policy unit from the Ministry of Commerce to the DIA and establish the OTSp (see paragraph 113). However, establishing the OTSp alongside the DIA carries with it some inherent risks that need to be carefully managed:

  • The accountability arrangements are inconsistent with those required by statute. The inconsistencies weaken accountability.
  • The direct reporting by the OTSp to the Minister lessens the practical involvement of the Secretary for Internal Affairs in monitoring and managing the performance of the semi-autonomous body, yet the Secretary remains legally responsible for doing so.

The Tourism and Sport Ministerial Advisory Board

At the time of our inquiry there were slightly differing views among the key parties about the role of the TSMAB and the primary recipient of its advice. According to its terms of reference (Appendix 2, page 101):

The prime function of the Board is to provide informal, candid and confidential advice to the Minister of Tourism and Sport and the Director of the Office of Tourism and Sport on the development and direction of tourism, sports and events-related policy.

The Minister in his evidence told us that he saw the role of TSMAB as being to provide strategic focus and support to the OTSp, rather than to provide advice to the Minister. The Director of OTSp confirmed this. However, one of the roles of the TSMAB as set out in the organisational statements of OTSp (Appendix 2, page 101) is to provide the Minister with critical feedback on the operation of the Board and other agencies that fall under the jurisdiction of the Minister’s tourism, sport and millennium celebration responsibilities.

That role is in conflict with evidence given to us by the Secretary for Internal Affairs and by the Minister. The Minister also indicated to us that he did not expect TSMAB to have a role in providing a review of the operations of the Board. He regarded this as being a non-strategic area for TSMAB. Further, the Minister said that he was surprised that the Director of the OTSp forwarded to TSMAB a copy of the PricewaterhouseCoopers report in advance of it being made available to the Board (see paragraph 245). The Director considered it to be appropriate, given the role of TSMAB to provide critical feedback on the operations of the Board.

Members of the Board told us that they were not consulted about either the establishment of TSMAB or its terms of reference. The Secretary for Internal Affairs commented in writing to us that in February 1998 (at the time that the proposal to establish the OTSp was being formulated for a Cabinet decision) he verbally advised the Minister to inform the Board about the proposed role of TSMAB. The Minister has no recollection of receiving this advice. In our view it would have been preferable for the Board to have been consulted.

We are concerned that there are differing views about the focus of TSMAB and who is the primary recipient of its advice. The Minister and the Secretary for Internal Affairs had differing expectations about the Secretary’s role in the process of establishing TSMAB – in particular, managing the relationships among key stakeholders. The Secretary had no part in proposing or appointing the members of TSMAB.

There is no question that the Minister was fully entitled to establish and appoint such an advisory body. Nevertheless, the similarities between the role and functions of TSMAB and the Board, and other Crown entities in the tourism and sport sector, ought to have been clarified at the outset.

The Use of Purchase Agreements for Crown Entities

The use of purchase agreements for Crown entities originated in the June 1992 report of the Treasury’s Working Party on Output Definition. Their development has in some respects been beneficial. For example, purchase agreements have given Vote Ministers an opportunity to define their performance expectations for Crown entities and specify their requirements concerning performance monitoring.

However, the use of purchase agreements by Ministers and Crown entities also raises issues which are not at present included in the Minister-department relationship. Almost invariably, the relationship between a Minister and a Crown entity is governed by statute. A purchase agreement is not necessarily a requirement of such statutes.

This was recognised by the Working Party, which acknowledged that a purchase agreement need not repeat information provided in other accountability documents.

The Cabinet accepted the Working Party’s recommendation that, as a minimum, the following points should be covered either in a purchase agreement or in other accountability documents:

  • description of outputs;
  • term of the agreement;
  • cost of the outputs;
  • performance measures and standards;
  • procedures for assessing performance;
  • reporting requirements;
  • dispute resolution procedures;
  • rewards and sanctions; and
  • procedures for amending the agreement.

We think that there is a particular need for guidance to Crown entities on how these minimum requirements should be addressed in the context of an entity’s statutory accountability documents, and whether a separate purchase agreement is also necessary. This issue is explored in greater detail, in respect of the Board, in Appendix 10 on pages 135-149.

A further point of concern arising from our inquiry is the need for adequate and appropriate dispute resolution procedures. Several Board members complained to us about the lack of a suitable means for resolving the differences which had emerged between the Board and the Minister. The provisions for dispute resolution contained in the accountability documents of the Board were relatively undeveloped.

By comparison, in the transport sector the performance agreement between the Minister of Transport and the relevant Crown entity outlines a process for conflict resolution and dealing with non-performance. The relevant clauses of the agreement set out a process which the parties agree to abide by in the event that the Minister is not satisfied with the entity’s performance with respect to any matter covered in their agreement.

In our view, the Minister of Tourism and the Board should consider including in the relevant accountability document a dispute resolution process.

Finally, we stress the importance of discussions and negotiations between Ministers and Crown entities occurring in sufficient time for accountability documents to be in place before the start of the reporting period to which they relate. The 1998-99 purchase agreement between the Board and the Minister was not signed until 2 November 1998. The withholding of funds from the Board might have been mitigated if negotiations on the purchase agreement had been scheduled well in advance of the beginning of the financial year.

In response to our 1996 report, the State Services Commission and the Treasury have jointly undertaken a programme of work covering:

  • the role of government departments in relation to Crown entities;
  • Crown entity statements of intent;
  • Crown entity appointment and induction procedures; and
  • Crown entity organisational form.

