Part 2: The framework for monitoring

Improving value through better Crown entity monitoring

2.1
In this Part, we look at:

the overall framework for Crown entity monitoring;
the guidance available for Crown entity monitoring; and
how monitoring departments develop monitoring frameworks.

2.2
We expected that:

monitoring departments would use a clear framework for monitoring that is consistent with the statutory requirements and good practice guidance;
monitoring frameworks would set out roles, responsibilities, and expectations;
monitoring departments would develop frameworks in consultation with the Crown entities they monitor; and
the monitoring framework would be appropriate and proportionate to the circumstances of the Crown entity being monitored.

Summary of findings

2.3
The main guidance published by Te Kawa Mataaho for monitoring Crown entities has clear expectations for responsible Ministers, Crown entities, and monitoring departments. Other guidance is also available and a group of officials meet monthly to share and develop good practice.

2.4
The guidance provides a strong basis for monitoring departments and Crown entities to create effective monitoring frameworks.

2.5
However, we found that the monitoring frameworks themselves need improvement. We reviewed frameworks used in nine monitoring arrangements. None of these frameworks:

set out a full, clear, and documented understanding of the role and responsibilities that monitoring departments have for each Crown entity;
reflected an understanding of the Crown entity's operations and context to help define monitoring expectations or activities; or
were developed in consultation with the Crown entities being monitored to secure their engagement and buy-in to monitoring and to improve relationships.

2.6
We recommend that monitoring departments work with the Crown entities they monitor to review the monitoring frameworks. This will help monitoring departments better understand the role and context of the Crown entities they monitor and the challenges they face. It should also lead to more monitoring arrangements that are fit-for-purpose and help to establish a common understanding of each other's roles and responsibilities.

The Crown Entities Act sets out the overall monitoring framework

2.7
Crown entities are established by statute, which typically defines a Crown entity's functions, objectives, and governance arrangements.

2.8
The Crown Entities Act 2004 sets out the accountability relationships between Crown entities, their boards, and responsible Ministers. Figure 1 shows the relationship between the different groups in the Crown entity monitoring system. Most Crown entity monitoring arrangements follow the accountability and assurance relationships described in Figure 1.⁸

Figure 1
The accountability and assurance relationships in a Crown entity monitoring arrangement

Source: Te Kawa Mataaho Public Service Commission.

2.9
The Crown Entities Act defines the role, accountabilities, and responsibilities of the Crown entity board, responsible Ministers, and monitoring department. Crown entity board members must carry out their duties in a way that is consistent with their statutory obligations. A mutual understanding of each other's role is necessary to ensure that Crown entities, responsible Ministers, and monitoring departments work together effectively.

Each Crown entity has a responsible Minister

2.10
The responsible Minister's role is to oversee and manage the Crown's interests in the relevant Crown entity. The responsible Minister has statutory responsibilities such as:

appointing and removing Crown entity board members;
giving the Crown entity direction;
reviewing the operations and performance of the Crown entity;
seeking information from the Crown entity;
participating in setting the Crown entity's strategic direction and performance expectations; and
monitoring the Crown entity's performance.

2.11
Parliament also scrutinises Crown entity performance. This is usually done through select committees and the annual review process where the Crown entity board, executive, or responsible Minister is questioned.

Crown entity boards are the entity's primary monitor

2.12
A Crown entity board governs its Crown entity. The board's role is to ensure that the Crown entity's executive acts consistently with the entity's objectives, functions, and current accountability documents.

2.13
The board is accountable to the responsible Minister for the Crown entity's performance. The board is the primary monitor of a Crown entity's performance and is expected to raise significant concerns and risks directly with the responsible Minister. It must give the responsible Minister any information about the operations and performance of the Crown entity that the responsible Minister asks for.

2.14
Board members have a set of collective and individual duties, which are similar to the duties of a director in the private sector. The Crown Entities Act sets out the collective duties of board members to ensure that the Crown entity:

performs its role effectively, efficiently, and in the spirit of public service (in collaboration with other public organisations where practicable); and
operates in a financially responsible way, prudently manages its assets and liabilities, and strives to ensure its long-term financial viability.

2.15
The Crown entity's executive is responsible for the day-to-day management of the Crown entity. The executive reports to the Crown entity board about the entity's progress and performance.

