COMMONWEALTH ASSOCIATION FOR

CORPORATE GOVERNANCE

DRAFT (2)

CACG GUIDELINES

Corporate Governance in

Government Companies

BEST PRACTICE GUIDE NO. 3 - June 2002

Sponsored by:

Commonwealth Secretariat Shell International

Institute of Chartered Secretaries and Administrators

Commonwealth Association for Corporate Governance

President

Dato Mohammed Azlan Hashim

Chair

Ms Jyoti Munsiff

Chief Executive

Lt Col Geoffrey Bowes MNZM

Council Members

John Ainsworth (United Kingdom) Philip Armstrong (South Africa) Winston Cox (Deputy Secretary General Commonwealth Secretariat) Marcelo Mackinlay (Canada) Richard Nottage (New Zealand) Gamini Wijeyesinghe (Sri Lanka)

Honorary Secretary

Ms Caroline Phillips

Executive Assistant

Gillian Edwards

CACG is a non-profit organisation incorporated under the Incorporated Societies Act, 1908 of New Zealand.

The CACG is extremely grateful for the contributions of Professor Y.R.K. Reddy of India, The Crown Company Monitoring Advisory Unit in New Zealand, Ron Hamilton and the Australian National Audit Office for the generous permission to use, and reproduce, their extensive material on the monitoring of boards and directors of Government Companies. Readers are reminded of the copyright restrictions which vest in the contributors of the material which have been reproduced, with permission, in this latest series of Best Practice Guides issued by the CACG.

Sponsors

Shell International New Zealand Government – Ministry of Foreign Affairs and Trade

Institute of Chartered Secretaries and Administrators – United Kingdom

Members

Caroline Philips, United Kingdom Davis Global Advisors Inc, United States of America

Duntroon Associates, New Zealand Gillian Edwards, New Zealand

Growth International, United Kingdom Huria Associates, New Zealand

Justice Awuku –Sao, Ghana Maswill Limited, United Kingdom

Mervyn King, South Africa Philip Armstrong, South Africa Priam (Pty) Limited, Australia

Research Institute of Investment Analysis, Malaysia Ron Hamilton, New Zealand

Securicor plc, United Kingdom South African Reinsurance Limited

Stephen Tiley, South Africa Sunderland Business School, United Kingdom

Times Media Limited, South Africa Vishnu Ramlogan, Spain Prof. Y.R.K. Reddy, India

Affiliates

Academy of Corporate Governance - India Australian Institute of Company Directors

Caribbean Management Development Association, Barbados Chartered Institute of Company Secretaries in Australia

Chartered Institute of Corporate Management, New Zealand Fiji Institute of Directors

Global Corporate Governance Research Center, United States of America Institute of Chartered Secretaries and Administrators, United Kingdom

Institute of Chartered Secretaries and Administrators in Zimbabwe Institute of Corporate Governance of Uganda

Institute of Directors in New Zealand Institute of Directors in Southern Africa

Institute of Directors in Zimbabwe Institute of Directors of Zambia

Institute of Directors, Ghana Institute of Directors, United Kingdom

Institute of Company Directors, Papua New Guinea Institute for Southern Africa Development

Investor Responsibility Research Center, United States of America Lusaka Stock Exchange, Zambia

Malaysian Association of the Institute of Chartered Secretaries and Administrators Malaysian Institute of Corporate Governance

National Association for Corporate Directors, United States of America Private Sector Corporate Governance Trust, Kenya

Private Sector Organisation of Jamaica Securities and Exchange Commission of Zambia

Strategic Management Centre, Nigeria The Centre for Tomorrow’s Company, United Kingdom

The Hong Kong Institute of Directors Limited

Affiliates Continued

The Institute of Chartered Secretaries and Administrators in Sri Lanka

The Institute of Corporate Directors, Canada The Singapore Association of the Institute of Chartered Secretaries and Administrators

The Southern African Institute of Chartered Secretaries and Administrators The Society of Accountants in Malawi

Interested Party

The Commonwealth Secretariat

Monitoring of Boards and Directors in Government Companies

Table of Contents

Preface

Conceptual Framework of Primary Principles

The First Principles of Corporate Governance for Public Enterprises in India

Annexure

The Crown Company Board Appointment Process, New Zealand

Annex 1 - Codification of the Appointment Process

Annex 2 - Process of Screening Prospective Director Candidates

Annex 3 - Conflict of Interest Letters

Monitoring Government Companies

Annex 1 - Monitoring Vehicles

Annex 2 - Purchase Agreement

Principles and Better Practices for Corporate Governance in Commonwealth Authorities and Companies, Australia

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Preface Introduction The relentless advance of globalisation of economies has forced formerly protected industries to compete with the most efficient companies in the world. Globalisation has put pressure on state-owned enterprises to restructure along more business-like lines and adopt international standards of good corporate governance in order to compete for scarce investment capital. State-owned enterprises are now expected to make profits and private companies are increasingly conscious of their social responsibilities. Multi-lateral lenders like the International Monetary Fund, as well as international institutional shareholders, take good corporate governance into account when making investment or lending decisions. This is one of the reasons good governance is a business issue which has to have the support of government. Weak governance is generally associated with slow and sometimes regressive, economic development; while improved governance promotes development success, and is a precursor to the possibility of international capital investment especially in the course of privatisation initiatives. In the 21st Century, state-owned enterprises which encourage market incentives will result in an improvement in the quantity and quality of services provided to communities. The process of change is always difficult, particularly when it involves a change in culture. The bureaucracy of government and the legacy of a culture driven by traditional business values make the principles of corporate governance difficult to implement. However, transparency, disclosure and accountability are even more important in the public sector because government holds a position of trust in these enterprises and is accountable to taxpayers and its citizens for the proper and efficient use of their money and utilisation of national assets. State Enterprises and Corporate Governance State enterprises must operate within the overall policy framework set by government. However, this requires difficult choices because government’s political objectives may be different from the commercial interest of the state enterprise. As a shareholder, the state has a responsibility to enhance the value of its assets. This may conflict with a need to provide services to the poor. Accordingly, the objectives of both government and state enterprises needs to be very definite to ensure that the most appropriate trade-offs are made. The roles and objectives of boards must also be clearly articulated and aligned with government’s objectives and to separate the operational and fiduciary responsibilities of the board. A particular problem of state enterprises is that government often delegates its responsibilities to one Minister. One individual acting as the interface between the shareholder and the board then wields an enormous amount of power. This can result in the relationship between the responsible Minister and the board being personality driven and vulnerable to political agendas which may not be in the best commercial interests of the state enterprise. Many governments view privatising as a means of realising capital for the economy and generating greater commercial by placing state assets in the hands of the private sector. Government still retains a minority share in industries which would not be able to survive without a government subsidy, or in order to maintain a level of control to ensure that the social objectives of such entities are not entirely compromised. This in itself presents difficulties or conflicts that need to be carefully managed. One way to achieve this, is to ensure that recognised practices and procedures of good governance are established in the enterprise, which encourage the required levels of accountability and responsibility in attaining the policy objectives of government and commercial imperatives of an efficiently utilised asset. Best Practice in Government Owned Companies and Authorities This Best Practice Guide contains case studies of the problems, processes and recommended practices in state enterprises in India, New Zealand and Australia. The intention is that these examples will be both thought provoking and helpful to Commonwealth countries. It is recommended that these case studies be read in conjunction with the CACG Guidelines on Boards and Directors, Best Practice Guide No 2 of August

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2000, as the corporate governance issues in that document apply equally to the private sector and state-owned enterprises. The intention is to provide Commonwealth countries with the opportunity to take the best corporate governance practices available and adapt them to their own needs and circumstances Geoffrey T. Bowes MNZM Philip A. Armstrong Chief Executive Special Advisor to the CACG

February 2002

The CACG Guidelines may be found on the following websites: http://www.cacg-inc.com http://www.cbc.to, http://www.combinet.net,

Conceptual Framework of Primary Principles

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Corporate Governance in Government Companies

