Part 3: Governance arrangements

Guardians of New Zealand Superannuation: Governance and management of the New Zealand Superannuation Fund.
Key messages
  • effective leadership and strong governance have been consistent themes throughout the first four years of the Fund's operations. This is demonstrated in the approach adopted by the Guardians in selecting and monitoring external providers.
  • The growth of the Fund and the increased number of investment mandates have increased the need for formalised governance processes and operating frameworks.
  • The Guardians' 2007 Statement of Intent addresses this. The document is important for the Guardians, as it focuses on developing effective management controls with high levels of accountability.
  • The actions taken by the Guardians allow stakeholders to have confidence that adequate processes are operating to manage risks to the Fund. However, the Guardians could do more to integrate risk management in important areas of business operations.
  • The Guardians need to adopt a formal Board Charter, make it publicly available, and incorporate the measures adopted in the Charter as part of their annual Board performance assessment process.
  • The Guardians have a sound Assurance Framework for assessing decisions made by management.
  • We acknowledge the Guardians' leadership to date, and encourage them to continue to lead and work with other Crown financial institutions on a common approach, where applicable, to responsible investment.

In this Part, we outline milestones in the relatively short history of the Guardians and report on how well the Guardians' governance arrangements were working when we examined them at the end of 2007. The governance arrangements are fundamental elements of managing investment performance. For these arrangements to be functioning well, we expected to find:

  • sound governance processes;
  • adequate application of governance processes;
  • effective and timely overseeing of management decisions; and
  • governance activities relevant to measuring the Fund's performance.

We examined how the Guardians apply governance processes to meet the legislative requirement to invest in a way that avoids prejudice to New Zealand's reputation as a responsible member of the world community.

Our findings

The Guardians’ governance arrangements are consistent with the context and nature of the Fund's legislative requirements.

The Guardians’ 2007 Statement of Intent acknowledges the need to change governance arrangements in response to changes in the Fund's environment and its growth. The Statement of Intent sets out a work programme to formalise the executive governance and internal control infrastructure. Implementation of the work programme will lead to further separation of responsibilities between the Board and management.

In our view, the timing and scope of the work programme set out in the 2007 Statement of Intent was appropriate.

Our performance audit was conducted just after the work programme was implemented. As such, at the time of our audit, some elements were only recently operational or were nearing completion. Our comments relating to the newly established framework should be read in this context. Many of our recommendations relating to terms of reference, charters, documents, and policies are likely to have occurred during the implementation process. It is also likely that the Guardians will identify further changes during the process beyond our recommendations in this report.

History of the Guardians and the Fund

The Guardians' first tasks were to devise an investment strategy for the Fund, agree investment mandates, and set up infrastructure for the Fund to receive and invest regular capital contributions from the Crown. A vital part of developing the infrastructure was appointing a Chief Executive Officer and a supporting management team. This was mostly complete by the end of 2006.

The way the Fund was established meant there was initially limited distinction between the Board and management. To start with, the Board performed some management functions. This mitigated the need for a complex governance structure. However, the growth of the Fund and the increased number of investment mandates have increased the need for formalised governance processes and operating frameworks.

The Board recognised the changing focus and approved a detailed programme to establish policies and procedures and operating infrastructure as part of the Guardians' Statement of Intent for the period commencing 1 July 2007 to 30 June 2010 (2007 Statement of Intent).

Figure 3 shows major milestones in the history of the Guardians.

Figure 3
Milestones in the history of the Guardians of New Zealand Superannuation to 2007

Figure 3: Milestones in the history of the Guardians of New Zealand Superannuation to 2007.

Governance arrangements

Governance structure

The Board and four Board committees govern the Guardians’ activities. The committees are:

  • Audit and Risk Committee (established May 2003);
  • Employee Policy and Remuneration Committee (established May 2003);
  • Responsible Investment Committee (established October 2003); and
  • Private Markets Committee (established December 2007).1

This governance structure reflects common practice, the requirements of the Fund's governing legislation, and the specific nature of the Fund's investments. All members of the committees are Board members, who are appointed to the committees depending on their specific skills. All committees are governed by terms of reference approved by the Board that outline specific responsibilities, scope, and any Board-approved policies.

