7.4 Governance in the New Zealand public sector

The public sector in New Zealand is made up of a wide range of different organisations, including departments of state, Crown entities, state-owned enterprises (SOEs), and sui generis organisations such as the Reserve Bank of New Zealand. Crown Entities are of three types: Crown agents (such as -Accident Compensation Corporation (ACC), New Zealand Qualifications Authority (NZQA) and New Zealand Trade and Enterprise (NZTE)), autonomous Crown entities (such as Te Papa) and independent Crown entities (such as the Commerce Commission).[38]

For SOEs, the dominant Crown interest is ownership. In this case, it is relatively easy for the Crown to clarify its objectives, for these are typically shaped by the fact of these entities operate in industries that have more-or-less competitive markets, or if not, are subject to standard approaches to regulation. Consequently, the government may leave it to the board to ensure that management of the SOE meets its objectives.

But for Crown entities, the situation is more complex, because in many cases the Crown interest involves a more complex mix of ownership, regulation and purchase objectives. Crown entities are of particular interest, because the government owns them and therefore has rights to direct them unless constrained by law. At the same time, Crown entities generally have boards of directors, while also being subject to government policy, monitoring by a relevant government department, and oversight by a responsible minister.[39] The way in which the government's rights of direction are exercised will have important implications for performance—if the structure and principal are incorrect, then responsibility and accountability will be diffused and performance will be relatively poor (Scott, 2001:271).

A common justification for creating Crown entities is the substance, or perception, of greater independence from ministerial direction by comparison with departmental heads. But while the mechanisms for ministerial direction of Crown entities are in theory more formal than those for government departments, in practice there may be little difference. The presence of a board in Crown entities (a governance layer between the minister and the chief executive), contributes to the perception that Crown entities have a greater degree of independence from political intervention in the management of their affairs (Scott, 2001:275). In practice, however, this independence may be more apparent than real, leading to a highly confused and ineffective governance structure.

The responsible minister is answerable to Parliament for the actions of the Crown entity. This includes actions taken under delegation by boards and managers. Ministerial accountability for a major failure is therefore unlikely to differ, if it is in a Crown entity or a government department. Further, while Crown entities have greater management freedom than government departments, this is counterbalanced by the ease with which ministers may change appointments (including the appointment of the chair of the board). Although board members of Crown entities have appointment letters with terms of office, they really serve at the pleasure of ministers (Scott, 2001:276).

Ministers are therefore the principal and (in many respects) residual claimant in the operation of both government departments and Crown entities: they carry the risk of non-performance and these risks extend beyond the performance of the entity per se to political risks arising from the fact that the minister has ultimate responsibility for the performance and strategic direction of the organisation. The CEOs of these entities are selected by the board, as they would be in the private sector, but they are public servants whose appointment requires confirmation by the minister.

The boards of Crown entities are appointed by the minister, but the boards are in most cases large and distant from the minister. This is appropriate in those situations where the interest of the minister can be expressed in legislation or occasional policy documents, but it is more difficult in Crown agents where the minister has substantial political risk from policy and service delivery, and thus expects to be allocated residual decision rights in all material matters. For Crown agents, statements of intent are cumbersome ex ante mechanisms for the specification of objectives that meet with the approval of the minister, consistent with an assumption of complete contracts, but inconsistent with the real world of contractual incompleteness. The problems of contractual incompleteness are compounded by the complex mix of objectives associated with public-sector organisations, and the way in which those objectives will change (both explicitly and implicitly) with changes in minister.

In practice, generic contractual incompleteness is addressed by a high level of interaction between the CEO of the Crown agent, the chair of the board of the entity, and the minister. This means that most important decisions are decided away from board meetings, and brought back to the remainder of the board as a fait accompli. In turn, this means that the most that can be said for the accountability of the boards of Crown agents is that they have responsibility for oversight of implementation of the decisions made by the minister, but it is not clear how much value they add in this respect. Effective Crown agent boards may address agency issues such as the level of effort provided by the CEO and senior management, but here the size and incentives of the board will be relevant.

The boards of Crown entities differ from boards found in the private sector as they are inserted between the principal (the minister) and the operation of the entity. The boards of Crown entities, particularly Crown agents implementing government policy, are likely to lack the knowledge or mandate to address problems of contractual incompleteness without reference to the principal. Thus Crown entity boards:

• May serve to confound the implementation of policy or performance via their own actions/acting as a shield for the CEO.
• At best operate to provide external advice to the CEO about their relationship with the minister, and monitor against the statement of corporate intent.
• May default to being stakeholder consultation boards rather than governance boards and the likelihood of this outcome will be positively correlated with the size of the board and the representativeness of its members.

Further, we note that the absence of full delegation of responsibility (eg, the minister for ACC rather than the board sets the levies, and the minister of tertiary education controls government funding and sets ceilings on the tuition fees set by universities) means that senior executives and boards always have ways to explain poor performance as resulting from factors outside their control.

A further complication arises from the existence of multiple central monitoring agencies of government. These agencies are normally identified as the State Services Commission (SSC), Department of Prime Minister and Cabinet (DPMC), and the Treasury. To these should be added, as a minimum, the Office of the Auditor General (OAG). And beyond this, a very wide range of monitoring responsibilities are allocated to different agencies, for example, to the Department of Labour in respect of ACC, and to the Tertiary Education Commission in respect of Universities, Wānanga and Polytechnics and Institutes of Technology. This makes for a convoluted and ineffective public-sector monitoring regime in which the collection, analysis and use of performance monitoring information has not lived up to the expectations associated with the creation of that regime (Gill and Hitchiner, 2010). We consider that this ineffectiveness arises for two reasons. First, multi-agency responsibility will naturally reduce clarity about where true responsibility lies and who is responsible for monitoring what, while also increasing the scope for genuine confusion about the boundaries of responsibility for monitoring. Second, this reduction in clarity reduces accountability for the quality of monitoring and reporting by any individual agency, and a reduction in accountability is likely to produce a concomitant reduction in effort devoted to monitoring.