General Government Companies are any entities that are owned either partly or wholly by the government of the country. They may well be called Public Enterprises, Government Companies, State Owned Enterprises or Parastatils etc., so long as they are registered under the Companies Act or some similar Act. This document applies to all such entities. Governance of a government company is no different from that of a private sector company in terms of executing the duties of director, individually or collectively. For this reason, the Principles laid out in “CACG Guidelines – Principles for Corporate Governance in the Commonwealth”, should be read and adapted in conjunction with that laid out hereunder. The major difference between the private and public sector company lies in the relationship and covenants between the shareholders, usually Ministers, and the board. Where these are obscure and or obtuse, then it is highly probable that the government company will not maximise its potential and/or not provide an adequate return to the country. It is recommended that in drafting a Code of Best Practice for Government Companies those doing so first look to the “CACG Guidelines – Principles for Corporate Governance in the Commonwealth” and also consider the principles laid out hereunder. Tenet 1 – DUTY It should be clearly stated where the director’s prime duty lies. In the private sector, the law in most countries states that the first duty of any director is to the company. In government companies it may well be to the Minister(s) who in turn are accountable to Parliament. It can be argued that Parliament is but a fiduciary for the citizens of the country and that the assets of such companies are not the Government’s assets but rather the assets of the people. Hence, any diminution of these assets by politicians could lead to legal action by the citizens. No matter what applies, the first or primary duty should be clearly stated and supported by legislation. Tenet 2 – LAW It should be clearly stated as to what the relevant laws are that apply to directors germane to the governance of government companies. Government companies have tended to be established under a number of Acts. CACG recommends, if this is possible, that one Act covers all matters related to the governance of Government Companies. This should include the local Companies Act. Tenet 3 – MONITORING There should be a clear statement as to what agency(ies) will be responsible for monitoring the performance of the government companies on behalf of the shareholder(s), complete with its (their) Terms of Reference. In government companies the shareholder is usually a Minister(s) of the Government and they will require and indeed should get advice on the performance and governance of their companies. CACG recommends one centralised Monitoring Unit, which is suitably staffed by officials or contractors, who have the required experience and background to provide all the necessary advice to the Shareholding Minister(s). Experience has shown that such a Unit should be independent of any other branches of the government. In the statement on Monitoring mention should also be made of any other monitoring that could be in place – e.g. Select Committees. Tenet 4 – CONTRACT There should be a clear statement as to how contracts, between the Shareholder(s) and the Boards of Directors are negotiated and signed off regarding the objectives and outcomes that the company is to deliver. Any uneconomic arrangements in such contracts should be declared and transparent. CACG recommends that contracts and Statements of Corporate Intent (sanitised public document) should be negotiated annually, initially with the Monitoring Unit and then with the Shareholder(s) and that they

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clearly lay out what is expected to be delivered by the company in the following year. Once this is done the Board should be left to implement the expected delivery. In the event that Shareholder(s) want to make variations to such agreements, then these variations should be subject to negotiation and an amended Statement of Corporate Intent be produced and signed off. Tenet 5 – APPOINTMENTS There should be a statement on how the appointments process for directors will operate in government companies. CACG recommends that advice to the shareholder(s) should be given by the Monitoring Unit, and that the process is transparent and ensures that appointments are made on merit, not for political reasons. Such appointees will be independent directors, not have conflicts of interest and not be allowed to appoint alternates. Appointments should be for a specific term but the Shareholder(s) should have enshrined rights on termination for lack of performance and this should all be contained in a letter of appointment. Where a replacement director is being sought the Chairman of that company should be consulted. CACG believes that there is merit in having a Commissioner of Appointments who can comment, if necessary, on all such appointments in public. Tenet 6 – REPORTING Any Code should contain details on what reporting is required and to who, by the Board. CACG recommends that such reporting should be through the Monitoring Unit and that such reports allow for a full evaluation of the performance of the company against agreed objectives. It is suggested that this should be done monthly. Tenet 7 – EVALUATION There should be a clear statement as to how the directors, collectively and individually, will be evaluated on their performance germane to directing the company. CACG recommends that this should be a peer review for individuals and be undertaken annually. For review of the Board as a whole collective, there may be merit in using an external facilitator. The objective all such evaluations is to improve performance. Where performance needs to be improved, the board should be proactive in providing education and information. The Chairman must be included in this review. Tenet 8 – REMUNERATION Remuneration is always a contentious issue and hence the Code should contain a statement on how remuneration of directors is set. CACG recommends that it should be done by the Shareholder(s) based on advice from the Monitoring Unit, who will in turn have consulted the board and cross referenced the fees with similar entities in the private sector. Tenet 9 – CHAIRMEN * A clear statement should be made as to how Chairmen are appointed and for what period. CACG recommends that Chairmen should annually be required to seek a vote of confidence from their fellow board members. The Chairman is the leader of the board, the conduit to the Shareholder(s) and Monitoring Unit, accountable to the Shareholder(s) and the spokesperson for the Company on matters that impact on the Shareholder(s) or the future direction of the Company. * either gender. Tenet 10 – CHIEF EXECUTIVE The Chief Executive must be appointed by and responsible to the board only for the duties that the board has delegated to him or her. Experience has shown that where the Chief Executive has responsibilities or direct access to either the politicians or bureaucrats there can be major problems. This must be clearly stated in any Code.

The First Principles of Corporate Governance for Public Enterprises in India

by

Prof. Y. R. K. Reddy

Reprinted with kind permission of Prof. Y.R.K Reddy

© Prof Y.R.K. Reddy / Yaga Consulting

Contact details:

Yaga Consulting Pvt. Ltd. 103, Classic Court Erramanzil Hyderabad Telephone: 91-40-3311680/3311693 500 082 Fax: 91-40-3318349 India E-mail: yaga@hd1.vsnl.net.in

CONTENTS

Preface 2 PART I 1. Background 3 2. The State and State Controlled Enterprises 5 PART II 3. Board Structure and Control Dynamics – A Factual Position of

Central Public Sector Undertakings 8

PART III 4. The First Principles 11 Annexure Recommendations of 1997 Report on

“Corporate Governance and PSUs” 15

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Preface India’s progress in public enterprise reform has been admittedly modest. The familiar issues of multiple roles of the Government, the agency problem, contractual incompleteness, and information asymmetry continue to affect adversely the potential of this sector. Yet the public enterprises will continue to dominate the economy for several years to come. It is inappropriate to believe that the argument of public vs. private has been settled conclusively so as to imply the gradual disappearance of the state owned enterprise. Despite the notable fatigue and cynicism that has set in, the reality is that Indian public enterprises need reform both in policy conditions and the internal structures and processes. The popular codes and principles on Corporate Governance are, in most parts, relevant to public enterprises. At the same time, they appear incomplete, as they have not addressed the special features of governmental control systems, which impinge on the quality of governance. I had occasion to raise the critical diversities in the governance systems of the widely held private firms and the state owned enterprises in the Commonwealth and the need to develop a more relevant set of principles for the latter. The SCOPE had commissioned a study in 1997 on this issue and had suggested in October 2000 that we prepare a document afresh for wider discussion. This report is the outcome of the initiative of the then Secretary-General of SCOPE and the subsequent support lent by the Forum for Policy Promotion, Hyderabad. The report uses a wide framework for the definition of public enterprises covering state level and central level companies; statutory bodies; Government trusts; departmental undertakings and state controlled co-operatives. The objective of the report is however, limited to: “Developing an approach and the first principles for improving the conditions for good corporate governance in public enterprises in India”. I recognize the difficulty in implementation of several of the first principles. This is indeed the case with any type of principles. Yet, there is need to build consensus on the non-negotiability of a few foundations on which the edifice of good governance in PEs can be built. The report discusses in Part – I the special features of the state controlled enterprises. In Part - II, the central public sector undertakings have been paid closer attention by debating the typical structure of the board, the process of decision-making and dynamics of control in them. This will help in assessing the major infirmities in policy and legal conditions, that affect the quality of corporate governance in the most visible and sizeable segment of public enterprises, which are in competition with private sector players. Part - III contains the First Principles with brief annotations. I have benefited greatly from interactions with international specialists and several documents of the Commonwealth Association for Corporate Governance. I also acknowledge with gratitude the comments and helpful suggestions on an earlier draft, from several friends, policy makers and academics. October 2001 Y.R.K. Reddy

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PART – I

1. BACKGROUND

1.1. Corporate Governance has reached centre-stage in the global agenda. The principles and codes that have evolved in several countries have furthered the cause of efficiency, transparency and equity particularly in the interest of the shareholders. Sustainable shareholder value has become the mantra for corporate immortality translating into the welfare of the society.

1.2. The debate and effort in the arena of corporate governance has been tilted mostly in favour

of publicly listed and widely held companies. It is possible that three factors have determined this inclination in the debate on corporate governance so far. First was the study of Berle and Means, which referred to the shifting of control when a company’s ownership is dispersed. The idea underscored the need to create and activate structures and processes by which the owners can ensure appropriate governance and management. The problem identified was not of efficiency of capital in itself or of ownership, but the possible divergence of interests between management and the dispersed owner (or some ownership vis-à-vis the rest). The influence of this study on subsequent principles and codes is evident from the arguments for separation of the position of the Chairman from that of the Chief Executive and for induction of independent directors.

1.3. The second factor is the Cadbury Committee’s report, which has been widely acclaimed

and emulated despite its limited set of terms of reference. The London Stock Exchange constituted the committee. The report dealt with the financial issues of the publicly listed companies in the London Stock Exchange. The Cadbury code addressed the prominent concerns of corporate failures and became the mother of all codes in several ways. Most other capital markets and their regulators adopted similar recommendations, albeit, given by locally appointed committees and commissions. The effort, in sum, appears to be towards more efficient regulation through amendments to listing agreements and company laws as well as updated standards of accounting, reporting and disclosures. A comprehensive solution to the Berle and Means propositions appears to have been found through changes in board structures, processes, shareholder rights, reporting, disclosure standards and legal remedies.

1.4. The third factor has been the hope of market efficiency as an ultimate solution to corporate

conduct and performance. This implied the creation of a market for control of the company and freely entering and exiting owners who made their decisions on the basis of returns. This factor, which has been experiencing a long and bullish run, implies aggressive corporatisation, privatisation and undiluted focus on shareholder value.