This work is ongoing. However, as yet there is no generic guidance available about purchase agreements which is specifically directed at the Crown entity sector.

Ministerial Control Over the Board

One of the principal issues underlying the dispute between the Board and the Minister is the extent to which the Minister may exercise control over the activities of the Board.

The Board has taken the view, supported by advice from its solicitor, that it is an independent statutory entity responsible to Parliament for carrying out the Board’s statutory object (see paragraph 107). That legal advice claims that the Board has separate responsibilities under its Act which make it accountable in its own right for developing, implementing and promoting strategies for tourism.

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

  • approving the Board’s section 8 annual statement, its statement of intent under the Public Finance Act 1989, and its "purchase agreement"; and
  • giving formal policy directions to the Board under section 9 of the Tourism Board Act.

In the Board’s view the Minister has no other authority to direct the Board insofar as its policies and operations are concerned. In particular, the Minister does not have any over-riding decision-making power.

The Minister, on the other hand, has taken the view that he is responsible for ensuring that taxpayer funds are spent appropriately. He therefore has 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 OTSp. The OTSp has in turn relied on advice from the Crown Law Office in relation to aspects of the requirements for purchase agreements.

In the course of our inquiry we received a considerable amount of evidence, as well as submissions on behalf of the Board and the OTSp, relating to the issue of ministerial control over the Board. It is apparent that a state of confusion has arisen – in large part as a result of the differing requirements of the Tourism Board Act and the Public Finance Act 1989 (as amended in 1992 and 1994), and the development of the purchase agreement regime.

These differences have contributed significantly to the approaches of the Minister and his advisers on the one hand and the Board and its advisers on the other. The differences have made it difficult for the parties to reach agreement on the basis for the appropriate relationships between them.

We 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.

The governance issues between the Minister and the Board – which are ongoing – should in our view be resolved quickly. This could be achieved either:

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

To assist in a resolution we have included as Appendix 10 (pages 135-149) an analysis of the statutory requirements prepared by our counsel. In summary, this analysis concludes that:

  • In terms of the Tourism Board Act the Minister does have power to determine the services provided by the Board in the performance of its functions. The Minister may exercise this power principally through the approval process for the Board’s section 8 annual statement and his authority to direct the amendment of that statement at any time.
  • The section 8 annual statement and the statement of intent (required by section 41D of the Public Finance Act 1989) are two distinct documents with different purposes, contents, and processes for their adoption. They should not have been combined into one document (see paragraph 131).
  • The section 8 annual statement is an accountability document between the Minister and the Board identifying the services which the Board will provide each year and the costs to be incurred in doing so. The annual statement may therefore constitute a "purchase agreement" between the Minister and the Board, and no separate "purchase agreement" would then be required.


We conclude that the following governance issues were significant contributing factors towards the breakdown of the relationship between the Board and the Minister in 1998:

  • The lack of a common understanding of the respective roles and responsibilities of the Minister, the Board, the OTSp, and TSMAB.
  • The lack of a relationship agreement between all the parties involved.
  • A lack of knowledge about the relationship between the various accountability requirements of the Tourism Board Act and the Public Finance Act 1989.
  • The belief of the parties that a separate purchase agreement was required.
  • The absence of sufficient guidance and understanding (either in statutory form or by administrative direction or protocol) about either the content of, or the process for negotiating, a purchase agreement between a Minister and an entity whose relationship is otherwise governed by statute.

The governance issues that arose between the Minister and the Board may be an extreme example. We have no doubt that some of those issues relate to the personal styles and interests of the individuals involved. All parties were clearly committed to achieving the best possible outcomes for New Zealand tourism.

The key parties disagreed about the means and the timing of changes to the strategic direction of the Board. It is not possible to say that anyone was right or anyone was wrong.

One of the fundamental prerequisites for effective governance of a Crown entity is a role for each of the parties which is clearly understood by the other parties.

Issues for the Future

In the last three years we have reported twice to Parliament outlining our concerns about governance arrangements for Crown entities.

Our 1998 report stated that central agencies need to take a look at their role and responsibilities in the Crown entity sector with respect to safeguarding the Crown’s interests, by providing quality advice on issues of ownership and financial management. We 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.

In our view, some of the issues that arose in relation to the Board are symptomatic of wider problems with governance arrangements that can arise in Crown entities:

  • the need for information and training for Crown entity board members in public sector procedures and practices, particularly upon the induction of new members;
  • the need for clarity on the roles and responsibilities of all key parties to the governance framework, perhaps by way of a relationship agreement; and
  • the need to resolve relationships between the range of accountability documents.

These are matters that require ongoing improvement both at the sectoral level and for specific Crown entities.

We also have concerns about the role of semi-autonomous bodies in the departmental accountability framework. Central agencies and the relevant departments need to ensure that the risks associated with this variation to the departmental model are managed carefully.

27: For the purposes of the Public Finance Act 1989 "Responsible Minister" means:

  1. In relation to a department, the Minister or Ministers for the time being responsible for the financial performance of the department:

  2. In relation to a Crown entity in respect of which there are shareholding Ministers, those shareholding Ministers:

  3. In relation to a Crown entity (other than one of the kind described in paragraph (b) of this definition), the Minister or Ministers for the time being responsible for the financial performance of a Crown entity:

28: CO (97) 10, 6 August 1997.

29: In the case of the Board we would expect the OTSp to perform this function with the concurrence of the Minister.

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