SOE directors' views examined in new research

MEDIA RELEASE

20 June 2006

SOE directors’ views examined in new research

Directors of New Zealand’s largest State-owned Enterprises are concerned the appointment process is too heavily weighted towards political acceptability, says a Victoria University researcher.

In an article to be published in the journal Public Sector, Dr Richard Norman, Senior Lecturer in the Victoria Management School, surveyed directors from nine of New Zealand’s largest SOEs in November 2005, using software that allowed them to anonymously answer a detailed questionnaire.

Dr Norman says the election of Labour-led Governments since 1999, has seen the ‘prepare for sale’ approach to SOEs replaced with a long-term hold strategy.

“Does political commitment to long-term ownership mean there should also be a change in the governance framework for SOEs? My research found SOEs could be at risk from an appointment process that virtually guarantees relatively high turnover among directors and limited engagement by chairs and directors in creating boards with the balance of skills needed for effective governance. Directors are concerned that appointments made for political or diversity reasons may be reducing their ability to assess long-term strategy.”

Dr Norman says the directors’ views about SOE governance raise interesting questions about the future direction of the SOE model.

“While these views are only one input into assessing the strengths and weaknesses of the model and identifying potential for improvements, they provide ‘inside’ knowledge and experience. Included are important suggestions for improving the allocation of decision rights, performance measurement, directors’ compensation and the alignment of all three for SOEs.”

Dr Norman says the survey indicates the move to a ‘long-term hold’ approach has seen one significant improvement, in that boards feel they are in control of decisions about strategy and have the opportunity to test strategic plans proposed by management.

“However the process and criteria for choosing directors and the determination of directors’ tenure is seen to have shortcomings. Responses indicate the process for selection is too arbitrary, lacks adequate input from the chair and board and is too heavily weighted towards political acceptability and correctness rather than capability.

“Most directors viewed the official policy of a maximum tenure of six years as insufficient. Perhaps of more importance, a number of comments suggest the issue of tenure, board appointments and director succession more generally should be determined by the SOE chairs and their boards, rather than being determined by formula or imposed by Ministers.”

Dr Norman says few directors felt SOE strategic and operating decisions are negatively influenced by political ‘interference’ in the measurement and evaluation of performance.

“But equally, few feel that performance or strategic development is well understood or enhanced by Government officials. Indeed an overwhelming majority believed the officials’ focus on financial analysis and control adversely affects the ability of boards to focus on maximising shareholder wealth.”

Dr Norman says directors were most unequivocal in the view that they were under-compensated for their roles and responsibilities, and that this adversely affected the availability of capable directors.

Dr Norman is presently visiting the Centre for Public Policy and Management, Manchester Business School, University of Manchester until June 23.

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The full report can be viewed online at: www.ipanz.org.nz

ENDS

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