1.5. These three factors have influenced the environment for good corporate governance in the

developed world where capital markets are vibrant. The codes and principles derived from this experience appear to be influencing developing countries in terms of sensitisation to the need for good governance. This is particularly so in countries where capital markets are expanding quickly. In the process, however, major business/commercial segments of the economies in the developing world are not covered by a corporate governance regulatory net or have found the principles less rewarding in practice. These are agencies, which carry out commercial activities, but operate under the control of government and are as such, incorporated public enterprises. In these economies, public enterprises, listed and unlisted, dominate over the private sector listed companies in terms of contribution to GDP, capital employed, income, employee strength, social impact and possibly, as is being asserted lately, in profitability.

1.6. The Standing Conference of Public Enterprises (SCOPE), New Delhi, recognised in 1996,

the need to examine the corporate governance issues relevant to the public sector undertakings in India i.e. those companies in which central government has equity of 51% and above. It was recognised that the codes, which were referred to (Cadbury’s and the Confederation of Indian Industry’s at that time), were most appropriate to the private sector and that the infirmities in the public enterprise governance needed a devoted attention. An attempt was made to address the special conditions of the central public sector undertakings, which are also publicly listed and traded on the stock exchanges and Yaga

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Consulting prepared a report titled “Corporate Governance and the Public Sector Undertaking” in October, 1997 (see Annexure).

1.7. The report, derived from the perspectives of several industry leaders and academicians,

highlighted a multitude of issues and recommendations to improve the quality of corporate governance. It was made prior to the Kumar Mangalam Birla Committee report and the changes effected by the Securities and Exchange Board of India in its listing agreements. The Kumar Mangalam Birla Committee report, like the Cadbury Committee, had limited its perspective to the typical private sector company – the composition of the committee reflects the tilt to this sector. Subsequent developments also affirm this limitation. (For instance, the dangers were not noted of separation of the positions of Chairman and Chief Executive in the case of public enterprises. Such a separation has proved to be an incentive for political leaders to get nominated by the Government as independent Chairmen. Further, in the interpretation of independence, the Securities and Exchange Board of India preferred to treat, by a separate clarification, nominees of Financial Institutions/Foreign Institutional Investors as independent even though they are equity holders. However, the civil servants who are government nominees in public enterprises by virtue of government’s ownership are not considered on the same footing.)

1.8. Besides the central public undertakings, there are several other entities – the state level

public enterprises, state controlled co-operatives, organisations created by special statutes, joint ventures of state and central governments, departmental undertakings, companies promoted by developmental financial institutions of the government and the like, which are currently in commercial activities or are pursuing potentially commercial objectives. All these public enterprises have a greater potential impact on society than the private sector due to the higher degree of ripple effect. In the developing world, the returns from good corporate governance in these enterprises should exceed those in the private fold. Obviously, there is a strong interface between good governance and corporate governance in the context of public enterprises as the latter are often used and perceived as instruments of public policy.

1.9. It is against this backdrop that the need for a special perspective was recognised and a

request made by the then Secretary General, Standing Conference of Public Enterprises, New Delhi, to Yaga Consulting to prepare a note with the objective of:

“Developing an approach and the first principles for improving the conditions for good corporate governance in public enterprises in India”.

The term “Public Enterprise” here has the broad international meaning covering various types of state owned/controlled enterprises. The listed and the unlisted government companies, the central and the state level corporations, public sector banks, insurance and Fls, co-operatives and department undertakings are included in the term. The principles, if accepted, will obviously imply several operational difficulties, pulls, pressures and dilemmas. However, the attempt is to identify and gain consensus on the pillars for good corporate governance without being daunted by potential controversies or operational barriers. Though this report is specific to India, the principles may be of relevance to several developing countries. These would also reflect and reinforce the Commonwealth Association on Corporate Governance Guidelines, which adopted an inclusive approach, relevant to the developing world and the OECD principles, which mirror the long-term vision of active, transparent, accountable and efficient markets.

1.10. The report discusses in Part - I the special features of the state-controlled enterprises. In

Part - II, the central public sector undertakings have been highlighted for closer attention by debating the typical structure of the board, the process of decision-making and the dynamics of control. This will help in assessing the major infirmities in external conditions that impinge on the quality of corporate governance in one of the most visible and sizeable segments of public enterprises, which are in competition with private sector players. Part - III contains the First Principles with brief annotations.

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2. THE STATE AND THE STATE CONTROLLED ENTERPRISES

2.1. There has been an universal belief that the government must restructure its activities and create market-related incentives and discipline for the enterprises in its control. Thus, corporatisation of state undertakings and privatisation have emerged as the most important methods of improving the efficiency of both the State and the corporate entities. Consequently, governments have been announcing the sale of several companies, reducing their stake in the existing public enterprises and restructuring Government Departments to become companies. In the case of co-operatives, the Indian government has sought to amend the law to enable them to become companies. Further, international bodies have been advising / pressurising governments to gradually eliminate subsidies, remove administered price mechanisms and reduce such other controls/support which contribute to false/artificial pricing and costs. The alternative, it is asserted, would perpetuate a moral hazard for the government - inefficiency in operations and management and a weak monitoring system. There is increasing convergence of thinking world-wide that:

! Commercial activities should be undertaken by the State;

! There should be a clear set of commercial/financially sustainable objectives without

cluttering social objectives; and

! Market related incentives and discipline including the market for corporate control would be necessary for sustainable economic management and development.

2.2. The framework for the principles of corporate governance has emanated from such a

“world-view” and with the objective of creating efficient and transparent markets with widely held private ownership. Understandably, codes and principles in different countries have tended to support the view that all enterprises will be of one variety only despite the caution that “one size doesn’t fit all”. Thus, public enterprises have been treated in the same manner as the private, either with the assumption that what is good for one is good for the other, or on the premise that eventually all enterprises should be free of dominant ownership by the government.

2.3. The assumption of free markets with widely held private enterprises could be insufficient at

present for four reasons:

! During the process of economic reform, several government departments will need to be corporatised and yet be under government control, at least in the initial stages. This process will be a continuous one as a State may declare one of its activities as detachable enough from the sovereign function to merit corporatisation. (For example: the Department of Telecommunications, which has been corporatised as Bharat Sanchar Nigam Limited). Until this process stops, we will continue to have State-owned enterprises which may not necessarily have the ideal market related incentives and disincentives, at least in the short term. Concurrently, there will be several statutory organisations, which might be considered as strategic/sensitive and hence not meant for privatisation at all for some years. (Ordinance factories, Nuclear Fuel Complex, Universities, Port Trusts).

! The second reason arises from the possibility of transitional control by the

government until a new set of active owners emerges. Such control by the government may be a fall back option in case of inefficient new owners or because the capital markets have not become mature enough to generate active shareholder monitoring, which would make a positive impact on managerial efficiency. The “golden share” approach adopted in some countries as an interim mechanism signifies the existence of a transitory position for the company before the ideal market conditions emerge.

The process of privatisation may ensure transferring property rights to new owners who may be from the general public, employees, other institutions and corporate entities. However, mere transfer of property rights does not ensure that the goals of privatisation have been attained. Sound corporate governance structures and processes need to be established and sustained during the transition period. In the

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absence of a better governance system and process, including more active and vigilant shareholders, the goals of privatisation would not be met. Thus the government may have to continue a direct control or indirect monitoring of those companies which are in the process of privatisation till conditions emerge requiring withdrawal of direct and other contingent controls and contractual obligations. (The recent penal action against the Sterlite Group by the SEBI after the government concluded the sale of its equity in Bharat Aluminium Company Limited, has raised an important issue – that of discovery of “corporate turpitude” or criminality before and after the sale of public stake to a private firm and the role of the government in such situations. There are possibilities now of contingent controls that were not envisaged earlier).

! Thirdly, and relatedly, it has been observed that in several countries, the privatisation

process resulted in transferring the property rights to parties, which are less efficient and/or less honest than the government’s previous “agents”. Such new owners may have failed in meeting the long-term goals of divestment/dis-investment/sale and may have created conditions that force governments to re-nationalise or take control. (Jute industry in Bangladesh is reportedly an example).

! Fourthly, there could be a realignment of the equity structure over a period of time in

joint ventures between public and private enterprises whereby the public enterprise gains control over the management. Such a change in capital structure may be rare and not a prospect that government prefers. (For example: the reported move of the public enterprise Hindustan Petroleum Corporation Limited to purchase the equity of the house of Birlas in the joint venture Mangalore Refineries and Petrochemicals Limited and take control of the management as the Birlas are unable to invest further monies required). Similarly, a public enterprise may acquire a private firm or another public enterprise or a government-controlled co-operative.

2.4. Thus, despite the idealism and merit of free market economy, with appropriate incentive

and disincentive mechanisms, there is a prospect of continued presence of public enterprises in India, in a large measure and for several years to come. The “Third Way”, between the unfashionable socialism and the romantic market fundamentalism may rest on such a prospect.

2.5. The range of public enterprises is vast and government’s control varies depending on

whether the entity is a departmental undertaking (like the Railways in the central government); a state enterprise (e.g. Hyderabad Allwyn); a central public sector undertaking (like the Indian Oil Corporation or BHEL); a statutory body at the central or state level (e.g. Unit Trust of India and the State Finance Corporations); a public sector bank (e.g. the State Bank of India which was created by law and in which the regulator also has ownership); a government controlled co-operative where the de-jure position is countered by the de-facto control (e.g. Indian Farmers Fertilisers Co-operative Sugar Factories).