In April 2007, as part of the governance infrastructure development programme set out in the 2007 Statement of Intent, the Guardians established four executive committees to support the Board’s committees. Comprising members of senior management, the executive committees are:

  • Investment Committee;
  • Portfolio Committee;
  • Management Committee; and
  • Communications Committee.

The Board or the applicable Board committee approves the terms of reference of each executive committee. The terms of reference for each executive committee contain all the material requirements that we would expect in such documents. However, we found minor areas where the terms of reference could be improved to bring them into line with governance standards promulgated by a selection of global regulators.2 (Our suggested improvements to the terms of reference are set out in Appendix 1).

Recommendation 1
We recommend that the Guardians of New Zealand Superannuation update the terms of reference documents for their Board committees and executive committees to better reflect governance standards promulgated by global regulators.

Board charter and performance review

Most organisations with a board have a board charter setting out the scope of responsibilities and how those responsibilities will be met. The purpose of a board charter is to document:

  • the role of the board;
  • the structure of the board;
  • matters relating to board members;
  • the committees of the board; and
  • standards and requirements for:
    • integrity and ethical behaviour;
    • financial reporting;
    • timely and balanced disclosure;
    • communication with shareholders;
    • recognition and management of risk; and
    • performance evaluation.

A board charter records basic information about how major decisions are made, how risks are managed, and how performance is assessed. This information is generally made available to the public, as it communicates the tone of the organisation, particularly in relation to core governance functions.

There is no formal published charter for the Board. However, there is a Board Governance Statement (in place since November 2003) that covers the material elements of a board charter, apart from minor areas where the document could be improved. At the time of our performance audit, the Board Governance Statement was not publicly available, and was being reviewed. We were told that our recommendations for improvement were being incorporated as part of this review.

The absence of a formal board charter may affect the objectivity of a board's performance assessment as there are no predefined measures against which that board can be held publicly accountable. However, in making this observation, we note that the Board has engaged qualified independent consultants to carry out annual performance assessments.3

The annual performance assessment involves each Board member completing a questionnaire covering various elements of governance. This approach to performance assessment is consistent with global practice and our experience is that New Zealand boards rarely conduct this type of assessment. The most recent independent performance assessment of the Board did not identify any significant issues.

Recommendation 2
We recommend that the Guardians of New Zealand Superannuation adopt a formal Board Charter, make it publicly available, incorporate the measures adopted in the Charter as part of their annual Board performance assessment process, and use the Charter to guide their external reporting.

This is a high-priority recommendation because the published document provides assurance to stakeholders that the Guardians are complying with generally accepted standards of governance. A formal Board Charter would also provide basic measures of performance for the Board and related committees to be measured against.

Applying the governance arrangements

Governance elements and associated processes and activities

The Guardians’ governance arrangements operate at multiple levels and involve many processes and activities. Figure 4 shows the main elements of the governance arrangements and the associated processes and activities.

Figure 4
Governance elements and associated processes and activities

Figure 4: Governance elements and associated processes and acitivities.

We reviewed how the governance elements outlined in Figure 4 have been implemented. In most areas, implementation meets or exceeds the relevant generally accepted governance standards. These standards include the governance standards of national and global regulators, and standards set out in other associated publications, such as those of the Committee of Sponsoring Organizations of the Treadway Commission (COSO)4 and the Control Objectives for Information and Related Technologies (COBIT)5 frameworks. The following activities, relating to policies, were under way at the time of our performance audit:

  • training staff on the requirements and expectations of corporate policies and procedures;
  • central publication of the policies and procedures so they are available to all staff; and
  • ensuring that the procedural requirements of policies are recognised as part of the treatment of risks under the Guardians’ Risk Management Framework.

At the time of our audit fieldwork, we were satisfied that the training of staff and central publication of policies would be completed as part of the work programme for the 2007 Statement of Intent. The Guardians have since confirmed that these activities are complete.

Risk Management Framework

Risk management is a crucial component of governance. Until 2007, the Guardians did not have a formal risk management framework. The absence of such a framework from the outset of the Fund has not been ideal. However, risk has been managed by the Guardians in a structured manner.

