Part 4: Finding solutions to governance challenges

Maintaining a future focus in governing Crown-owned companies.

In this Part, we outline the challenges in maintaining a focus on the future that interviewees commonly identified and that we observed.

Many of these challenges arise from the inherent tensions in the commercial model and, especially, differing expectations of how the model is supposed to work. Some Crown-owned companies had identified positive ways of addressing these tensions and of ensuring that they focused on the future. We outline some of these.

In summary, we observed that successfully focusing on the future seems to be built on good information flows supported by shared understanding and mutual respect. A shared understanding of performance should be the foundation of information flows so that monitoring and reporting does not become a compliance burden.

The challenges

Most interviewees mentioned two main challenges: the composition of Boards and finding ways to ensure that governance was focused on the future. Some interviewees identified other challenges in communications, roles, and expectations. Those who had addressed this latter group of challenges had more success in influencing government processes than those who had not.

Figure 4 shows the percentage of interviewees who mentioned each challenge during the 31 interviews that we carried out.

Figure 4
Challenges to future-focused governance that interviewees raised

Categories of challenges Percentage of interviewees who mentioned the challenge
Board composition 93
Practices of future-focus governance 73
The right skill and personality mix 70
Communication, roles, and expectations 50
Expectations of Board and shareholders 41
Sector, company, and industry understanding 37
Maintaining a future focus 37
Board turnover 37
Quality information 13
Making use of communication opportunities 13
Information flow 10

Board composition

What we heard about Board composition

Interviewees recognised that Ministerial accountability meant that Boards must hold the trust and confidence of their shareholding Ministers. Two main factors about the composition of Boards were important to our interviewees:

  • the right skill mix and team dynamic; and
  • turnover – having the flexibility to ensure an appropriate amount of Board turnover while retaining institutional memory within the company and throughout the monitoring arrangements.

Board member skill awareness

One prospective Board member researched what skills government Boards needed through publicly available information and through personal contacts. She then matched her existing skills, personality, and development goals to the needs of a particular Board and waited for an opportunity to apply to join it. She was successful.

Skill mix

Many interviewees told us that processes for appointing Board members had improved over time and were generally better at taking account of skills and relevant experience than in the past. However, some interviewees were concerned that there was not enough attention paid to the appointee's fit with the current Board culture and team dynamic.

Some interviewees told us that they had made opportunities to discuss with their monitoring agents and shareholding Ministers the particular skills and working styles they needed to achieve their strategy. Those who had done so reported success in securing the skills they sought for their Board. Others said that they were powerless in this and other accountability processes (see paragraphs 4.26 and 4.36).

In one instance, two interviewees from the same entity were concerned that, although a recent Board appointee had significant expertise in the public sector and Crown-owned company knowledge, they did not bring the strategic IT skills that had earlier been identified as lacking in members of this particular Board. (The limited availability of people with strategic IT skills was a concern shared by members of several Boards.)

The interviewees were not aware that the appointment reflected the entity's need for the new appointee's public sector skills. This example shows the importance of recognising what and when particular skills are needed, and having a shared understanding of future needs.

Turnover of Board members

Turnover of Board members was raised as a concern by 37% of interviewees. Changes in Board members, executives, monitoring staff, and shareholding Ministers created a significant risk to institutional memory not only within Boards but also in other parts of the governance system. This is because high turnover means people are in "new learning" mode and are not always able to draw on past experience when making decisions about the future.

Learning more about commercial entities in practical environments

Several CRI chairpersons told us that, collectively, their Boards visited each other’s research sites to discuss issues and ideas with frontline staff and each other. They did this to remain focused on the future and connected to the issues.

Many interviewees argued that, for Boards of more complex Crown-owned companies, there was merit in allowing directors to serve longer than the perceived norm of two terms (six years). A few interviewees also felt that a Board member leaving the Board earlier than the norm was seen as a reflection of poor performance, rather than making room for changing skill needs.

One appointed auditor we heard from also noted that uncertainty about Board appointments, including extensions to appointments, distracted people from focusing on the future. Some interviewees suggested that this problem could be dealt with by staggering the appointment process more, so that there is an overlap between new and experienced members, rather than replacing several members at the same time or in quick succession.

Our observations about the composition of Boards

Appointing Board members is one of the main ways that shareholding Ministers ensure that Crown-owned companies perform in keeping with the public sector context.

Board members of Crown-owned companies that had well set out accountability statements reported more success in securing the skill mix and team dynamic that they thought they needed for the Board. We concluded that these Crown-owned companies are proactive in communicating, whether through accountability statements, through appointment processes, or by creating communication opportunities. Because they could convincingly and consistently show how and why they needed particular skills, they were in a better position to influence appointment processes and other considerations.