2.6. The departmental undertakings are government and in competition directly or otherwise for

market share. The railways, post & telegraph and telecommunications are a case in point. To the extent that they are businesses and have the characteristics to be separated and made corporations under the company law, these may be deemed as public enterprise to which the general principles of corporate governance apply. In the case of statutory bodies, it is evident that several provisions of special authorities, accountabilities and Board structures are inconsistent with principles of corporate governance. The incongruence becomes glaring where public holds some part of the equity of such corporations. Similar is the context of the central public sector undertakings and the Banks where the special rights and privileges for one owner, even if it is Government, agitate against the tenets of equitable shareholder rights, under the principles of corporate governance. The co-operative sector which is expected to thrive on the basis of voluntarism reflects yet another spectre of government exercising de-facto control, thus eroding the right of self-governance to the members.

2.7. The government’s control system reflects, inter alia, the inherent conflict of roles of the

State – as a regulator, owner, adjudicator and executive – and the divergence in applying the principles of corporate governance amongst the different entities and at different levels

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of ownership. The multiplicity and ambiguity of roles has helped the State in using public enterprises as agents of political interest rather than public policy. Subsidy to consumers or targeted sections at the cost of the public enterprise, special grants and bail-out packages, have offered reasons, even if misplaced, for continued special controls and rights.

2.8. The infirmities in governance architecture in the case of public enterprises appears to arise

mainly from:

! The current powers to create, develop, renew and restructure the governing board and its members and their variance with the typical widely held public corporation.

! The powers specially created or exercised by the government, which are not in

agreement with the transparency ideal and other generally accepted principles of good corporate governance.

! The lack of logic for the continuation of these powers in the interest of independence

in the governing board, its integrity, accountability and transparency.

2.9. A close examination (as evident from the analysis pertaining to the central public sector undertakings in Part - II) reveals that the government has a massive task before it to create the enabling conditions that would improve the quality of corporate governance across the public enterprise system and for its transition to becoming market orientated.

2.10. Good corporate governance in public enterprises implies attention to issues larger than

those of law and stock exchanges. They need to address the principles of government and public enterprise relationships and create the fundamental pillars on which the governing board can be based on to become effective. The principles, codes and best practices for boards will become far more attractive and effective once these fundamentals are agreed upon and instituted. These have been termed as the First Principles and stated in Part - III.

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PART – II

3. BOARD STRUCTURE AND CONTROL DYNAMICS – A FACTUAL POSITION OF CENTRAL PUBLIC SECTOR UNDERTAKINGS

3.1. The Board of Directors of public sector undertakings normally comprises of:

! Full time functional directors or executive directors

! Nominees of the Administrative Ministry

! “Non official part time directors” (independent directors) and, at times

! Special representatives (e.g. Worker representatives).

3.2. The chief executive and functional directors are recruited, selected/promoted by the Public

Enterprises Selection Board. Each appointment is normally for a term of three years but renewable till the age of superannuating.

3.3. The appointments of board members have to be cleared by the Appointments Committee of

the Cabinet consisting of ministers. The recommendations of the Public Enterprises Selection Board are considered by the committee but not necessarily accepted. A Maximum of two nominees for the Administrative Ministry are selected by the concerned minister – they are usually the Additional Secretary and the Joint Secretary of the relevant department. They operate on a non-rotational basis but the individuals keep changing, as transfers are frequent in most ministries. All appointments are subject to due diligence and clearance by the Central Vigilance Commissioner.

3.4. The Department of Public Enterprises, which has been issuing guidelines, has not expressed a view on whether the Chairman ought to be independent or have executive responsibilities. Almost all the central public sector undertakings have Executive Chairman with the designation Chairman & Managing Director. (This has closed the option to Government of nominating political leaders as Chairmen, which is not the case in the majority of the state level enterprises.) By a specific decision of the government, Members of Parliament are excluded from being appointed to the boards of the central public sector undertakings. The guidelines also recommend that full time functional directors should not exceed 50% of the board, government nominee directors should not exceed one sixth of the actual strength and in no case should the number exceed two.

Department of Public Enterprises

Administrative (Responsible)

Ministry -Officials and

Ministers

Board

Management

• Parliament and Parliamentary Committees

• Cabinet/Appointments Committee of the cabinet

• Finance Ministry/Special Committees of secretaries

• Planning Commission • Comptroller & Auditor

General of India • Central Bureau of

Investigation • Central Vigilance

Commission • Writ Jurisdiction of High

Court & Supreme Court • Public Enterprises Selection

Board

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3.5. Part time non-official directors should make up at least one-third of the board. The responsibility for filling vacancies has been vested with the Administrative Ministries, the Department of Public Enterprises and the Public Enterprises Selection Board – the board itself has little power in board appointments, renewal or succession planning. The compensation for full time directors and the Executive Chairman are as per the guidelines issued by the Department of Public Enterprises while the non-official part time directors are allowed a sitting fee per meeting, which is a nominal amount.

3.6. All listed public sector undertakings are required to follow the Securities Exchange Board of

India’s requirements of corporate governance including the constitution of the Audit Committee with a majority of independent directors with at least one director having accounting knowledge; disclosure of financial performance/results of the listed companies on their web-site or on the web-site of the stock exchange on which the company is listed; separation of the position of Chairman from the chief executive failing which a greater number of independent directors are to be inducted and provide a separate section on corporate governance with details on compliance, non-compliance (with reasons) of the mandatory requirements along with compliance certificate from the auditors in the Annual Report.

3.7. The courts have held that public sector undertakings are indeed part of government and

thus special privileges and rights are bestowed upon the employees, under Article 12 of the Constitution. Public sector undertakings also figure in Parliament debates and its committees by virtue of the majority holding by the government.

3.8. The Department of Public Enterprises issues guidelines on board appointments, the

appointment of other personnel, wages and salaries. The Central Vigilance Commissioner issues guidelines on conduct, disciplinary cases, investigations and the like. The central public sector undertakings are also subject to a special additional audit by the Comptroller and the Auditor General. The Central Bureau of Investigation assumes jurisdiction over the employees and the directors as they are regarded as “public servants”. The Planning Commission of the Government of India has a role in planning and project proposals of the public sector undertakings.

3.9. The ownership rights of the Government are exercised along with other controls by a

complex system primarily arising from the view that Public Sector Undertakings are indeed part of government and that the boards are needed only for compliance purposes. Though the public and the employees hold some stock, their role and voice appear even more subordinated than in a similar case of the private sector due to the additional controls that he Government exercises as an owner.

3.10. Several boards do not have the full complement of directors and several positions of

executive Chairman remain unfilled for long periods or are under additional / temporary charge. The ministry representatives on the Board often exercise, de facto, veto powers. The salaries and foreign travel of directors need ratification or approval from the ministry. Capital expenditure beyond a limit, long term purchase agreements, joint ventures and, technology agreements need a clearance by the ministry outside the board and the shareholder meetings, even in the case of the “Navratnas”.

3.11. The shareholder meetings are generally routine in nature and do not signal activism, except

occasionally by the employees. The expectations of employees and the general public of the boards also appear to be modest. The Department of Public Enterprises has conceived the functions of the boards as mostly relating to production management, materials management, financial management, construction management and general management. The illustrative checklist provided by the Department of Public Enterprises recommends several managerial functions for the boards and makes little reference to governance and strategic aspects. Case studies reveal that the Board processes and procedures reflect the dominance of compliance and operational bias rather than governance and strategy.

3.12. Control by the government is admittedly hampering the efficiency and competitiveness of

the public sector undertakings, which have represented the creation of a “level field” vis-à-vis the private sector. There is continued debate on the comparative efficiencies of the public sector and the private sector, with a recent survey by the Centre for Industrial and Economic Research revealing that the Indian public sector undertakings have better

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performance ratings than those in the comparable private sector. There have been repeated public statements that autonomy, transparency and a governance structure akin to the one for the private sector would make public sector undertakings truly world class in their efficiency, growth and competitiveness.

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PART – III

4. THE FIRST PRINCIPLES

4.1. The government should review the legal status of all organisations controlled by it so as to separate those which can carry out commercial activities as companies following the market discipline, and those that will continue as a sovereign function of the government.

Statutory bodies, Commisionerates, Directorates, Departmental Undertakings, Co-operatives and Trusts may be reviewed and given the opportunity of becoming companies under company law without any ambiguity regarding their character, purpose or legal status.

4.2. The government should draw up a consensus based comprehensive policy of

privatisation, of both companies and other entities delineating these, which will continue to be State-owned, the method of disengagement and the process of disengagement.

An approach has been attempted in a limited way by segregating “core and non-core” and “strategic” enterprises, though the criteria are not evident. The efforts of the Disinvestment Commission and the Department of Disinvestment in this direction are noteworthy. However, these need to be deepened and broadened so as to cover all issues pertaining to all the public enterprises and evolve a political consensus. The valuation methods, processes of valuation, choosing the method of disengagement, tendering/bidding and sale/selection of bidders have been contentious in most countries including India. These can be resolved through consensus and transparency and breaking away from the case-by-case approach.

4.3. The government should issue guidelines, policy or directives indicating the

contingent conditions alone under which a currently private sector activity will be brought under State-control.

This measure may limit the extent of moral hazard and the use of golden-share type of mechanisms. If a company/activity fails, there are numerous arguments and pressures to invoke the States’ support which obviously results in the foregoing of other socially advantageous opportunities. Room for such pressures need to be foreclosed to the extent feasible.