From 2004, the Guardians have been developing risk capability. Risk papers were reviewed by the Audit and Risk Committee in 2004, 2005, and 2006. In 2007, the Guardians appointed a Chief Operating Officer to formalise risk management for the Fund in accordance with the 2007 Statement of Intent. The Chief Operating Officer has been largely responsible for developing the policy programme in 2007/08 as well as the Risk Management Framework approved by the Audit and Risk Committee in October 2007.

The primary purpose of the Risk Management Framework is to:

  • identify the major risks that could prevent the Guardians from realising their objectives;
  • understand the activities applied by the Guardians to manage these risks and determine the adequacy of the activity;
  • link the risk management activity to the operational business processes;
  • provide ongoing measurement of the effectiveness of the risk management activity; and
  • ensure that assurance from management and independent assurance providers over major risks and their related management activities is aligned with controls.

Figure 5 shows the main components of the Guardians' Risk Management Framework. It reflects the various stages of the risk management process from initial assessment through to ongoing monitoring or closure.

Figure 5
How the Guardians of New Zealand Superannuation's Risk Management Framework operates

Figure 5: How the Guardians of New Zealand Superannuation’s Risk Management Framework operates.

The main focus of the Guardians' Risk Management Framework is to document and link risk management activity throughout the operations of the Guardians. A knowledge management project has been established by the Guardians to document core processes and procedures. The Guardians told us that they intend to implement the remaining elements of the Risk Management Framework in 2008.

We reviewed implementation plans for the Guardians' Risk Management Framework and noted opportunities to further integrate risk management processes into business operations. These include:

  • preparing a risk management policy (see paragraph 8.18);
  • linking high inherent risks to processes by documenting how risk relates to processes;
  • documenting how major risks (and the process for risk assessment) relate to service level agreements with external providers (to ensure that important requirements are addressed);
  • documenting how executive monitoring and performance measures relate to the ownership and management of major risks;
  • documenting how the risk measurement criteria (that is, likelihood and effect measures) relate to the strategic objectives of the Guardians; and
  • documenting how risk management is used to assess project risks and project significance, to demonstrate that projects are managed based on risk rather than cost.
Recommendation 3
We recommend that the Guardians of New Zealand Superannuation update their Risk Management Framework so that relevant risk management activity is identified in important areas of the operations. This update should include preparation of risk plans, incorporating risk management measures into executive performance assessment, and linking risk to service level requirements and policy development.

This is a high-priority recommendation because embedding the Risk Management Framework throughout the Guardians' operations will give management and the Board confidence that major identified risks are appropriately managed. It would also help to ensure that management action plans are appropriate and are being complied with.

Risk-based internal audit

Under a good governance framework, a board typically appoints an internal auditor to review the assessment and management of risk throughout the organisation. The internal audit scope and plan of work is based on a risk assessment completed in conjunction with the organisation's risk management framework.

In the absence of a risk management framework, the Guardians' internal audit function has not had a formal process for determining a risk-based internal audit plan. Therefore, most of the internal audits have been management initiatives based on the Guardians' Statement of Intent, and risks identified by management and the Board. Internal audit plans have been approved by the Audit and Risk Committee and management.

While this approach made sense during the phased development of the Guardians’ operations, internal audit plans should start to use the Risk Management Framework to demonstrate how core assurance is provided over high risks. This approach will become increasingly important as the Guardians continue to separate the roles of management and the Board, and can be done by linking internal audit coverage to processes for managing high risks (see paragraph 3.29).

Recommendation 4
We recommend that, in their 2008/09 internal audit plan, the Guardians of New Zealand Superannuation target high-risk processes as identified by their Risk Management Framework for assurance on a set timetable (for example, every two years).

Overseeing management decisions

Role of the Board

The usual role of a board is to oversee management decision-making, and where appropriate, approve decisions of strategic importance to the organisation.

Initially, the Board was responsible for a lot of day-to-day decision-making. This included strategic decisions that we would expect the Board to be involved in and some non-strategic decisions that we would not normally expect the Board to be involved in. This meant the Board initially acted in a quasi-executive role rather than in a fully independent governance role.