In our work for this study, we found no evidence of a "right term" for Board members. We found a consistently emphasised principle that being able to contribute in the entity's current context should determine the term of appointment. Not paying enough attention to Board turnover could have a significant effect. This is especially so if changing Board membership is considered in isolation, rather than within the context of the turnover of monitoring agents and Ministerial portfolios as well.

Dedicated strategy thinking time

Airways, NIWA, Crown Fibre Holdings, and others noted that strategy thinking time was used effectively when it was early in a meeting and when members had prepared for the discussion. This discussion often included setting aside dedicated time to ask what value the Board had added to the company. This was an opportunity to focus on whether the Board had improved the company’s ability to contribute to New Zealand’s future, whether the formal strategy was being achieved, and whether the company was in a better financial position because of the Board’s actions.

Maintaining a focus on the future

What we heard about maintaining a focus on the future

Knowledge of the public sector, industry, and commercial model

All interviewees mentioned the need for Board members to have appropriate knowledge and training. Lack of institutional knowledge and knowledge gaps were recognised as risks for all Boards. Improving the knowledge of Board members is vital to managing these risks. However, 61% of interviewees raising this issue knew of Board members who were not using professional development budgets and Board members who did not always combine practical learning opportunities with paper-based reviews of the industry or entity.

More than 40% of interviewees said that, as well as focusing on the needs of individual Board members, development budgets should address the needs of the Board and the Crown-owned company. Some took a "whole of government" perspective, noting that Boards could co-ordinate needs and use collective budgets to create learning opportunities targeted at several Crown-owned companies.

Taking a long-term view through forecasting

Transpower’s long-term forecast to 2040 has transformed the way the Board considers asset management practices. The same forecast is also made available to other industry entities to ensure that they co-ordinate in the long term.

Although few interviewees wanted more training programmes, they said that directors and the Board as a whole needed practical help. Several interviewees suggested a need for more sources of practical information and advice from experienced Board members, as well as opportunities for learning from others.

At present, informal networking fills this need. Many interviewees thought that more formal arrangements could help. Introductory courses and events held by the Treasury's Crown Company Monitoring Unit (COMU), the Institute of Directors, and the New Zealand Institute of Chartered Accountants provide some opportunities. Internet-based learning, including blogs (such as, is another source. However, the interviewees said there was limited opportunity to access experienced experts who could provide the targeted, succinct, and timely help that Boards need.

Framing issues as strategic and long term

For Boards to focus enough on the future, defining success is important. This definition is unique to each organisation. However, it needs to be generated within the context of the public sector commercial model. As a result, achieving clarity and full buy-in from all Board members and other people in the governance system can be a more complex task for a Crown-owned company than for a listed or privately owned company.

Board reviews and other formal and informal reviews

Board reviews are an opportunity to reinforce a culture of future-thinking, if the review considers the achievement of future-focused goals.

Many long-serving chairpersons, Board members, and chief executives noted that the formal Board review process was taken more seriously in recent years and that valuable changes took place in Boards as a result.

For example, AgResearch and Crown Fibre Holdings used their annual Board reviews and Board paper reviews to improve the quality of debate through better information.

Thirty-seven percent of interviewees noted it is easy to lose sight of the "big picture", particularly if a matter is being debated in a high-pressure environment, such as in the media or during an inquiry. All Crown-owned companies recognised some uncertainty in their operating environment. The challenge, as one interviewee put it, is to "learn to manage through uncertainty". Interviewees suggested various ways to ensure that the Board remained focused on the future.

Our observations about maintaining a focus on the future

Some of our interviewees' suggestions for building knowledge and staying focused on the future were practical, simple, and common sense. Despite this, we found that simple and practical steps are not always put into practice. We observed that Crown-owned companies that were highly focused on the future usually had particularly uncertain environments, whether in their operating environment or because of a crisis in their organisation. These companies had thought about their purpose and how best to achieve their goals. They had analysed what the future might hold. New Zealand Post and KiwiRail, for example, stood out because they had used a major threat or crisis to stimulate positive change, rather than ignoring it.

Setting goals and expectations

Transpower, MetService, Scion, New Zealand Post, Airways, Crown Fibre Holdings, and other Crown-owned companies set Board goals or a charter to ensure that they remain focused on the strategic issues and consider the future implications of operational matters.

There are also "quiet achievers" that have been experimenting with innovation to ensure that their people and assets are best placed to respond to new opportunities, regardless of any significant threat – for example, MetService, Scion, AsureQuality, Plant & Food, and Geological and Nuclear Science.