4.4. The continued ambiguity in the set of objectives of public enterprises should be

resolved by the government, highlighting the primacy of financial objectives within a framework of product – market targets and other values/social commitments.

Despite years of debate and directions, the ambiguity continues in both policy statements as well as actions. Consequently, public enterprises often have confusion concerning their market segments, value-delivery, levels and extent of social responsibility. A clear policy statement by the government will bring about the essential difference between the non-negotiable explicit financial objectives/priorities and the set of values and preferences inherent in the mission of the organisation, whether explicit or implicit.

4.5. The government should bring about greater transparency by fully accounting for

subsidies and price controls imposed on public enterprises, and by achieving the desired social and developmental objectives through government’s budgetary provisions and related mechanisms.

In the case of banks, such a measure would apply to directed social lending and in the case of insurance, the special schemes. In the case of electricity companies, it relates to free or concessional supplies to specified sectors and groups. These measures will ensure that true costs and prices are apparent in the books and transparent to all stakeholders. Social/human developmental objectives, which require investment must be met through direct budgeting, direct subsidies to the target group and long-term contracts between the government and the public enterprise. Such an approach will make the social objectives

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more transparent, more efficient and also allow the public enterprises and governments to move towards global standards in fiscal transparency, accounting standards and public disclosure practices. This measure will also remove the confusion on the objectives of public enterprises.

4.6. The government should give up direct control over public enterprises by

restructuring/rationalising the role of departments overseeing these undertakings.

Government should arrange to exercise its superintendence through the Governing Board and the General Meetings. The current administrative control will become redundant if a special agency/body is used for exercising the ownership rights of the government, as recommended in 4.10 below. On the other hand, if there were any regulatory role for the ministry/department, the same would also need review in the context of the current perspectives on the independence of regulatory bodies from that of ownership. In either situation, redundant oversight may breed a false sense of legitimacy for inefficient control mechanisms and may also create special constituencies for drawing unjustifiable benefits.

4.7. The government must separate its ownership role and let public corporations be

governed by the same structure of controls as that of any other company. The laws giving special status to public enterprises or special controls over them must be amended / annulled.

In the case of central public sector undertakings, amendments would be required in the company law to remove the special status of a government company; revisiting the interpretation of the applicability of Article 12 of the Constitution to the employees of public enterprises; removal of the jurisdiction of Comptroller and Audit General, Central Vigilance Commission and the Central Bureau of Investigation. In the case of public sector banks, the role of the Reserve Bank of India must be restricted to being a regulator. In keeping with good principles of corporate governance and the several recommendations made already in this regard, the RBI must discontinue the practice of having its nominees on the boards of the banks it supervises and approving board appointments, and it must divest its equity stake in banks. Similar actions would be required in the case of ports, railways, electricity companies, government controlled co-operatives and a host of other public enterprises.

4.8. Parliamentary/Legislative Assembly control over public enterprises should be limited

to interaction with the body exercising the ownership rights of the government.

Currently, government ownership implies the right of Parliament over even the operating matters of PE’s. Managers in the PE’s regard this as a special control that the private sector does not suffer from. It is advisable that Parliament/Assembly deals with those exercising the ownership rights on behalf of the government (say, Trustees or members of a Commission, as the case may be).

4.9. The government should assess and re-capitalise public enterprises to ensure that

the cost of social burden on a historical basis is made good on a one-time basis after adjustments for special grants and concessions are given, if any.

This will help some of the public enterprises in mitigating the net burden or lagged effect of non-commercial objectives and directed activities and assist progress towards greater transparency and competitiveness.

4.10. Ownership rights of the government should be exercised by specialised bodies to be

created for that purpose.

These special bodies / agencies can be Trusts or Commissions, which alone should deal with the public enterprises as an owner. These may be both at the State and the Centre levels. The government should transfer all the shares / ownership rights to such special bodies. These special bodies should comprise of independent professionals with good experience of carrying out fiduciary responsibilities. These bodies may, as in the case of several countries, use special intermediaries (service providing companies) for actively monitoring, evaluating, contesting, and proxy voting on their behalf, if so required. Exercise of ownership rights may include disinvestments, privatisation, acquisition of equity,

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reinvestment, portfolio management, JVs, M&As and the like which are typically associated with ownership rights that can be exercised through the Board and the shareholder meetings.

4.11. The body exercising the voting rights should actively structure, create, develop and

renew the governing board ensuring the highest qualities of leadership, enterprise, integrity and judgement.

The body must be staffed with professionals who are well trained in law, finance and general management. The body should build data and knowledge of various standards, situations, board dynamics, the internal process of briefing, de-briefing, monitoring and evaluation. It should have sound mechanisms of managing the performance of its representatives/nominees.

4.12. Governments must ensure that persons who are or were members of parliament or

legislative assemblies be excluded from occupying the positions of Chairman or members of the governing board of a public enterprise, thus extending the spirit followed in the case of central public undertakings.

This is to ensure that public representation, which is a function of the practice of vote maximisation, and nurturing of constituencies, does not contradict the pursuit of transparent sustainable objectives of the enterprise.

4.13. The position profile and specifications of chairman, chief executive and members of

the governing boards should be approved by the governing board and shareholders in advance and through the expert advice of external bodies.

This will ensure that people do not chase board slots and jockey for a position. It will also help in debating and structuring the Board with the requisite competencies required to steer the organisation well into the future. Periodic amendments and exceptions may be needed. However, these amendments should pass through the board and the shareholders. Such a system will help in curtailing the scope for “cronyism”.

4.14. Listed public enterprises will have to follow the mandatory requirements of company

law and the stock exchange regulations. All other public enterprises should follow the relevant CACG or OECD principles that would foster independence, integrity, transparency and accountability of the governing board, protect the rights of shareholders and engage the stakeholders.

There is increased compulsion now for listed companies to induct independent directors, create an audit committee, have a separate section in the annual reports on corporate governance compliance, a section on management discussion and analysis, better disclosures and board practices. Public enterprises other than the listed corporates are not under any obligation to improve the quality of transparency and accountability. As a first step, they may adopt the international guidelines and list in their reports the current state and further steps contemplated vis-à-vis each of such principles/guidelines. These public enterprises may give a short report as to how the structure, systems and processes of the governing board will meet the principles/guidelines and the spirit behind them.

4.15. Each public enterprise should develop a best practice manual for board processes,

procedures and formats which may include, inter-alia, the profile of board positions; recruitment, selection, induction, training processes; conduct of board meetings; dealing with conflict of interests, disclosures, accounting and reporting requirements; evaluating board members; remuneration and renomination.

The best practice manual will be helpful in lessening the scope for poor governance and, progressing to meet international standards. There will be fewer omissions and, hopefully, there will be some control over commissions of unethical/inappropriate actions.

4.16. Public enterprises should ensure that individuals chosen for appointment as

directors are either properly accredited, when such facility is available, or be formally trained in corporate governance practice.

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The major challenge in progressing quickly on good governance is the dearth of competence in directorial functioning. Most directors do not have the essential knowledge on relevant law; duties, responsibilities and liabilities; financial analysis; strategy; business ethics and effective decision-making. It is necessary to build capacity throughout the country by an accreditation process, training and development. Directorship must develop, eventually, as a profession with a sound body of knowledge. A director must be recognised because of such knowledge and the associated competence rather than the position itself. Several countries including the UK, Australia and New Zealand have set excellent examples for director training and accreditation.

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ANNEXURE

RECOMMENDATIONS OF THE 1997 REPORT ON

“CORPORATE GOVERNANCE AND PSUs’

by Yaga Consulting Pvt. Ltd. A. Government & Public Sector Units:

A.1 It is indeed trite to repeat the several recommendations and the logic behind each one of them, from the 60’s onwards, exhorting the government to give greater autonomy to the Central Public Sector Units (PSUs). The several Committees on Public Undertakings have highlighted this aspect but there has hardly been any change. One of the major complaints of PSU’s has been that the minister and the officials in the ministry exercise authority frivolously through formal as well as informal communications. Concurrently, there is inadequate consultation and discussion during crucial decisions. Whereas, the ministry can easily conjure up reasons for all such communications and non-communications, there is unanimity that good governance will endure if communications systems and structures are rationalised. It is also a fact that several directors and chief executives often appear to be seeking undue interaction with the ministers and secretaries – such inclination is also rationalised giving reasons for the importance of managing this authoritarian stakeholder. Irrespective of who is to be blamed for this situation, it is recommended that the administrative ministry contact the PSUs only through its representatives on the Board and not otherwise. Even as its feasibility is discussed, the interim arrangement must be to list all such communication-events along with the subjects of discussion for circulation among members of the Board every three months (Recommendation 1).