Since then, the Board has progressively delegated decision-making activities to management (for example, assessing potential Investment Managers). The 2007 Statement of Intent work programme has allowed the Board to step away from operational roles with the confidence that expectations of roles are clear.

The work programme completed under the 2007 Statement of Intent set in place formal structures and processes to be applied to the operations of the Guardians. Many of these processes are measurable, but at the time of our audit were not supported by a reporting framework to measure and assess compliance. The Guardians are in the process of addressing this reporting deficiency.

Recommendation 5
We recommend that the Guardians of New Zealand Superannuation further develop and refine standard reporting to support the separation of Board and management responsibilities. This should include assessing management decision-making within predefined parameters approved by the Board.

Board capability

The Board has professional members and maintains significant institutional knowledge through its remaining founding members. Our assessment of the Board in place at the time of our performance audit was that it is effective and capable of challenging and questioning management’s technical decisions.

The Board engages with international investment strategy specialists and regularly meets with management. There is clear evidence of detailed technical analysis and challenge of management in minutes of meetings of the Board and its committees. For example, a decision to establish a Private Markets Committee resulted from discussions between the Board and management on risk matters relating to Private Markets, time taken at Board meetings to address the issues, and the need for more Board attention in this area.

The ability of the Board to oversee the Fund effectively depends on the Board’s collective competency and understanding of:

  • the Fund and the Guardians;
  • the Guardians’ investment and management strategies;
  • the business operating environment; and
  • the investment environment.

The ability of the Board to effectively question and challenge management decision-making will become more important as the founding members retire and the Fund moves into more complex asset classes. In addition, there are ongoing governance challenges facing the Guardians related to:

  • being located in New Zealand; and
  • the requirements of the founding legislation.

The governance challenges include:

  • The size of the Fund relative to the New Zealand asset management industry, which means that some investment strategies are likely to be unique within a New Zealand commercial context. This may require specialist skills not easily found in New Zealand.
  • Board members are remunerated under the Crown remuneration framework,6 which so far has not limited the ability of the Guardians to attract and retain high calibre Board members. However, in time this could limit the ability of the Guardians to attract and retain appropriately qualified international board members, should that be necessary.

Leading global regulatory bodies recommend that board member appointment, board performance assessment, and board remuneration be performed by a nominating committee comprising independent members receiving external advice.

Sections 55 and 56 of the Act require the Minister to establish a nominating committee of at least four people with relevant skills and experience, whose function is to identify suitably qualified candidates for appointment to the Board. This is different from most other Crown entities, and the provision in the Act for a nominating committee reflects the importance of the Board’s appointment. The Minister can choose only from the list proposed by the nominating committee.

We are aware that the Treasury has regular discussions with the Board Chairman about Board capability. There is also dialogue between the Board and the Minister.

The Board periodically reviews its performance using a self-assessment process, but it does not assess or benchmark its collective capability against peer organisations. In our view, an independent review of Board capability is necessary given the international investment focus of the Fund and the specialist nature of some of its investments. An independent review would help to identify any potential risks and provide the Treasury with an objective basis to assess collective Board capability. The Board is aware of the capability risks and uses an expert reference group to provide feedback on investment governance.

Recommendation 6
We recommend that the Guardians of New Zealand Superannuation assess the scope of the Board’s current and future capability by initiating a regular independent assessment of the Board’s combined capability relative to appropriate international peer organisations, and by conducting exit interviews as members retire from the Board.

This is a high-priority recommendation because the capability of the combined Board has not been compared to Boards of similar organisations. In our view, it is not possible to effectively compare the Fund, and the Board, to peer organisations based in New Zealand. In making this recommendation, we have not had access to relevant Board assessments performed outside the Guardians.

Board assurance

Assurance Framework

To fulfil its overseeing role effectively, a board relies on access to relevant information to assess management decision-making. Board assurance refers to all processes and activities that provide information about whether business processes are functioning adequately, risks are being appropriately managed, and policies are being complied with. This includes information provided by auditors, advisers, and management.

