Part 5: Building monitoring capability

5.1
In this Part, we discuss:

• the inherent tensions in the Crown entity monitoring system;
• maintaining monitoring capability in monitoring departments;
• the need for strong system leadership; and
• the need for regular reviews of how monitoring arrangements are operating.

Summary of findings

5.2
When we spoke with people who were directly involved in Crown entity monitoring arrangements, we observed a clear desire to improve the effectiveness of these arrangements. This included improving transparency and accountability to responsible Ministers and providing better advice and support for Crown entities so they can provide more effective services to New Zealanders.

5.3
Nevertheless, there was a perception that little progress had been made to address the recommendations from our 2009 report, How government departments monitor Crown entities.

5.4
There are tensions that responsible Ministers, Crown entities, and monitoring departments must manage. Monitoring departments will sometimes need to challenge Crown entities while respecting the arm's-length nature of Crown entity governance and maintaining a constructive working relationship. Monitoring departments describe this tension as a "critical friend" relationship.

5.5
In our view, if the right balance is not achieved, the quality of the monitoring activity is undermined. Currently opportunities for monitoring departments to properly understand Crown entities' business and provide meaningful advice and support to improve Crown entities' performance are being missed.

5.6
Compounding these difficulties, monitoring departments can find it challenging to retain staff with monitoring capability. We regularly heard that staff turnover was an issue. Because monitoring relies on an individual's knowledge and connections with the Crown entity, the monitoring department's long-term relationship with a Crown entity can be undermined if those individuals leave.

5.7
Stronger system leadership could help address these challenges. Although guidance published by Te Kawa Mataaho is used widely, monitoring departments and Crown entities told us they need further support to implement this guidance, particularly for developing and maintaining the "critical friend" relationship.

5.8
Responsible Ministers, Crown entities, and monitoring departments should review monitoring arrangements regularly to ensure that they remain fit for purpose.

There are inherent tensions in the Crown entity monitoring system

5.9
At the core of the Crown entity monitoring system are inherent tensions. For example:

• Monitoring departments and Crown entities need to work closely to develop monitoring frameworks and common expectations. However, a monitoring department must retain enough independence to take an objective view of the Crown entity's performance.
• To be an effective "critical friend", monitoring departments must be prepared to challenge the information that Crown entities provide. However, at the same time, they also need to respect the arm's-length relationships a Crown entity has with its responsible Minister.
• Crown entities highlighted that one of the main challenges in the monitoring arrangement was that monitoring departments lack understanding of the Crown entities' context and business. Despite this, some Crown entities were reluctant to share too much information because they were concerned that the monitoring department would micromanage their business.
• The primary oversight and monitoring relationship for a Crown entity is with its governance board. However, part of a monitoring department's role is to provide advice to the Minister about whether board governance is effective. To form this judgement, the monitoring department might need to see some similar information as the board to assess whether the board is carrying out effective oversight.
• The board of a Crown entity receives information about the performance of a Crown entity that is more detailed and up-to-date than the information a monitor receives. We accept that it can be challenging for monitors to provide a totally accurate and up-to-date assessment of entity performance. However, this is why ongoing dialogue between monitors and Crown entities is important.

5.10
Ministers we spoke to acknowledge the complexity in balancing these tensions. They told us that a framework that enables Crown entities to operate at arm's length is good and emphasised that their relationship with the board chairperson is the primary source of assurance about a Crown entity's performance.

5.11
The difficulty in balancing these tensions appears to be a barrier to monitoring departments and Crown entities working together to actively improve their monitoring relationship. For example, monitoring departments routinely accept information provided by Crown entities and report it to responsible Ministers without substantively challenging the information. We saw instances where both monitoring departments and Crown entities appeared indifferent to the continued use of inadequate performance measures (see paragraph 3.29). We also heard from some monitoring departments that the levers to address poor performance by Crown entities were ineffective (see paragraph 4.34).

5.12
Some monitoring departments do not appear to prioritise the monitoring function. In our survey, people who worked at the monitoring departments highlighted a range of challenges, including that:

• the monitoring departments they worked in lacked understanding of the monitoring function;
• monitoring teams lacked resourcing;
• people with specialist skills were hard to recruit and retain;
• the work was largely reactive, which made it difficult to take a strategic focus; and
• structures in some monitoring departments did not support the capability required to monitor effectively.

Maintaining monitoring capability is difficult

5.13
We heard that, for monitoring teams to work well, they need to have:

• strong relationship management skills;
• the ability to understand complicated organisations quickly;
• knowledge of risk management and investment logic; and
• attention to detail and analytical ability.

5.14
Some monitoring departments have long-serving and experienced monitoring staff. These staff members have extensive knowledge of the sector and strong relationships with the Crown entity.

5.15
However, people with these skills and experience are relatively few. Every monitoring department we spoke to said they face challenges in maintaining fully effective monitoring capability.

5.16
We identified two main challenges to maintaining capability:

• People we spoke to said that staff regularly move away from monitoring, resulting in a loss of skills and relationships. For example, one Crown entity told us they had five different monitors in five years.
• Monitoring staff told us that they feel they lack influence. Crown entities also told us they felt monitors could not always influence chief executives and responsible Ministers to make required changes to support improvements (for example, changing how funding is allocated to achieve outcomes).