A.2 The BPE (now the Department of Public Enterprise) was set-up with laudable objectives,

which appeared strategic at the time. Most objectives, even on reckoning the recommendations for strengthening the BPE’s role and the current process of re-engineering the circulars and guidelines, now appear incongruous. This is primarily because of the need for firm-specific approaches as against unitary designs and also the ineffectiveness of departmental governance. The command and control approach which had much validity in the early years after the Independence is no longer valid due to the induced as also the naturally evolving diversities and complexities in the nature of ownership, nature of differentiated competition in the market place and other related issues. Kathryn said the above paragraph does not make sense (highlighted) Thus, the Department of Public Enterprises must revisit its role. It is recommended that the Department of Public Enterprises recraft its mission and role to that of a competitive consultancy organisation offering value-added services to all varieties of PSU and in the process severe all of its traditional relationships with PSUs. (Recommendation 2). This would seem drastic but administrative reform which is connected with economic adjustments calls for, among others, restructuring and “institutionalising” / corporatisation of some services. Countries such as Australia and the U.K did this successfully years ago.

A.3 The performance contract system between the Government and the PSU`s has had a long

and unsatisfactory history in the world. By now, it is abundantly clear that the Memorandum of Understanding (MoU) is, as termed by an eminent academic, `more memoranda than understanding’ and has degenerated into a ritual. The system itself has no fit with the new dynamism required for a more competitive world. However, it is a necessary transition that an economy like ours had to go through rather than leapfrog into the totally unfamiliar. It is evident that no straight-jacket system such as the Memorandum Of Understanding will suit the needs of individual companies and their technology, products, markets, risk profiles, competitive conditions, cost structures and inherent disabilities. Importantly, the legality and ethical justification for such a contract with a part owner even if the largest, would soon become questionable. Consequently, it is recommended that the Memorandum of Understanding system is scrapped and in its

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place, a firm-specific `Strategy Agreement’ is implemented. This new instrument will concentrate on a few crucial issues surrounding the profitability, survival, and sustainability issues under the most plausible scenario of competition, supply-demand-price dynamics and the changing profile of governmental support, direct and indirect. This Strategy Agreement System may be developed by specialists to a full-blown form and will enable a strategic approach and encourage commitment rather than rituals. This system may adopt a yearly cycle. In course of time, and on attaining reasonable diversity in ownership, it would be prudent to involve other important stockholders in this exercise. (Recommendation 3)

A.4 Several experts on PSU`s have criticised the role of Comptroller and Audit General (CAG)

as an additional burden. Whereas, the Comptroller and Audit General is an important instrument of public accountability, it works to the detriment of several normal rights of enterprises. It is recommended elsewhere that the Comptroller and Audit General must become involved through a different mechanism to ensure diligence in management and restructure the method required to advise on the appointment of chartered accountants, issue directions under section 619(3) of the Companies Act, to prepare special reports, affirm, or comment upon or supplement the audit report prepared by the Chartered Accountants as provided under section 619(4) of the Companies Act. PSUs have complained that this double check is not suffered by the private sector and also that the annual general meetings are delayed, among other reasons, on account of the Comptroller and Audit General audit. More importantly, despite the recent castigation of some auditing firms, a re-certification by the Comptroller and Audit General is considered as an affront to the chartered accountancy profession. It is recommended that the Companies Act be amended to remove the separate category of government companies and provide the necessary level-playing field for the PSU. In the interim, it is recommended that the Comptroller and Audit General carries itself as an instrument of public accountability through participation in the Audit Committee of the Boards and refrains from the traditional types of scrutiny to the extent legally permissible. Continuation of the existing approach in light of errant auditors is no justification for over-governance but is a fit case to be addressed by the profession itself. (Recommendation 4).

A.5 The Parliament’s role in the governance of PSUs has received mixed reactions but

predominantly indicates that call attention motions and questions in the Parliament have not served the interest of the PSUs, save a very few policy discussions that took place in the case of Indian Airlines, Steel Authority of India Limited. Whereas, policy discussions should feature prominently in this forum, it is the dominant view that several questions are constituency based and interest related and hence avoidable. It is recommended that Parliament adopts an internal code to be enforced by the Speaker, through which all questions related to specific PSUs will be raised only in the Consultative Committee. The Committee can call the Chairman of the concerned PSU and also a representative of the ministry, if required, for clarification and discussion. It is also recommended that the discussions pertain to strategic matters only and not operational. Such a system will bring greater transparency apart from being more effective. To strengthen this system, the Consultative Committee and the Committee on Public Enterprises may be apportioned special budgets for engaging external consultants or commissioning special studies as in the case of the Senate Committee in the United States. (Recommendation 5). Though the practicality / acceptability of this best practice code may be doubted, it may be pointed out that it will have as much good effect as any other code and is non-competing with better alternatives that may emerge in the years to come.

A.6 The writ jurisdiction provided by Article 12 of the Constitution has come under severe

criticism. This provision has led to a flood of cases and a fear psychosis amongst management. At the same time, there are several employees who prefer the continuation of this coverage. Though this provision is not a part of corporate governance in itself, it seems to have an impact on building long term capabilities in competition with those in the private sector and also those where the government control falls below 51%. It is recommended that Article 12 of the Constitution be amended to exclude coverage of PSU`s and provide them with a level playing field. Meanwhile, it is noticed that the Supreme Court has also undergone changes in interpreting labour laws evidenced in some recent judgments. Keeping this in view an early opportunity may be made use of to test the applicability of Article 12 once again. (Recommendation 6).

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A.7 Similarly, the jurisdiction and roles of the Central Bureau of Investigation and Central Vigilance Commission are seen as an anachronism. PSU employees may be treated no differently from other corporate employees - it would indeed be difficult to comprehend the need for differing systems for increasingly identical segments of employees. It is recommended that the Prevention of Corruption Act be amended to exclude the PSU employees from the definition of `public servant’. Further, it is recommended that the Central Vigilance Commission’s jurisdiction over PSUs is removed and the Board is allowed to appoint a Chief Vigilance Officer as deemed appropriate. (Recommendation 7).

A.8 It is realised that integration of employees, management and the Boards in the process of

increasing share-holders’ value and the value of the shares in the market is important for acquisition and long-term sustenance of competitive abilities. Employee Stock Option Plans are an important instrument not only for better strategic management of the enterprise but as an indirect mechanism of corporate governance in future. It is strongly recommended that PSU`s examine and devise valid Stock Option Models to achieve objectives of corporate governance as well as operational efficiency on a dynamic basis. (Recommendation 8).

B. The Board of Directors:

B.1 It is regrettable that several directives and recommendations regarding the composition of the Board have remained un-implemented. The more recent foray into this is the important circular of the Department Of Public Enterprises dated 16th March 1992. It is the general feeling that the stake-holders’ interests are being sacrificed significantly through slow action in professionalising and empowering the Boards on the one hand, and politically motivated decisions in the appointments of both CMDs (Chairman and Managing Directors) and Directors, full-time as well as part-time, on the other. It is, however, a happy augury that the `Navratnas’ are being given further powers and the boards being reconstituted. Similar move in the case of Miniratnas may also be noted with optimism. Reckoning all aspects and without labouring on the much discussed lacunae, our recommendations in respect of the Board of Directors is as follows.

B.1.1 It is recommended that the positions of Chairman and Managing Director continue

to be vested in one person, which goes against the popular view for the private sector. (Recommendation 9). This is to ensure that PSUs do not get into the same difficulties as several State level enterprises due to political appointees as non-executive Chairmen. The positions may be separated as and when the selection process of the non-executive Chairman becomes objective and not a political patronage. The situation in the private sector is the converse, as the balance of power needs to be distributed in the opposite direction as a check against run-away management.

B.1.2 It is recommended that each PSU Board has a minimum of 8 and a maximum of 15

directors at any point in time and 50% of this number be functional directors including the Chairman and Managing Director. (Recommendation 10). This implies a minimum of four functional directors including the Chairman and Managing Director.

B.1.3 If there is any vacancy due to the number of functional directors not adding up to

50%, then a representative from the employee and consumer segments must be co-opted in that priority to take up the position as a part-time Director. This recommendation is in the hope that undue delays are prevented in the process of appointing functional directors. (Recommendation 11).

B.1.4 One-quarter of the Board must be drawn from experts, academicians, professionals

and technocrats. (Recommendation 12).

B.2 The suggested structure would require a change in due course to provide for representation of financial institutions or similar significant shareholders in the making. Even if the government continues to hold more than 51% stock, it would be prudent to allow one or two financial institutions or mutual funds holding considerable shares, to take Board positions. This is in recognition of the general trends world-over towards proportionate representation.

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B.3 Representatives from the administrative ministry and Ministry of Finance must be

represented at a senior a level as possible and not exceed two. (Recommendation 13). B.4 It is recommended that no director shall hold such a position in more than three

organisations concurrently. This may be adopted as a “Best Practice” norm as the Companies Act provides for twenty directorships. (Recommendation 14).

B.5 The tenure may be fixed at three years for the part-time directors and in respect of

Chairman and Managing Director and functional directors it may be five years or superannuation, whichever is earlier but not less than three years. (Recommendation 15).

B.6 Each Board must appoint from within them an Appointments Committee and standing Audit

Committee. Similarly, committees for Capital Expenditure and Compensation may also be created on a need-basis. In the Board managed situation capital expenditure decisions and compensation designs may be left to the Boards/AGM (Annual General Meeting). These committees may co-opt external specialists, representatives of ministries, PESB (Public Enterprises Selection Board), Comptroller and Auditor General as appropriate. (Recommendation 16).