The Guardians’ Assurance Framework comprises three elements common to most organisations:

  • Management assurance, representing procedures performed by management and external providers. The specific objective of management assurance is in relation to timely and accurate organisational performance.
  • Internal assurance, representing internal audit and other independent review of controls to validate that processes and activities are performed effectively and efficiently. The specific objective of internal audit is to assess policy compliance, management of identified risks, and the adequacy of internal control procedures.
  • External audit assurance, where the Board and other relevant stakeholders derive assurance over financial controls from the work carried out by the external auditor to audit the annual financial statements.

Management assurance

A significant portion of Fund assurance comes from management assurance activities. This reflects the extensive review procedures performed by the Guardians’ Operations team to verify that the Custodian controls are working. Other assurance is also provided by the Custodian, through checks to ensure that all operational external providers are subject to regular reviews as well as specific assurance reports such as a SAS 70 report. These checking procedures occur because the Guardians recognise that they can outsource the activity but not the responsibility for the activity.

The two main operational risks for the Fund relate to transactions and valuations. Transaction risk relates to the fair and transparent exchange of cash for investment assets. Valuation risk relates to the correct valuation of assets for investment performance and portfolio management purposes.

Generally, controls over these risks are separated into primary and secondary controls. Primary controls relate to system-based controls enforcing segregation of duties, or forcing certain actions to occur before a transaction can be processed. Secondary controls relate to the independent review of processes and activities to verify completeness and accuracy. Most of the Fund's primary controls are outsourced.

The primary controls performed by the Guardians, such as payroll, cash management, and accounts payable, are less risky compared to the primary controls performed by external providers. This is because the Fund's bank accounts are separate from those of the Guardians, which reduces exposure to the risk of inappropriate transactions and activity.

The Guardians have outsourced a significant portion of the Fund's investment operations. This has implications for their assurance processes because contracts with external providers establish predefined performance measures, which are monitored and assessed by various parties.

Internal audit assurance

Deriving value from internal audit is more challenging when investment operations are outsourced. Where all processes are performed in-house, the internal auditor will be reviewing controls performed by the entity. In an outsourcing environment, the internal auditor either reviews controls, checking the work of the third party, or reviews reports provided by the third party and their auditors. There is limited internal audit review of primary controls given the outsourcing environment. The Guardians recognise this and have appropriately focused internal audit activity on areas where risk is retained in-house.

The Guardians conduct quarterly meetings with assurance providers to ensure that there is no scope overlap between internal and external audit, and that both assurance functions are fully aware of ongoing management assurance activity.

The internal audit function of the Guardians is contracted to a third party provider. This is a common approach given the specialised nature of internal auditing. However, the Guardians do not have a formal service level agreement in place with the provider. Instead, there is an existing Internal Audit Policy and a protocol agreed with the provider for initiating audits, determining scope, obtaining sign-off, and agreeing dates to complete and provide feedback. This protocol does not reflect all the relevant guidance of the Institute of Internal Auditors.

Recommendation 7
We recommend that the Guardians of New Zealand Superannuation formalise their internal audit framework by establishing an Internal Audit Charter (consistent with the guidance of the Institute of Internal Auditors), a service level agreement with their internal audit provider, and by carrying out three-yearly peer reviews of the services provided by their internal audit provider (consistent with the Institute of Internal Auditors’ peer review framework).

Governance of responsible investment

We have reviewed how the Guardians manage investment activity to avoid prejudice to New Zealand’s reputation as a responsible member of the world community.7

In the absence of a Crown-wide definition of what constitutes prejudice to New Zealand, the Guardians have applied the international responsible investment framework, as defined by the United Nations Principles for Responsible Investment (UNPRI). In taking this approach, the Guardians believe they have satisfied the intended requirements of the governing legislation. They also believe that the risk of prejudicing New Zealand’s reputation through the investment activities of the Fund is extremely low.

Responsible Investment Policy

The Guardians have developed a detailed Responsible Investment Policy in response to their obligations under the Act. The policy is benchmarked to leading global practice. It requires the Guardians to take responsible investment seriously. This includes a considerable annual commitment of resources to responsible investment activities.

