Good governance and performance advice matter.
The Treasury’s advice to Ministers aims to ensure that companies and entities perform well and deliver against their objectives, and that the Crown maximises the long-term value it gets from ownership.
When companies and entities perform well, they contribute to overall well-being and economic efficiency. Companies and entities also deliver shareholder returns and taxation that can be applied to support other government priorities.
In most cases, the legislation establishing each category or individual company or entity sets out obligations for boards and Ministers. For example, Ministers are required to appoint or remove directors and to provide comments on strategies proposed by boards.
In practice, all of the ownership frameworks operate in a broadly similar manner.
- Companies and entities are set up at arm’s length and are legally separate from the Crown.
- Companies and entities are run by their boards and management who are accountable for overall performance.
- The members of these boards have duties to act in the best interests of the company or entity.
It is important for Ministers to receive advice on the performance of Crown companies and entities as Ministers do not exercise direct control but may use other methods to influence performance. This includes appropriate board appointments, setting of clear expectations, and performance assessment and advice from the Treasury.
What does our role involve?
Our advice to Ministers has two key areas of focus.
- Ownership advice: what does the Crown want to achieve through its ownership of companies and entities?
- Performance advice: how is a company or entity delivering against its objectives for ownership?
The Treasury uses a risk-adjusted approach and targets advice according to risk and Ministerial priority.
The Treasury provides advice to Ministers when setting and communicating the objectives and performance expectations for Crown-owned companies and entities.
The objectives for a company or entity are expressed through legislation and, for companies, through their constitution.
Ministers’ expectations are conveyed to boards through annual letters of expectations. For example, Ministers may express their expectation that a board will manage appropriately its strategic change process, improve its information flows, or address any emerging concerns.
The Treasury also outlines the enduring expectations of ownership by the Crown through the Owner’s Expectations document. This document outlines expectations in areas such as board conduct, business planning, reporting, engagement with the Treasury, financial and non-financial performance, and public accountability.
The Treasury’s role also includes broader policy and commercial advice on options available to Ministers to deliver certain policy objectives, including ownership and use of commercial entities.
The Treasury advises Ministers on the performance of companies and entities and the ways in which they can influence performance.
Key elements of this role include the following.
- Appointing board members. Appointing capable and effective boards is the most important lever for Ministers. Ministers should be able to rely on board members with the right skills and experience to govern the company or entity adequately. The board appointment process involves assessing skill requirements for each board as vacancies arise, calling for candidates, interviewing and short-listing, providing recommendations to Ministers, steering the process through Cabinet, and holding induction sessions for new directors. The Treasury also provides advice to Ministers if there are concerns about board performance or issues about individual director performance or conflicts of interest.
- Advising Ministers on each company’s or entity’s performance and risk profile, including comments on a board’s business plans. This advice is structured around the annual accountability process. To do this, the Treasury analyses performance against various dimensions including leadership, results, organisational performance, strategy, investment, and each company’s or entity’s alignment with its objectives.
- Advising on specific ownership issues such as approval for major transactions or potential investments.
Annual accountability process
The activities in the diagram below apply to most companies and entities, with some exceptions. Some dates are approximate.
Treasury’s approach for listed companies
The approach differs for the four listed companies. They are subject to NZX Listing Rules under which they release regular operating and financial updates to all their shareholders. The Treasury receives the same level of information as other shareholders in normal circumstances and maintains a relationship with boards and management and an understanding of the industries in which the companies operate and the issues that they face.
The Treasury is one of several departments in the State sector that provide performance advice to Ministers. Whereas the Treasury focuses primarily on companies and commercial entities, other departments advise on entities in their areas of policy responsibility.
The State Services Commission also prepares guidance. The ‘It takes three’ document outlines the role of Ministers, boards, and monitoring departments for statutory entities.