B.7 The manner of appointing directors may be changed forthwith. The representatives of the

ministry may be nominated by the Secretary and in his own case, by the Minister concerned. The selection of functional directors as well as the Chairman and Managing Director must be done by the Appointments Committee of the existing board of the PSU with the assistance of the Public Enterprise Selection Board. The Public Enterprise Selection Board must take a supportive and advisory role without wielding any specific over-riding authority. It may be worthwhile for the Public Enterprise Selection Board to change its mission and role to that of a service provider to all PSUs, at a price. The logic for this suggestion will be found in the realm of administrative reform under economic adjustments, as already mentioned elsewhere. (Recommendation 17).

B.8 It is realised that several suggestions/nominations by the concerned PSU and/or the Public

Enterprise Selection Board have been turned down by the ministry/ACC (Appointments Committee of the Cabinet) concerned with little justification, making the entire process a futile exercise. It is sincerely hoped that the current efforts in respect of Navratnas and the others will be more objective and expeditious. While appreciating this effort, it is felt that some changes in the context of empowering the boards are still needed.

B.9 It is recommended that a unanimous decision by the Public Enterprise Selection Board and

the Appointments Committee of the Board be treated as automatic approval. The composition of the Appointments Committee may be made dynamic, in such a way as to exclude those who are candidates for the directorships. Where there is a difference of opinion, the same may be referred to the Appointments Committee of the Cabinet or to its delegated authority. In due course, however, these decisions may be taken at the Board level and Annual General Meeting without involving the Public Enterprise Selection Board. (Recommendation 18).

B.10 Appointments on the board must be so timed as to ensure that there is no large-scale

change amongst the directors and that there is always some mix of the earlier members and the fresh ones. In selecting the directors, the Appointments Committee of the Board must ab-initio describe the existing profile of the Board, the gaps in the expertise/skills and the specifications of the desired additions. (Recommendation 19).

B.11 It should be ensured that full-time directors are identified/appointed so as to be in place

and understudy the current incumbents for at least three months ahead of the completion of their term. (Recommendation 20).

B.12 In the case of a new PSU or the Joint Ventures/Subsidiaries of existing ones, it may be

ensured that the functional directors are in place before any strategic decisions such as those relative to locations, choice of technology and long-term contracts are made. (Recommendation 21).

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B.13 Should there be a vacancy of the Chairman and Managing Director for any reason whatsoever; there must be a standing directive that the next senior-most functional director will act in his or her place automatically. Under no circumstances should any other person be appointed to act in that position. (Recommendation 22).

B.14 It is recommended that the database of part-time directors be created by a ‘Standing

Conference on Public Enterprise’ in consultation with existing PSU, national level academic institutions and the government. This panel may be submitted to the Public Enterprise Selection Board and also made accessible to all PSUs. (Recommendation 23).

B.15 It is recommended that each Board constitutes a standing Audit Committee. The Audit

Committee must have full powers for appointing chartered accountants and accepting the audit reports. The Audit Committee must have a special invitee from the Comptroller and Auditor General’s office. The representative of Comptroller and Auditor General can initiate, suggest and recommend any type of audit as he/she deems fit for the concerned PSU. The need for additional audit by the Comptroller and Auditor General will not be necessary. (Recommendation 24).

B.16 It is obvious that the remuneration for the members of the Board should be far higher than

the current levels so to attract the best talent in the country. It is recommended that the board level appointments be freed from rigid guidelines. Full-time directors may be appointed taking cognisance of the market dynamics, but subject to the condition that the Appointments Committee will fully record the justifications that the Audit Committee endorses. Differences if any will be referred to the Appointments Committee of the Cabinet or any authority designated by it. (Recommendation 25).

B.17 In respect of part-time directors, it is recommended that a sitting fee of Rs. 30,000 per

meeting be granted apart from reimbursing costs of travel and stay. This is the minimal incentive for ensuring that reputed and worthy people are inducted. No other facilities such as telephone at residence or secretarial help should be extended. (Recommendation 26).

B.18 All members of the Board must be trained, especially in aspects of strategy, strategic

planning and strategic management as a necessary competence for discharging their roles effectively. Additionally, they must be exposed to industry-specific issues. The Standing Conference of Public Enterprises may be entrusted with this project on a countrywide basis and it may draw upon professional expertise as deemed appropriate. (Recommendation 27)

B.19 The board must prepare an internal note laying down the operational aspects, which it shall

not take-up in its meetings under normal circumstances. Such an exclusion list will ensure adequate focus on the strategic issues of the company and good governance in the long run. (Recommendation 28).

B.20 The disclosure and reporting norms as prescribed now may be continued and, in addition,

the Board may give a statement of the perceived risks for the PSU concerned in the next three years on a rolling basis and certify that the firm is indeed a going concern. (Recommendation 29)

C. Codes & Ethics:

C.1 All approaches to corporate governance appear to converge on the issue of recommending a code for adoption. It is evident from several experiences, that mere codes, in whichever field, have little utility in themselves. This is not merely because there is no statutory support for them, but more because of their remoteness on the one hand and their theoretical approach, on the other. While good codes can be important templates if they are supported by appropriate sensitisation and training, there are several actions possible that would improve governance even if the formal codes take time for institutionalisation.

C.2 It is recommended that where directives or actionable guidelines are possible, they be

issued straightaway by the concerned departments/bodies/PSU without waiting for codes to trigger change. Changes in law where they become essential, must be followed through separately and without unnecessary bundling of recommendations. Further, each PSU

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must develop its own code through an internal mechanism. This develops necessary ownership, which is the key to good governance. (Recommendation 30).

C.3 Similarly, it is recommended that concerned ministries, Parliament, Comptroller and Auditor

General, Central Bureau of Investigation and the Central Vigilance Commission also develop their own respective Codes of Best Practice in relation to PSUs, within the next six months to enable good governance. (Recommendation 31).

C.4 Ethics are the soft side of corporate governance. Good controls and systems are

necessary for good governance but they are not sufficient. Sufficiency arises only when sensitivity to ethics is institutionalised and imbibed into the organisational culture. It is realised that most courses in our country at University level as well as at the management development level have ignored ethics. Thus, ethics is often mixed up with morals, mere legal requirements or personal attributes like honesty, discipline and habits. It is the belief in all modern economies that ethics needs to be discussed and understood formally.

C.5 It is recommended that each PSU selects a possible group of 20 to 30 executives from

middle and senior levels of management as potential ethics Counsellors. This group will be responsible for undergoing training in Ethics and triggering a Code of Ethics for the PSU. The code on approval by the board will be used as a template for sensitising employees at all levels to enable them to distinguish the acceptable from the unacceptable. This group will continue to counsel employees whenever any one has an ethical dilemma or on an apprehended risk. (Recommendation 32).

C.6 Members of the board may be given a special one-day training on ethics on a pan-India

basis. This project may be entrusted to the Standing Conference of Public Enterprises, which may collaborate with other professionals in the country. (Recommendation 33).

The Crown Company Board Appointment Process

The Crown Company Monitoring Advisory Unit, New Zealand

Reprinted with kind permission of The Crown Company Monitoring Advisory Unit, New Zealand

© The Crown Company Monitoring Advisory Unit

Note: These guidelines have been prepared as guidance for boards and directors of State-owned or controlled enterprises and authorities in matters of good corporate governance and are not intended to be exhaustive. Given the diversity of jurisdictions and structures of enterprises owned and controlled by the State across the globe, recipients should not depend or rely upon these best practice guides as a substitute for proper professional advice or as a basis for formulating business decisions.

Contact details: The Director of Appointments and Governance CCMAU PO Box 10-465 Telephone: 4-474-8220 Wellington Telefacsimile: 4-499-2107 New Zealand website: www.ccmau.govt.nz

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CONTENTS

Introduction Executive Summary Director Appointments Terms and Conditions Background Director Appointment Process Terms and Conditions Further Developments Annexure 1 Codification of the Appointment Process Annexure 2 Flow Chart describing Appointment Process Annexure 3 Conflict of Interest Letters for the Three Sectors

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CROWN COMPANY BOARDS: APPOINTMENT PROCESSES Introduction 1. This memorandum outlines the advice presented to the New Zealand Cabinet following The Crown

Company Monitoring Advisory Unit’s (CCMAU) 1999 review of the process in which it identifies and recommends candidates for appointments to over 60 Crown companies. It should also be read in conjunction with the Unit’s booklet, “The Crown Company Board Appointment Process”.

2. Although CCMAU’s appointment process has been in place for a number of years, the recent

enhancements of the rules governing Crown entities have, where appropriate to Crown companies, been incorporated.

3. This memorandum outlines the platform on which the director appointments can be managed. It has

the capacity to be used by all Responsible Ministers in making appointments to the companies in their respective portfolios. Ministers will be able to incorporate it in their strategic expectations for the companies and sector, or company specific requirements. Ministers will then determine the preferred board and director competencies.

4. This memorandum introduces a number of steps aimed at ensuring that Responsible Ministers are

formally consulted on the broader aspects of each company’s board appointments. These steps include an annual review of each board’s skills profile and the skills profiles of the individual appointments which are related to the annual review of the company’s business strategy.

