Part 2: Legislative compliance

2.1
In this Part, we:

• provide an overview of the legislative requirements for the content of statements of corporate intent; and
• present our findings on the extent to which the public entities in our sample complied with those requirements.

Legislative requirements for the content of statements of corporate intent

2.2
The content requirements for statements of corporate intent differ subtly depending on the entity type and its governing legislation. Common elements include a requirement to set out:

• the objectives of the group (the parent entity and its subsidiaries), and the nature and scope of activities to be carried out;
• performance targets and other measures by which the performance of the group may be assessed; and
• certain financial information (such as accounting policies and planned dividend) that can help shareholders and other interested parties to assess the operation of the entity and its intended business success.

2.3
Appendix 2 provides more information on the content requirements of statements of corporate intent for each type of entity we examined.

Our findings

2.4
We compared the statements of corporate intent for the year beginning 1 July 2005 produced by our sample of 54 public entities against the coverage and content required by the applicable legislation (see Appendix 2).

Including the next three financial years

2.5
All the entity types we examined are required to include the next three financial years in their statements. Therefore, the statements we examined were required to cover the three financial years from 2005/06 to 2007/08. The intention of this multi-year coverage is to enable shareholders to understand the direction of an entity not just for the next year, but for the medium term.

2.6
Forty-two of the 54 entities we examined (78%) included the required three financial years when setting out their objectives, performance targets, and financial information in their statements of corporate intent (see Figure 2).

Figure 2
Number of financial years included in our sample of statements of corporate intent

2.7
The entities we examined that did not include the next three financial years (22% of our sample) included only the 2005/06 financial year. In our sample, seven of the 12 council-controlled organisations, and three of the 10 council-controlled trading organisations, provided information for only one financial year.

2.8
Many council-controlled organisations – including those in our sample – are small trusts or incorporated societies that run on a non-profit basis, with substantial direct operational funding from their local authorities. These types of council-controlled organisations (and their shareholders) may consider the need to provide a multi-year statement of their intentions and direction to be less important for them than for entities that are required to be a successful business.¹ However, providing a three-year forecast of objectives or intentions can provide valuable accountability between council-controlled organisations and their shareholders. For example, a trust that operates a museum can advise shareholders of its longer-term intentions to change or expand its exhibitions that might require funding changes beyond the next financial year.

Including subsidiaries

2.9
All the entity types we examined are legislatively required to include any public entity subsidiaries they may have in their statement of corporate intent.

2.10
Our sample included 37 entities that we knew to have subsidiaries. Of these 37 entities, 28 (76%) included their subsidiaries in their statement of corporate intent. The remaining nine entities with known subsidiaries did not refer to them in their statements.

2.11
Given that the legislation specifically requires the inclusion of both an entity and its subsidiaries, we expected the statements to acknowledge the subsidiaries, include them in the accounting policies, and include them in the summary of the nature and scope of the group's activities.

2.12
Where a subsidiary represents a significant or distinct trading operation of the parent entity, we also expected the statements to either:

• state that the subsidiary was covered by its own separate statement ofcorporate intent; or
• include the objectives, performance measures, and financial forecasts specific to the subsidiary as part of the parent entity's statement.

Compliance with legislative requirements for the content of statements of corporate intent

2.13
We examined how well our sample of 54 entities complied with the legislative requirements for the content of their statements of corporate intent (see Appendix 2).

2.14
The legislation about statements of corporate intent sets out some very specific content requirements (as Appendix 2 shows). However, we excluded some conditional requirements from our analysis in order to aid the usefulness of our findings:

• we excluded a requirement to cover "other matters" that are agreed by shareholders and an entity board; and
• we excluded a requirement for all the entity types except energy companies to disclose any activities for which their boards seek compensation. (Many entities may not have included this in their statements because they had no plans to seek compensation).²

2.15
The 2002 Act gives council-controlled organisations some flexibility with their statements of intent by allowing them to include information only:

… to the extent that it is appropriate given the organisational form of the council-controlled organisation…³

2.16
Some of the information requirements specific to the operation of a successful business are not relevant for council-controlled organisations that are non-profit trusts or incorporated societies. Therefore, we also excluded from our analysis of compliance by council-controlled organisations, the requirements to provide:

• a ratio of consolidated shareholders' funds to total assets;
• an estimate of the amount or proportion of accumulated profits and capital reserves intended to be distributed to shareholders; and
• the board's estimate of the commercial value of the shareholders' investment in the group.

2.17
Overall, we found general compliance with most content requirements for the statements we examined (see Figure 3). Thirty-one of the 54 statements (or 57%) included all the content that we expected given their entity types, while a further 21 statements (39%) omitted only one or two requirements. Only two of the statements we examined (4%) omitted three or more requirements that we expected them to include.

Figure 3 Extent to which entities in our sample met the content requirements for their statement of corporate intent

2.18
All but one of the statements we examined included performance measures or targets as legislatively required. However, the range of performance measures used, their ability to be usefully measured and understood, and how clearly they linked to entities' stated objectives, all varied. We discuss performance measures and targets in more detail in Part 3.

1: To operate as a successful business is a legislatively-specified principal objective of energy companies, port companies, and State-owned enterprises.

2: We noted that some entities, especially council-controlled organisations, mistakenly included operational funding or grants they receive from shareholders as compensation.

3: Local Government Act 2002, Schedule 8, clause 9(1).