Monitoring departments help responsible Ministers carry out their role

2.16
Usually, the government department that administers a Crown entity's enabling legislation is also its monitoring department.

2.17
The monitoring department supports the responsible Minister and provides advice about whether the Crown entity is performing to expectations. This includes advising the responsible Minister and administering appropriations and legislation relevant to the Crown entity.

2.18
Monitoring departments also provide advice to the responsible Minister about appointing members to a Crown entity board and manage the appointment process. For Crown agents or autonomous Crown entities, the responsible Minister appoints board members. For independent Crown entities, the Governor-General appoints the board members on the recommendation of the responsible Minister.

2.19
Monitoring departments typically monitor Crown entities that are in the same sector.

Central agencies play a role in supporting the system

2.20
The Treasury and Te Kawa Mataaho jointly administer the Crown Entities Act. The Treasury administers the part of the Act that details Crown entity reporting and financial obligations. Te Kawa Mataaho administers parts of the Act that detail establishing, governing, and operating Crown entities.

2.21
Both Te Kawa Mataaho and the Treasury provide guidance for Crown entities and monitoring departments. For example, Te Kawa Mataaho has published the main guidance for monitoring departments. The Treasury has published guidance on preparing end-of-year performance information for Crown entities.

Good system-level guidance and support is available

2.22
Te Kawa Mataaho has published a suite of guidance to support responsible Ministers, monitoring departments, and Crown entities.

2.23
The main guidance is It Takes Three: Operating Expectations Framework for Statutory Crown Entities.⁹ This guide sets out the roles, responsibilities, and operating expectations of monitoring departments, Crown entities, and responsible Ministers under the Crown Entities Act. It also provides context about how the Crown entity monitoring system works.

2.24
It Takes Three sets out four guiding principles:

Clear roles and responsibilities. All parties in the monitoring arrangement fulfil their critical roles and responsibilities. They have a shared understanding of their statutory roles and responsibilities, meet all statutory accountabilities, and follow the "no-surprises" convention.
Strategic alignment. Policies strategically align so the same principles drive relevant parties to the same outcomes. There is cross-government engagement between Crown entities and other parts of the relevant sector.
Efficient and effective monitoring. Performance monitoring, data collection, assessing and managing risk, and resource management are customised and proportionate to each Crown entity.
Trusted engagement. The parties in the monitoring arrangement commit to good practice to ensure that their relationships are trusting and productive.

2.25
The four principles are each supported by sets of "working principles". These working principles define the specific expectations of each party at a high level.

2.26
There are two more guides, one for monitoring departments and one for responsible Ministers. There is also guidance material for Crown entities on Te Kawa Mataaho's website.¹⁰

2.27
In our view, the guidance available is of good quality and reasonably comprehensive. The guidance clearly sets out the roles, responsibilities, relationships, and statutory requirements for each organisation. It also provides helpful information about why specific activities are important and assists organisations to understand how they should carry out activities.

2.28
There is also a voluntary cross-agency network of monitoring practitioners – the Monitoring, Appointments and Governance Network. It aims to build a community of practice to support and improve the performance of managers and advisers through hosting networking opportunities, sharing experiences and information, encouraging good practice, and helping the professional development of officials.

Monitoring departments are expected to develop monitoring frameworks

2.29
Te Kawa Mataaho prepared It Takes Three for responsible Ministers, monitoring departments, and Crown entities. Because of this, it is general in nature. The guide sets an expectation that each monitoring department should develop and maintain a monitoring framework that is appropriate and proportionate to the Crown entity it is monitoring.

2.30
Monitoring frameworks help ensure that there are common expectations between monitoring departments and Crown entities and that roles and responsibilities are well understood.

2.31
In our view, to be effective, monitoring frameworks should clearly set out:

the purpose of the monitoring and the value gained;
how the monitoring department will carry out its monitoring role. This includes who is responsible for monitoring, the scope of monitoring, relevant accountabilities, frequency of reports, when and why different staff will meet, and an escalation process for risks;
the information the monitoring department needs to monitor effectively. This includes the outcomes the Crown entity is trying to achieve, the information that will be used to measure a Crown entity's progress, any gaps the Crown entity should address, and an understanding of what "good" performance looks like; and
how performance issues will be managed. This should include what happens if a Crown entity does not meet performance expectations, how monitoring departments will advise responsible Ministers about how a Crown entity is managing poor performance, and the interventions available.

