Come on in, the water’s fine! The case of public sector governance

Public sector and private sector boards play the same role, right? There is more certainty and a long-term focus being on a public sector board, isn’t there? Boards have a clear sense of purpose for the public sector organisations and the entities they oversee, don’t they?

At a casual glance, boards in the private and public sectors play the same role and operate in the same way. In theory, overall our Four Pillars of Governance Best Practice points to all boards being responsible for: determining purpose, an effective governance culture, holding to account, and effective compliance.

The reasons to have a board, using good governance practice, are common across all entities in the public and private sectors. Having a board govern an organisation (as opposed to single individuals) has multiple benefits, including:

• Bringing a variety of skill sets, expertise and experience together to collectively support chief executives and their leadership teams to navigate an increasingly complex and challenging environment.
• Being able to stand back from day-to-day operations and provide a wider strategic and independent perspective on opportunities, challenges and risks for an entity.
• Supporting smooth transitions in leadership by anticipating and effectively planning for leadership succession for chief executive and board members.

Beyond this, however, the similarities between private and public sector entities are only ‘skin deep’ for several reasons:

• Often, boards of public sector entities have limited ability to set higher-level strategy for the entity. This is often determined by legislation and/or by responsible ministers who want to see the entity deliver specific outcomes. For example, Health New Zealand – Te Whatu Ora has its role and focus set by sections 13 and 14 of the Pae Ora (Health Futures) Act 2022 and the Minister of Health’s Letter of Expectations. Similarly, the New Zealand Transport Agency – Waka Kotahi has its scope and focus set through a Government Policy Statement on land transport and a letter of expectation. Kāinga Ora – Homes and Communities has its overarching focus and functions set in legislation, has to operate within the bounds of Government Policy Statement on Housing and Urban Development and work within a ministerial letter of expectations.
• For most public sector entities, except state-owned enterprises (SOEs) and other companies owned by the government, the only funder of what the entities deliver is the minister.
• The primary relationship with the single funder is between the minister and the chief executive for many public sector entities. As a result, while the board may appoint the chief executive and play a role in overseeing their performance, the chief executive will most often meet weekly with the relevant portfolio minister. In substance, this relationship is little different to the relationship chief executives of government departments have with a minister.
• While there may be equity invested in the entity for which the minister is like a ‘shareholder’, responsible ministers will most often focus on investment to support service delivery, reflecting their primary funding relationship with the entity. 

Council-controlled organisations (CCOs) are not too dissimilar either. A council appoints the directors, sets its expectations in a letter of expectations and signs off the Statement of Corporate Intent, as well as the requirement for regular monitoring by and reporting back to the council. Some CCOs also have elected members appointed as directors on their boards.

These characteristics of governance in the public sector constrain the scope of board oversight outlined in the Four Pillars. Ministers play a role that is greater than ‘shareholders’. They have a direct relationship with the chief executives of public sector entities that often means they meet more often than the chief executive does with the board, and ministers have more levers that impact on entity performance than any shareholder. Indeed, in some circumstances, a shareholder operating in these sorts of circumstances would be a ‘deemed director’ of a private sector company. 

Certainty and the long term

One of our Top 5 Issues for Directors in 2024 was ‘future ready succession’. The intent in highlighting this issue was to help boards prepare for transitions around the board table, including bringing new people in to broaden the skills base, and to ensure smooth changes in chief executives.

In some ways, this Top 5 issue has proven to be too prescient. There have been significant changes in boards and chief executives in the private sector, some of which were not fully anticipated or prepared for.

The same has also been true in the public sector in the past several months. The chairs of at least four Crown entities have been replaced, and whole boards have changed (or are in the process of doing so) in at least three Crown entities.

In a recent press conference, the Prime Minister made two observations:

• Ministers have only one major lever when it comes to public sector entities with boards – board appointments and board accountability.
• If those public sector entities are not delivering the outcomes the government is seeking, including with sufficient performance information, this is a governance failure, and the governance (such as a board membership) needs to be addressed.

This has been most prominent in the decisions to replace the Health New Zealand – Te Whatu Ora board with a commissioner. It has also been evident in the decision to replace the Kāinga Ora – Homes and Communities board, and similar decisions by ministers or board members in relation to KiwiRail and Pharmac – Te Pātaka Whaioranga. All followed adverse reports about entity performance and suggestions that governance was poor and failing.

CCOs faced similar scrutiny when Auckland Mayor Wayne Brown was first elected. Brown had campaigned on replacing the directors of CCOs to gain more control by council. This was certainly not the first time that elected members around the country had voiced this sentiment. 

Under the Four Pillars, boards have a specific role in holding management to account. This holds true as a general rule. But how true can it be when a range of other players, monitoring departments, central agencies and ministers (through cabinet collectively) set expectations and strategy, control all of the funding and, in some cases, expect entities (supported by their boards) to ration services without sufficient clarity about delivery priorities from those who fund them?

These issues are not new either. A 2023 review of the corporate governance of statutory authorities and office-holders in Australia commissioned by the government found “a lack of governance for several of the authorities considered by the review due to several factors including unclear boundaries in their delegation, a lack of clarity in their relationships with ministers and portfolio departments, and a lack of accountability for the exercise of their power”.

In addition, when it comes to outcomes, and potentially long-standing funding, structural and other issues, long-term solutions may be required. It can take time for issues to develop and time to address them. These longer-term organisational issues are matters for boards – that should be their focus. 

However, announcements around Health New Zealand – Te Whatu Ora and Kāinga Ora – Homes and Communities suggest shorter-term fixes are wanted. The Health New Zealand situation, particularly, suggests going beyond governance with the Minister of Health indicating action that was the “strongest Ministerial intervention available” and the Commissioner having “operational responsibility for the turnaround plan”.

As a whole, the turnover, and expectations of quick turnarounds in performance and governance (but not necessarily other action) where poor performance is perceived, creates uncertainty for experienced directors in public sector board roles. In many ways, this is much more complex than board roles in the private sector. 

Clear purpose for ownership

In a further twist, that uncertainty is arguably, particularly for SOEs and other publicly owned companies, because of a lack of clear purpose for the ownership of these entities.

This is made clear in the letters of expectations on the Treasury’s website, which say the minister “intend[s] to develop statements of the Crown’s purpose for owning each of the state-owned enterprises and other relevant companies I am responsible for. These will be statements of what the Crown wants to achieve from its shareholdings in each company, as distinct from the company’s own purpose.”

IoD submissions on the amendment of the Companies Act 1993 and the Ministry of Business, Innovation and Employment’s 2022 long-term insights briefing, The future of business for Aotearoa New Zealand, suggested a ‘best interests’ of the company statement would support a more transparent relationship with stakeholders (including shareholders) and clarify an agreed understanding of purpose. This would have to align with shareholders’ reasons for owning the company.

Dipping your toes into the public sector board water

Many directors appointed to public sector boards have observed that the operating and governance environment is more complex and difficult than similar roles in the private sector. Recent developments suggest  these roles carry more, and arguably less manageable, uncertainty too.

It seems likely that this contributes to the perception by 60 per cent to 75 per cent of public sector board members that their remuneration is not adequate. They were the least satisfied of all of the directors surveyed for the 2023/2024 Directors’ Fees Report.

This is not just a remuneration story. It points to a, likely, more cautious approach by well-qualified and capable directors when considering public sector roles, even where they want to give back to the community.

In the end, governance does matter when it is framed in a way that achieves the best outcomes, has a longer-term focus that is not operational and supports management to deliver its best.