We have reviewed the Guardians’ policy standards and procedures and compared them with relevant practices applied elsewhere in the public sector and to global investing entities subject to similar responsible investment obligations. The Guardians’ Responsible Investment Policy covers the Fund's requirement to have an ethical policy and a policy on voting. Other policies of the Guardians cover broader governance and Investment Manager due diligence.

Responsible Investment Framework

The Guardians' Responsible Investment Framework includes policies, standards, and procedures. The framework concentrates on acting as a responsible shareholder and fostering transparent corporate governance rather than necessarily excluding shares or securities. This is achieved by adopting standards such as the UNPRI and the United Nations Global Compact for monitoring corporate behaviour.

Monitoring for responsible investment

The Guardians engage external responsible investment agencies such as Innovest Strategic Value Advisors, Institutional Shareholder Services, and the Morgan Stanley Capital International universe of potential investments to monitor the majority of the Fund's portfolio. Mostly, these agencies look to analyse companies’ environmental, social, and governance performance.

The Guardians use this monitoring information to exercise the Fund's vote as an active shareholder, to engage with companies, or to identify companies for exclusion. Responsible investment is also achieved by managing how the Fund votes, engages, invests, and divests as a shareholder. The framework is diverse and approaches responsible investment on a number of fronts, including active shareholder actions, shareholder voting strategies, screening, and share exclusion.

Responsible Investment Committee

The Responsible Investment Committee oversees the framework. Its responsibilities include:

  • preparing, for Board consideration, responsible investment policies, standards, and procedures to meet obligations outlined in sections 58 and 61 of the Act;
  • monitoring the Guardians’ implementation of responsible investment policies, standards, and procedures on behalf of the Board through regular reporting;
  • recommending to the Board any external parties to be contracted to assist the Guardians in relation to their responsible investment obligations;
  • requesting specific guidance from management on any specific responsible investment issues that have been raised; and
  • reviewing and making recommendations to the Board on advice received on responsible investment matters.

Where the activities of an entity are found to potentially prejudice New Zealand’s reputation, there are various options for the Guardians to manage the exposure. These include engagement with the entity using shareholder groups, through to share exclusion.

Share exclusion means removal of the shares from the Fund's portfolio through divestment or specific instruction to the Investment Manager to never hold the shares in the portfolio. Share exclusion is a last resort for the Guardians. It will occur only if the Guardians cannot bring about a positive outcome through exercising their shareholder rights. Share exclusion decisions are based on receiving information from subscriber organisations specialising in investigating and reporting matters of corporate responsibility, or where the activity of a company is contrary to New Zealand law.

Managing responsible investment risk

Despite the work that has been done and the extensive management framework based on global investment principles, a number of challenges still face the Guardians in managing their responsible investment risk. These include:

  • Generally, the Fund is not a substantial shareholder in any entity in its own right. Therefore, the Guardians could be less effective if they operated alone in engagement with companies or divesting. Instead, the Guardians increase their effectiveness through collaboration with other investors. Principally, this occurs through the Guardians’ involvement with the UNPRI. The Guardians depend on these organisations making decisions that are consistent with their “avoid prejudice” requirement.
  • The Guardians have a responsibility to assess the effect of exclusion on investment risk and returns.
  • Identifying which companies to exclude can present challenges and requires a specialist screening agency (for example, checking for a company’s involvement in landmine manufacture).
  • For some asset classes, it can be difficult to understand all activities of the entity that the Fund has invested in. This can make it difficult for the Guardians to assess the appropriateness of the activity.
  • It is not always possible for the Fund to identify all activities in pooled investment structures such as unit trusts.

Communicating about responsible investment

The Guardians are often asked for information about their actions as a responsible investor. Each year, the Guardians publish their responsible investment approach and programme within the Statement of Intent. This is the Responsible Investment Policy, Standards and Procedures. However, this issue is complex, emerging, and of high public interest. We consider that the Guardians could more effectively communicate their primary responsible investment strategy of working through shareholder engagement groups to influence the behaviour or operations of an organisation in which they have invested.

