Part 1: Introduction

1.1
It has been more than 25 years since New Zealand set up a commercial model for governing and delivering some public services. Since then, different governance arrangements for entities using this model have evolved. However, all have fundamental features to allow Boards to manage Crown-owned companies for the benefit of all New Zealanders and for shareholding Ministers to be responsible to Parliament for the entity's performance.

1.2
This commercial model sought to transform the organisations that delivered those services into Crown-owned companies that are exposed to market disciplines and governed by boards of directors (Boards) that can focus on their company's future.

1.3
This report has been prepared as part of our work towards our 2012/13 theme, Our future needs: is the public sector ready? The future-focused governance of Crown-owned companies is important in helping the public sector to meet our future needs. Although there are many aspects to effective governance, we have focused on the ability of Boards and the governance system to support "future thinking" and to realise and adjust their company's strategy accordingly. This report focuses on examining how people are maximising, and can further maximise, the current legal arrangements and governance conventions.

1.4
The purposes of this report are:

• to set out for Parliament and the public some of the challenges in maintaining a future focus in governance; and
• to share lessons from members of the Boards of Crown-owned companies in dealing with these challenges.

1.5
The Crown-owned companies that we look at in this report – State-owned enterprises (SOEs), Crown research institutes (CRIs), and selected other Crown companies – control a sizeable portion of Crown assets, liabilities, and revenue. Together, these companies have:

• revenue of about $5.1 billion;
• liabilities of about $20 billion; and
• assets of about $28.3 billion.¹

1.6
These Crown-owned companies provide strategically significant services. For example, they ensure that:

• scientific expertise is used to increase economic growth;
• there is infrastructure for our electricity consumption; and
• our meat exports are safe.

1.7
In 2012, the workforces of the Crown-owned companies that we discuss in this report ranged from the 11 staff of Animal Control Products to the 7029 staff at New Zealand Post. The first SOEs were set up in 1987 and the first CRIs in 1992. Many of these entities were formed by commercialising previous public sector functions. Since then, new technologies or consolidations and reconfigurations of other functions have resulted in new Crown-owned companies, such as Plant & Food (2008) or Crown Fibre Holdings (2009).

1.8
Further changes are also occurring. For example, while we were preparing this report, decisions were made to wind up Learning Media and to sell Kordia's retail service provider, Orcon, to private investors. In the longer term, New Zealand Post has been considering how best to respond to declining postal use. KiwiRail has grappled with the appropriate classification of its assets. It has separated its public-good assets and the assets that can reasonably be expected to provide a return on investment. Also, some Crown-owned companies have struggled with the global financial crisis, and others have had new threats and new markets emerge.

How we carried out our special study

1.9
To get a range of perspectives for our special study, we considered three types of Crown-owned companies: SOEs, CRIs, and a selection of other Crown companies. We excluded those entities that already have a mixture of public and private shareholders (for example, Air New Zealand) and those that have been identified as suitable for partial sale to private investors (for example, Mighty River Power and Solid Energy). Figure 1 lists the Crown-owned companies covered in this report.

Figure 1
Crown-owned companies covered in this report

1.10
This study draws on interviews, insights from experts, and analysis of written documents. We conducted 31 interviews. They included the chairpersons of all 20 entities and a selection of directors (experienced and new), chief executives, and monitoring agents.² We asked our appointed auditors for their insights, and other people involved in governance gave us their thoughts. We also analysed the financial statements of the Crown-owned companies in this study and the results of our recent audit work.

1.11
Interviewees and others were asked to discuss their experience not only in their entity but also in other companies, in public entities, and internationally. Westlake Governance, a governance consulting business, helped us with interviews and in ensuring that this report was relevant to Board members.

1.12
Our interviews were open. They were shaped by the matters that those we spoke to were willing to share and thought relevant. We sought views on:

• how to govern effectively with a focus on the future;
• what being part of the public sector means for Boards;
• challenges in focusing on the future and solutions to those challenges; and
• managing risks and access to capital with the Crown as shareholder.

1.13
In Part 2, we outline the general governance and accountability arrangements for Crown-owned companies. We also describe our previous reporting on these types of entities.

1.14
In Part 3, we consider what being part of the public sector means for Boards. This includes:

• managing the Government's long-term investments;
• comparing their entity's performance to comparable businesses; and
• having a clear purpose.

1.15
In Part 4, we discuss the feedback from our interviews about focusing on the future, the challenges that Boards commonly face, and suggested solutions to those challenges. This includes:

• the composition of the Board, including:
  • Board members' skill mix and team dynamic; and
  • the turnover of Board members;
• maintaining a future focus, including:
  • understanding the sector, industry, and commercial model; and
  • framing issues as strategic and long term; and
• communications, roles, and expectations, including:
  • the public sector context to the expectations of the Board and of shareholding Ministers;
  • quality information and the flow of information; and
  • creating opportunities to communicate.

1.16
In Part 5, we set out our analysis of Crown-owned companies' financial statements and the results of recent audits that shed light on the entities' capacity to respond to future needs. This includes:

• trends in managing assets; and
• being able to manage uncertainty, including:
  • the entity's proportion of fixed costs;
  • the entity's ability to meet current liabilities from available resources; and
  • the entity's ability to finance operations and investments (and deliver shareholder returns).

1: This includes Kiwibank's assets and liabilities– see Crown Ownership Monitoring Unit (2012), 2012 Annual Portfolio Report, New Zealand Treasury.

2: Monitoring agents (mainly the Crown Company Monitoring Unit within the Treasury and the Ministry of Business, Innovation and Employment) monitor the Government's investment in Crown-owned companies, help with the appointment of directors, and provide performance and governance advice to shareholding Ministers.