This innovation has been recognised in case studies in internationally recognised journals. One of these described the technological innovation at MetService, New Zealand Post (Kiwibank), and Quotable Value.11

Making a new technology part of business as usual

To improve the accessibility of current weather information, MetService adopted social media early. Weather forecasts are available through social media when and where people and organisations need them. MetService has more than 11,000 followers on Twitter and about 19,000 Facebook “likes” – see our 2013 report, Learning from public entities' use of social media.

Fundamental to Board members being able to anticipate future needs is developing appropriate business and public sector knowledge. Interviewees who had tried to get exposure to practical industry and public sector contexts were better able to articulate and communicate their future needs (and had more success in influencing other parts of government, see paragraphs 4.8 and 4.36).

Crown-owned companies that made a conscious effort to reframe a matter in terms of strategic needs or long-term goals appeared to have considerable success in addressing immediate issues in a way that led to enduring solutions. Those experimenting and innovating to ensure that their people and assets were best placed to respond to new opportunities appeared to be those most likely to identify and use those opportunities.

Building capable managers

The Airways Corporation’s succession planning programme includes employing people at the senior level who are capable of doing their manager’s job and then training them to do so. This is part of the MANA (Making A New Airways) project.

Communications, roles, and expectations

What we heard about communications, roles, and expectations

For Boards and shareholding Ministers to make good decisions and for monitoring agents to provide support for decision-making, interviewees identified three interrelated building blocks: clear expectations, good information, and communication.

The public sector context in relation to the expectations of Boards and shareholding Ministers

About half of the interviewees told us that it was important for Boards to understand the expectations of their shareholding Ministers. They also said that it was important for Boards to provide those Ministers with their perspective on the major initiatives, concerns, and risks their company is dealing with. The formal process for communicating expectations includes the letter of expectations that shareholding Ministers send to Crown-owned companies each year, and a manual that outlines shareholding Ministers' expectations of the companies fully or jointly owned by the Crown.

Sharing the narrative of the Crown-owned company’s strategy

The chairperson of Plant & Food uses his consultancy techniques to help the Board and managers use the same language and shared understanding of team work.

At the direction of the chairperson of the Institute of Environmental Science and Research, the Board spent time “learning the language” of the main stakeholders.

Some interviewees said that they had sought and created other opportunities to better understand the context in which shareholding Ministers, monitoring agents, and the other main stakeholders worked. Those who sought to understand these contexts were better placed when tensions arose within the Crown-owned company, within the industry, or more widely.

Monitoring agents and Crown-owned companies told us that they were able to manage tensions and difficult situations constructively when the company, the shareholding Ministers, and the monitoring agents shared an understanding of the Board's performance and capability, and of the company's role. More effective communication occurred when Boards, Crown-owned companies, monitoring agents, and shareholding Ministers had a consistent understanding of context, processes, and expectations.

Pressured situations or those with high media exposure can complicate this clarity. Interviewees described circumstances where shareholding Ministers interacted directly with chief executives to obtain real-time information. When the Board meets less frequently, measures need to be in place to ensure that all parties understand the expectations and roles in changing circumstances.

Creating opportunities to communicate

Because the shareholding Minister(s) is the only shareholder in a Crown-owned company, annual general meetings might not always be a priority for the Minister(s) because they can communicate at any time. As a result, some Crown-owned companies have turned annual general meetings into wider stakeholder meetings.

The stakeholder event helps shareholding Ministers to prioritise attendance, so that the Minister can hear what other stakeholders want from the company as well as discussing their own expectations with the company.

Quality information

All interviewees told us that good information was essential to success. Several interviewees told us that good information relies on Crown-owned companies collecting and analysing information about strategy, performance, risk, and opportunities.

Many interviewees also said that they had seen a general improvement in Board papers over time. These interviewees said that Boards had to improve managers' understanding of the Board's role and responsibilities so that the Board received relevant information in a better format.

Board papers improved when companies had considered and debated the information that the Board might find useful for monitoring operations and assessing the achievement and development of the company's strategy. Companies that had improved the quality of information had focused on effectively condensing a lot of information. This included using summary financial information and visual aids that highlight trends and variations in results.

Experimenting with integrated reporting

New Zealand Post released its first annual report using the integrated reporting framework in October 2013. Interviewees told us that feedback on the new reporting format has been very positive from a range of stakeholders.

The report won the 2013 NZICA Best Sustainability Reporting Award.

New Zealand Post will continue to work with the integrated reporting concepts, specifically the six capitals, throughout the year and assess the benefits of the framework.

Information flow

Some interviewees described a sense of powerlessness when working in the public sector context and especially when communicating with monitoring agents (see paragraphs 4.8 and 4.26). These interviewees perceived that monitoring agencies did not always use company information as much as they could when advising the shareholding Minister. They perceived that information flows "one way". We noticed that, in some instances, companies did not know that their understanding of governance arrangements and expectations differed from that of monitoring agents.