Taking a leadership role in responsible investment

The Guardians meet regularly with other Crown financial institutions to discuss responsible investment, and have encouraged the other institutions to adopt the UNPRI approach. A common definition of responsible investment could evolve from this.

Recognising the significant investment made by the Guardians and their expertise in responsible investment, we consider that there is merit in the Guardians taking a leadership role in this area within the public sector. Largely, this has been occurring through the Guardians encouraging other Crown financial institutions, although this role has not been formalised within the public sector. There is also no formal initiative to harmonise how Crown financial institutions address responsible investment issues.

We acknowledge the Guardians’ leadership to date, and encourage them to continue to lead and work with other Crown financial institutions on a common approach, where applicable, to responsible investment.

We consider that, overall, the Guardians have taken an appropriate and pragmatic approach to responsible investment.

Investment screening process

The current investment screening process is limited to equity positions and sovereign securities held by the Fund. The screening process does not check for any debt securities that the Fund may hold in an “excluded entity”. This can lead to a situation where a company or entity is placed on an “excluded list” by the Guardians, but the Fund continues to hold debt or fixed interest securities in the same company or entity. We recognise that the risk of this occurring is low because the Fund currently holds only New Zealand-based corporate bonds.

Recommendation 8
We recommend that the Guardians of New Zealand Superannuation extend their screening of investments in excluded companies or entities to all security positions, including debt or fixed interest securities.

Our conclusions

Effective leadership and strong governance have been consistent themes throughout the first four years of the Fund's operations. This is demonstrated in the approach adopted by the Guardians in selecting and monitoring external providers. While our performance audit has highlighted areas for consideration and improvement, this reflects the evolution and development of the Guardians rather than any perceived deficiency in their current governance framework.

1: This committee was established by the Board and management to help the Board assess the merits of complex instruments that mostly relate to unlisted markets.

2: Financial Reporting Council of the United Kingdom, The Combined Code on Corporate Governance; Monetary Authority of Singapore, Combined Code of Corporate Governance; New Zealand Securities Commission, A Handbook for Directors, Executives, and Advisors.

3: Governance effectiveness Review - BOARDWORKS International July 2007.

4: COSO focuses on controls for financial processes. Internal controls promote efficiency, reduce risk of asset loss, and help to ensure the reliability of financial statements and compliance with laws and regulations.

5: COBIT is an open standard published by the IT Governance Institute (ITGI) and the Information Systems Audit and Control Association ISACA). It is an information technology control framework based on the COSO framework. ISACA is a global organisation with members in 160 countries. ITGI was established by ISACA in 1998.

6: The Department of the Prime Minister and Cabinet (Cabinet Office circular CO(06)08), Fees Framework for Members of Statutory and Other Bodies Appointed by the Crown.
The following discussion is from a footnote in the Auditor-General’s good practice guide Audit committees in the public sector, March 2008. It provides context relevant to the issue noted in paragraph 3.43.
Several entities have raised with us specific concerns about the remuneration levels set by the Cabinet Office’s fees framework (CFF). Many felt that remuneration levels within the CFF are too low for an entity to be able to secure the necessary skills and expertise for their audit committee to provide proper scrutiny, advice, and insight.
We share this concern. In our view, even allowing for an element of public service, the fees paid under the CFF are low. There is a limited pool of people who are willing and able to provide services at the level required for the current rates.
If government departments consider that the fees payable are too low to attract people with the required skills, they can seek advice from the State Services Commission (SSC). A Crown entity should pursue the question through its monitoring department. For departments, the CFF allows for exceptional fees (up to a prescribed limit and where clearly justified) for the chairperson and members of audit committees, subject to consultation with the responsible Minister and the Minister of State Services in each case. The SSC has advised us that such approval is rarely sought. Based on comments made in the interviews we conducted, some may see the approval process as unduly difficult, while others are unaware that it exists. If government departments consider that an exceptional fee above the CFF limit is justified, they should discuss the matter with the SSC.
The SSC has advised us that the CFF is reviewed biennially and that our concerns will be noted during the next review (in June 2008).

7: Section 58(2) of the Act.

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