Monitoring frameworks need improvement

2.32
In our 2009 report, we recommended that monitoring departments have a clear and documented understanding of the monitoring role they have for each Crown entity and their responsibilities in fulfilling this role.

2.33
When we looked at monitoring frameworks for this audit, we found mixed results. Some monitoring departments had frameworks that were spread across multiple documents or were only partially documented.

2.34
There are no requirements on what form a monitoring framework should take. Monitoring departments and Crown entities can record their monitoring framework in a single document or across multiple documents. However, to be well understood and provide a useful basis for monitoring, frameworks need to be accessible for monitoring staff and the Crown entity.

Frameworks do not fully define roles and responsibilities

2.35
All of the monitoring departments that responded to our survey told us that they had a document or documents that outlined the roles and responsibilities of organisations involved in a monitoring arrangement. However, nearly half of Crown entities that responded said they did not have, or were not aware of, an agreement in place that set the monitoring and reporting requirements. This suggests that roles and responsibilities were not fully defined and understood.

2.36
We asked to see the frameworks related to nine monitoring arrangements. Overall, the documents we received varied in quality. We were typically provided with internal guidance documents about how staff members should carry out their roles. This included dates when quarterly reporting was due or when board members' terms were up for renewal or replacement.

2.37
Although these frameworks provided guidance to monitoring staff for some matters, they were not comprehensive. Frameworks did not fully document all aspects of the monitoring department's role for each Crown entity. For example, frameworks we saw:

stated that part of a Crown entity's performance would be based on measures in its Statement of Performance Expectations. However, frameworks did not cover what the monitoring department should do if performance did not meet expectations, or how to influence performance expectations that were not aligned to the responsible Minister's or the Government's priorities;
stated that a Crown entity's quarterly report is due one month after the end of a quarter. However, monitoring frameworks did not cover what monitoring staff should do if a report is delayed, did not contain the information required, or highlighted poor performance;
stated that a quarterly report should have information on risks. However, frameworks did not clearly outline how to gather information on risks or, after they were identified, how to prioritise, escalate, or track them; and
had a calendar of due dates for certain reports. However, frameworks did not specify how monitoring departments should engage with a Crown entity on certain reports, such as when a monitoring department receives a draft Statement of Performance Expectations.

2.38
When roles and responsibilities are not clear, there can be confusion. In practice, we found that monitoring departments and Crown entities rely on relationships to address any ambiguity in roles and responsibilities. Although a strong relationship supports effective monitoring, in our view formalising and documenting expectations helps ensure that they are understood by all parties.

Monitoring arrangements tend to be "one size fits all"

2.39
Crown entities and monitoring departments are expected to adapt the expectations set out in Te Kawa Mataaho's It Takes Three to their specific circumstances.

2.40
It Takes Three states that monitoring departments need to customise their approach to monitoring so it is proportionate to the profile (for example, the size, role, and risk profile) of each Crown entity (see paragraph 2.24). Customising the approach helps to ensure that monitoring does not impose an excessive burden on a Crown entity for limited benefit.

2.41
We expected to see evidence that monitoring departments understood the profile of the Crown entities they were monitoring and adapted their monitoring approach appropriately. For example, monitoring departments could change the quantity or frequency of information the Crown entity reports to them and how often officials met to discuss issues and challenges.

2.42
However, we found that most monitoring departments use the same framework for all the Crown entities they monitor. Although we saw monitoring departments sometimes try to understand the scope, scale, complexity, and risk profile of the Crown entities, we did not see them use this information to help inform the monitoring expectations or activities. For example, we saw a situation where a small Crown entity had the same reporting requirements as a Crown entity that manages significant assets.

2.43
This is consistent with the findings of at least three Performance Improvement Framework reviews we saw. One review commented that the monitoring department "needs to develop its engagement and monitoring approach to better reflect the scale, size and complexity of the individual Crown entities". Another review said that "Crown entities consider much of the monitoring is low level, with a compliance rather than strategic approach".