Many of the same interviewees suggested that reporting and compliance burdens could be lower and that there were unnecessary compliance costs in the commercial governance model. Interviewees felt, for example, that the extent of Parliamentary scrutiny that they experienced, such as select committee review, varied.

In contrast, people who knew more about government processes and the public sector context were able to maximise the value gained from information used for accountability requirements. These people recognised that the requirements provided information that allows the company's performance to be scrutinised and were an opportunity to communicate with decision-makers. They used the commercial governance model and other process requirements to maximise the future potential of their company and to shape the understandings that shareholding Ministers and Parliament had of their capability and performance.

Creating opportunities to communicate

Interviewees told us that focusing on the quality of their information and communication to a wide range of stakeholders helped their companies achieve their strategies and ensure that accountability obligations were met.

Interviewees told us that, as a result, they had had considerable success dealing with many matters, including Board appointments, accountability statements, and communicating with stakeholders and other parts of government. For example, although some interviewees perceived COMU and the Treasury as a "one-way mirror", others told us how well they worked with COMU to ensure that shareholding Ministers were well briefed. They believed that two-way sharing of information, between monitoring agent and/or shareholding Ministers and the Board about the needs of the Crown-owned company and the government, enhanced achievements.

Clarify expectations and discuss performance proactively and openly
For the Ministry of Business, Innovation and Employment (MBIE), the type of monitoring relationship that would enable it to improve the quality of its advice to Ministers has the following main characteristics:
  • good two-way communication; and
  • robust discussions of future strategy and proactively sharing information about context, potential challenges, and strategic intentions.
MBIE told us how one such monitoring relationship worked in practice. Using a Crown entity as an example, it described the transformation of a relationship from “diffi cult” to “very good”. The strategies that had changed included being proactive about identifying and discussing concerns. Collectively, MBIE and the entity used the following strategies to improve matters:
  • creating opportunities to better understand each other’s perspectives, such as frequent engagement with senior management, developing a relationship with the Board (in particular, the Chair), and positive engagement at other stakeholder meetings; and
  • MBIE being transparent about how it used information from the entity, its value-adding analysis, and the “whole of government” context in which it advised the Minister.
These strategies had helped the Board, entity, and monitoring agent to understand each other’s perspectives, needs, and sources of information. They allowed the entity to test ideas for developing the entity in a safe environment that was closely attuned to shareholders’ needs.

Interviewees identified that communications strategies are particularly important when two or more Ministers are involved with the portfolio. COMU, the Ministry of Business, Innovation and Employment, and other officials might need to ensure that good communication strategies are in place when two or more Ministers consider the performance of a Crown-owned company. When only one Minister dealt with all matters about, and the policy context for, the company, it was easier for the Minister to see the Crown-owned company from a strategic perspective. When the roles were split, good communication between Ministers, officials, and Crown-owned companies became more important for ensuring that a future focus was maintained.

Our observations about communications, roles, and expectations

The success of the governance models for Crown-owned companies is built on good information that supports shared understanding and mutual respect.

Boards are responsible to shareholding Ministers for how their Crown-owned company performs and to shareholding Ministers and the public for reporting on that performance. A Board must try to give the shareholding Minister confidence that it understands the Minister's expectations. Clear and aligned understanding of roles and responsibilities allows Boards to produce concise and well-tailored information to help decision-making.

Boards, managers, shareholding Ministers, and monitoring agents need shared understanding of the inherent tensions between the public and private sector models and mutual respect for each other's responsibilities. Each Board needs a shared understanding with their shareholding Minister and monitoring agent of:

  • the context of the Crown-owned company within the public sector;
  • the Crown-owned company's objectives; and
  • the Crown-owned company's performance, including the performance and capability of the Board.

This shared understanding should form the foundation for information flows between all the parties involved in the governance of Crown-owned companies to inform future-focused decision-making and avoid becoming compliance burdens.

There are reporting and monitoring risks in the commercial model governance arrangements. Mainly, these risks are:

  • that a Crown-owned company's independence is threatened or circumscribed in some way in particular, if there is general public dissatisfaction with the Crown-owned company's performance; and
  • creating a "compliance burden" for example, through overly detailed letters of expectation and other regular and irregular reporting and information requests.

A compliance burden could arise where processes for company staff to consult, liaise, and report to monitoring staff duplicate or render ineffectual the Board's oversight and governance role.

Monitoring agencies have been improving their monitoring and ability to engage with Boards. It will be interesting to observe the improvements over time.

11: Kearins, K., Luke, B., and Verreynne, M-L. (2010), "Innovative and entrepreneurial activity in the public sector: the changing face of public sector institutions" in Innovation Management, Policy & Practice, 12(2), pages 138-153.

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