5.17
Staff from monitoring departments said that if there was a clear career development pathway for monitoring staff, it could help attract and retain more people. From the interviews we carried out, it was clear that this pathway did not exist.

There is a need for strong system leadership

5.18
Monitoring departments and Crown entities primarily use guidance published by Te Kawa Mataaho. In our survey, every monitoring department stated it uses guidance from Te Kawa Mataaho, such as It Takes Three, in its monitoring role. The same survey found monitoring departments rated the guidance documents that Te Kawa Mataaho produces as the most useful for monitoring activities.

5.19
Although the guidance is good quality, comprehensive, and widely used, some monitoring departments told us they would find more examples of good practice useful. Monitoring departments and Crown entities also told us they felt that Te Kawa Mataaho could have a greater role in helping monitoring departments with this.

5.20
In the Performance Improvement Framework reviews it carried out, Te Kawa Mataaho also identified challenges to effective monitoring, including:

• encouraging monitoring departments to collaborate with Crown entities to build monitoring approaches together;
• supporting approaches that better reflect the individual Crown entities being monitored; and
• improving sector co-ordination across Crown entities on relevant issues affecting the wider sector.

5.21
Te Kawa Mataaho has an opportunity to explore how it provides more support for, and greater oversight of, the Crown entity monitoring system. This includes providing advice on how to develop the "critical friend" relationship. Although this relationship will be unique to each monitoring arrangement, Te Kawa Mataaho is well placed to offer support.

5.22
Te Kawa Mataaho has recognised that there are areas where improvements to monitoring performance and capability are required. We have heard that it is planning to do more work to support this system. For example, it has recently appointed a director to scope its role in supporting appointments, governance, and Crown entity monitoring.

5.23
In response to our findings, Te Kawa Mataaho has told us it has several initiatives under way that will address some of the challenges we have identified. We are encouraged by this and will maintain an interest in the progress of that work.

5.24
For example, Te Kawa Mataaho told us it is currently including monitoring performance in the performance measures for monitoring department chief executives.

5.25
It also plans to:

• work with relevant agencies to develop a post-graduate professional development pathway for monitoring staff;
• develop tools to support more effective and diverse boards, such as a public service competency framework for boards and an all-of-government board appointment data integration system; and
• update its guidance following the Public Service Act 2020 reforms and develop more practical, hands-on guidance to support monitoring departments.

5.26
The Treasury administers Part 4 of the Crown Entities Act 2004, which covers Crown entity reporting and financial obligations. In our view, the Treasury should also consider its role in supporting Te Kawa Mataaho and the Crown entity monitoring system.

5.27
We acknowledge that our findings do not specifically reference Māori-Crown relationships or te Tiriti o Waitangi. In part, this reflects the fact that these are not referenced in the Crown Entities Act or It Takes Three.

5.28
The Ministers of Finance and the Public Service, through the Treasury and Te Kawa Mataaho respectively, issue an enduring Letter of Expectations that applies to all Crown entities. In the current letter, both Ministers indicate that they expect Crown entities to support future-focused Māori-Crown relationships.

5.29
In our view, Te Kawa Mataaho should consider working with the Office for Māori Crown Relations – Te Arawhiti¹² to explore ways they can support monitoring departments and Crown entities to meet these expectations within their monitoring frameworks. There could also be an opportunity to consider reflecting these expectations more explicitly in other relevant guidance.

Regular review of how monitoring arrangements are operating would be valuable

5.30
Some monitoring departments agreed that regular reviews of monitoring arrangements were needed. They were not clear how often they should review monitoring approaches, what to measure, and how to assess if they are monitoring effectively. This means that monitoring departments cannot be fully confident that they are well placed to engage with Crown entities.

5.31
We saw examples of monitoring departments making changes to how they monitor. These changes were usually in response to a significant issue. Generally, changes focused on the frequency of reporting. For example, when one Crown entity was having significant financial issues, the monitoring department increased the frequency of financial reporting. However, it was not clear to us what steps the monitoring department took to better understand or help the Crown entity address the underlying cause of this issue.

5.32
Our survey supports this finding. We found that although half of monitoring departments surveyed had reviewed how they monitor their Crown entities in the last three years, only one did so as part of a regular scheduled review. More than 60% of monitoring departments that responded to our survey carried out the review themselves and did not involve Crown entities.

5.33
Chief executives of monitoring departments need a way to assure themselves that their monitoring approach is effective. Regular reviews allow monitoring departments and Crown entities to determine if the monitoring framework is fit for purpose or what needs to change to improve it.

5.34
In our view, monitoring departments and Crown entities should collaborate on these reviews to ensure that they both fully understand and buy into their monitoring frameworks.

5.35
Greater collaboration can also help to clarify expectations and appropriately reflect a Crown entity's circumstances. In turn, this can mitigate any perception that monitoring is imposed.

5.36
Monitoring departments should regularly ensure that responsible Ministers are satisfied with the quality and frequency of monitoring advice.

5.37
In our view, these reviews should take place at least after significant change in the size, role, risk profile, performance, or leadership of Crown entities has occurred.

12: The Office for Māori Crown Relations – Te Arawhiti is a Crown agency dedicated to fostering strong, ongoing, and effective relationships with Māori across Government. It provides support and guidance for relationships between Māori and the Crown, which, through effective partnership, realise the intentions of te Tiriti o Waitangi.