2.44
Many Crown entities we spoke to consider the current monitoring requirements to be an administrative burden without an equivalent benefit. We heard that one of the biggest challenges is that monitoring departments do not focus on the right things and do not fully understand the Crown entities they are monitoring. Through our survey, Crown entities told us that information requests often do not reflect realistic time frames because they have not considered a Crown entity's capacity to respond.

Monitoring frameworks are not developed in consultation with Crown entities

2.45
In our view, the issues we have described highlight the importance of Crown entities and monitoring departments working together to understand one another's roles, establish common expectations about the monitoring relationship, and test the practicality of those expectations.

2.46
The advice monitoring departments provide Ministers should be independent of Crown entities. However, a monitoring department and Crown entity working together does not necessarily undermine the independence of this advice.

2.47
In our view, monitoring departments and Crown entities working together will more likely secure engagement and buy-in to monitoring and strengthen relationships. These factors will facilitate better information sharing, make it more likely that issues can be identified early, lead to more effective and enduring solutions, and improve the quality of advice to Ministers.

2.48
Te Kawa Mataaho's guide, It Takes Three, sets similar expectations. For example, it states that monitoring departments should work with the Crown entity to ensure that performance reports provide enough detail on the entity's progress.

2.49
However, in our view, Crown entities were not adequately consulted in the development of the monitoring frameworks we looked at. We heard from Crown entities that they felt the monitoring frameworks were imposed on them.

2.50
Several Crown entity chairpersons told us that it would be helpful to document the purpose of monitoring and the respective roles and responsibilities that are agreed between individual Crown entities and their monitoring departments. We agree. In our view, the purpose and objectives of a monitoring arrangement should be set out clearly in the relevant monitoring framework.

2.51
Crown entities and monitoring departments working together to develop a monitoring framework that is consistent with statutory requirements and available guidance would provide an opportunity for monitoring departments to:

learn more about the context in which the Crown entity operates;
learn more about the nature and scope of the Crown entity's functions; and
discuss, test, and document the boundaries of the respective roles and responsibilities in the monitoring arrangements so that they are well understood.

2.52
In our view, frameworks should also be reviewed periodically to ensure that they reflect the latest expectations of responsible Ministers as well as major changes in the Crown entities' operating environment. It would be useful if these reviews took place, at a minimum, after significant change in the size, role, risk profile, performance, or leadership of Crown entities. We discuss this further in paragraphs 5.30-5.37.

Recommendation 1
We recommend that monitoring departments and Crown entities work together to clearly document the monitoring framework they will use to support their monitoring arrangements. Monitoring frameworks should at a minimum: set out the purpose and objectives of the monitoring; set out the respective roles and responsibilities for the monitoring arrangements; describe the information the monitoring department needs to monitor effectively. This should include the outcomes the Crown entity is trying to achieve, the information that measures a Crown entity's progress, any gaps the Crown entity should address, and an understanding of what "good" performance looks like; set out how performance issues will be managed. This should include what happens if a Crown entity does not meet performance expectations and when and how monitoring departments should advise a responsible Minister about how a board is managing performance; be developed in consultation with the relevant Crown entities, and take into account an entity's specific circumstances, functions, and activities; and be supported by the responsible Minister.

Recommendation 1

We recommend that monitoring departments and Crown entities work together to clearly document the monitoring framework they will use to support their monitoring arrangements. Monitoring frameworks should at a minimum:

set out the purpose and objectives of the monitoring;
set out the respective roles and responsibilities for the monitoring arrangements;
describe the information the monitoring department needs to monitor effectively. This should include the outcomes the Crown entity is trying to achieve, the information that measures a Crown entity's progress, any gaps the Crown entity should address, and an understanding of what "good" performance looks like;
set out how performance issues will be managed. This should include what happens if a Crown entity does not meet performance expectations and when and how monitoring departments should advise a responsible Minister about how a board is managing performance;
be developed in consultation with the relevant Crown entities, and take into account an entity's specific circumstances, functions, and activities; and
be supported by the responsible Minister.

8: Some Crown entities have Commissioners that fulfil both the governance and executive functions of a Crown entity. Examples include the Productivity Commission, the Commerce Commission, and the Privacy Commission.

9: This guidance is available at publicservice.govt.nz. It was last updated on 14 July 2014.

10: All guidance is available at publicservice.govt.nz.