7.5 Conclusion

The new public management model of the 1980s focused on the potential for public-sector boards to resolve agency (opportunistic behaviour) problems consistent with the academic literature of the time. However, the most recent literature in economics provides grounds for suggesting that the governance models in the New Zealand public sector (both as they were originally conceived, and as they have evolved over time) may need to be reconsidered. In particular, boards of Crown Agents are not close enough to ministers to be delegated authority to make decisions on matters not specified in ex ante ministerial instructions, which means that in practice CEOs and (often) board chairs engage directly with ministers on matters of importance. This, in turn, means that these boards are ineffective in undertaking the key role of governance—resolving contractual incompleteness. These boards may serve other roles, including representation of stakeholder groups, but this mixture of roles does not increase the quality of governance, and the Crown entities will often have more effective mechanisms for stakeholder consultation at their disposal.

These problems could be resolved in three complementary ways:

• Separate those entities in which the boards serve primarily as advisory boards rather than as governance boards, and reconstitute them as such. This would make it clear that for those entities, the minister rather than the board had the responsibility for addressing contractual incompleteness.[40]
• Establish a much clearer distinction between public-sector organisations where governance can be effectively delegated to a board of directors, and enshrine that separation from ministers much more clearly in the constitutions of those entities (as has been done for the Reserve Bank, Commerce Commission, and universities). Following the approach that we have set out above, the private board model is appropriate where ministers can delegate to the board residual decision-making rights. These entities would be those where relatively complete contracts relating to the objectives of government could be set out ex ante, or directed through the purchase interest of the government.[41] Where contracts are highly incomplete, as they appear to be (at least in the minds of ministers) with many Crown entities, then governance would be improved by making the boards advisory boards only, paying only meeting expenses for those boards, and making them truly representative of stakeholders.
• Change the structure of the boards that remain, making them smaller to ensure that the whole board can be informed of the minister's views, and leave them to make decisions. This would have many advantages in making boards more effective, since smaller boards could pay more to each board member, would provide much stronger individual accountability for board members, and would allow ministers to select individuals with much larger reputational capital. Higher remuneration and reputational capital would mean that individual board members had much more to lose in the event of ineffective governance.[42]

Note that it is likely that these two approaches will be complementary in a variety of respects, including in that smaller boards are likely to provide better governance in every case. Where boards currently serve to provide stakeholder representation, then exploring alternative mechanisms for that representation may be more effective.