5. This memorandum and the attached codification paper (Annex 1) focuses primarily on the role of the

Responsible Minister. The Minister of Finance is the other shareholding Minister and carries equal responsibility for director appointments and for exercising the rights and obligations of a shareholder. However, CCMAU’s primary contact is through the Responsible Minister. The Minister of Finance and the Responsible Minister need to establish clear operating guidelines for determining the level of involvement the Minister of Finance will have in the selection process. The Minister of Finance’s role should not be less than that set out in the attached codification paper but could be equal to that of the Responsible Minister. CCMAU will follow the process agreed upon between the two Ministers and will ensure that the Minister of Finance is included in the distribution of all relevant documentation through the appointment process.

6. Annex 1 describes the candidate selection and appointment process. It should be read as a high-level

overview and not as a detailed description of the operational processes and the supporting regimes (eg., managing conflicts of interest). CCMAU will produce operational guidelines that will provide that level of detail should Cabinet approve the higher-level guidelines.

Executive Summary 7. The fundamental role of the board of directors is to facilitate the company creating value. Director

competencies are based upon this criterion. Director Appointments 8. The objective of the director appointment process is to develop and maintain best practice in the

corporate governance of Crown companies. 9. Good corporate governance requires that:

(a) The shareholder has a clear set of strategic ownership objectives for each company as established in the Statement of Owners Intent (SOI), Statement of Corporate Intent (SCI) and the Business Plan;

(b) Shareholders appoint committed and highly skilled directors who understand the context in

which they operate to ensure that the board is able to meet shareholder objectives and set strategic direction for management while holding management fully accountable for their performance;

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(c) Management is both guided and empowered to achieve the strategic objectives of the company;

(d) Where the Responsible Minister’s expectations for the governance of the company are not

met, a director or directors accepts that shareholding Ministers may exercise their prerogative to seek the director’s (or directors’) resignations.

10. Although all directors of Crown company boards are expected to display the core competencies as set

out in Annex 1 (paragraph 19, a fundamental prerequisite for achieving best practice in corporate governance is that the directors of each company board are selected and appointed based on the particular skills they bring to the board.

11. The identification of the skills requirements of each Crown company board, therefore, is critical to the

appointment of the best-qualified candidate to each board position. 12. The process for ensuring that the best qualified person available is appointed to each board position

has the following basic components:

(a) Initial Candidate Screening: CCMAU conducts assessments of individuals who submit expressions of interest in being

considered for directorships or who have been referred to CCMAU. (b) Board Succession Planning: An ongoing skills identification process is performed by the Chair of the Crown company and

CCMAU, in consultation with the Responsible Minister to formally assess the skills requirements for each individual board position.

(c) Candidate Identification and Selection: A matching of the competencies and skills of potential candidates with the skills requirements of

the board as approved by the Responsible Ministers. 13. The procedures proposed in this paper provide Ministers with an opportunity early in the appointment

process to approve the required skills set profile against which director candidates will be selected and appointed.

14. The recommended Selection and Appointment process is attached to this report as Annex 1. A flow

diagram provides a diagrammatic outline of the overall appointment process in Annexes 2. Terms and Conditions 15. Directors are appointed for terms of up to three years and may, subject to their performance and their

skills continuing to be relevant to the business, be re-appointed for a second term. In exceptional cases, a director may be appointed for a further term.

16. Board fees are based on a process approved by Cabinet in 1997 (APH (97) M6/4) which compares

Crown companies with private sector companies of comparable complexity and size. 17. Directors’ fees are set on a “pool” basis for each board and are approved each year by the

shareholding Ministers. CCMAU annually reviews board fees based on market information processed by human resource management firms and other market surveys in both the public and private sectors. Once the “pool” has been approved, the allocation of fees to individual directors is then up to the board, which may remunerate directors depending on their actual contribution and membership of board committees etc. It would be normal for the Chair to receive twice the rate of the standard director fee. Any payment made to directors beyond the “pool” requires the specific approval of the shareholding Ministers.

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Background 18. Directors of Crown companies are appointed in terms of the Companies Act 1993, sector-relevant

legislation (e.g. the State Owned Enterprises Act 1986, Crown Research Institutes Act 1992 and the Health and Disability Services Act 1993) and the companies’ own Constitutions. Crown directors have to meet the same responsibilities and obligations as directors on private sector boards as well as any specific requirements contained in their sector specific or company specific legislation. For example, Radio New Zealand directors have specific obligations as set out in the Radio New Zealand Act 1995. The Hospital and Health Services (HHS) directors have to meet the objectives set out in the Health and Disabilities Act 1993.

19. All appointees to Crown companies must be mindful of their responsibilities to the government as

shareholder, and to the legal framework within which they operate. They also have to deal with commercial and competitive risks. Crown company directors face both collective liability as a board, and personal liability as a consequence of duties and obligations imposed upon them by statute, e.g. The Companies Act 1993, Commerce Act 1986, Resource Management Act 1991, and as a natural consequence of undertaking a commercial activity. The Crown has an interest in appointing directors to the board who have the requisite competencies and skills and who add value to the shareholder's investment in that company. If the Crown does not maintain this standard, it runs the risk of not recruiting and retaining high quality directors.

Best Qualified 20. Given the responsibilities that Responsible Ministers have to Parliament for the performance of the

Crown companies, it is imperative that the process should appoint the best-qualified persons to each board. Accordingly, Responsible Ministers have tasked CCMAU with the responsibility of identifying the most suitable candidates for each board and to make recommendations to Ministers that are consistent with best practice corporate governance.

21. ‘Best Qualified’ is generally defined as

The candidate whose skills and experience best meet the Responsible Minister’s assessment of the skills profile which has been developed on the basis of the Government’s strategic overview of the company and in consultation with the Chair of the company and based upon the advice of CCMAU. This definition is intended to encompass the primary requirements for directors. However, the State Owned Enterprises Act 1986, the Crown Research Institutes Act 1992 and the Health and Disability Services Act 1993 also establish clear guidelines that must be taken into account by those appointing directors to Crown companies. It is important that the director selection process is anchored in the statutory guidelines for each company.

22. ‘Best qualified’ does not necessarily mean that appointees must have previous director experience.

The nucleus of a board should consist of such directors but, and this depends on the calibre of the Chair, first-time directors possessing company-relevant experience should also be considered for appointment, depending on the capacity and calibre of the Chair. In this way, the next generation of directors are being developed. For example, as at 15 August 1999, 250 of the 376 director positions were occupied by directors who had not previously held a Crown company directorship. For many, the Crown appointment was their first directorship.

23. In identifying candidates, every effort is made to include people who reflect the government’s wish that

board membership be representative of the demographic make up of New Zealand. However, as the prime objective is to appoint the person best qualified to undertake the role of a director in that particular company, it will not always be possible to find people with the necessary qualifications and skills among some population groupings. Appointing lesser-qualified or less experienced people may place other directors at risk, with a consequent impact on director retention and company performance.

24. An important and on-going aspect of the appointment process is the role undertaken by CCMAU to

gather expressions of interest from people who believe that they have the qualifications and the competencies to be Crown directors. CCMAU’s process in relation to evaluating expressions of interest is outlined in Annex 1. Currently, the CCMAU database holds the details of approximately 3,000 people.

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Director Appointment Process 25. Responsible Ministers and the Minister of Finance are accountable for the appointment of directors to

the various Crown boards. By convention, the appointment process has been managed by the Responsible Ministers. Each has formed their own arrangements for consulting with the Minister of Finance in the course of each appointment round.

26. In codifying the appointment process, CCMAU has focused on and strengthened the role of the

Responsible Minister in a number of aspects:

(a) In conjunction with the Responsible Minister’s annual review of each company’s business strategy, business plan, SOI or SCI, CCMAU will provide an assessment of the board’s overall competencies and recommend where changes need to be made. This will be in the form of an Annual Board Skills Profile;

(b) The Responsible Minister’s approval will be sought for the Annual Board Skills Profile, which

will form the basis of candidate profiling for vacancies for the following year;

(c) CCMAU will submit an Individual Skills Profile for the Responsible Minister’s approval for each individual vacancy. The approved profile will be the basis for candidate identification. CCMAU’s prior consultation with the concerned company Chair contributes to the preparation of the Individual Skills Profile;

(d) CCMAU will refer identified candidates, together with an assessment of how each matches the

Individual Skills Profile, to the Responsible Minister for approval prior to the candidates being invited to undertake due diligence.

27. These steps are intended to facilitate improved succession planning and candidate identification and

to ensure that appointees conform to the shareholding Minister’s requirements as articulated by the Responsible Minister’s governance requirements for each company. Variation from either the Annual Board Skills Profile or the Individual Skills Profile will require the approval of the Responsible Minister.

28. The process outlined also provides for candidates sourced by other than CCMAU to undergo the

same degree of evaluation (including due diligence). 29. The appointment process is described in detail in Annex 1. However, it is important to highlight two

features in finalising the selection of candidates of a position:

(a) It is important that candidates have the opportunity to complete due diligence prior to their being appointed. Due diligence allows a director to ascertain whether or not he can add value to a board, the degree of risk entailed in the appointment and whether there are any conflicts of interest arising from the proposed appointment. The Chair, who is also involved in the due diligence process, reviews conflicts of interest (from the company’s viewpoint) and the candidate’s potential for meeting the skills profile for the vacancy.

(b) As referred to in 30(a) above, the presence or otherwise of conflicts of interest is an essential

part of the decision-making process. Conflicts may be perceived or real. Both have the potential to impact negatively on the appointment. Where conflicts of interest are identified, the extent to which they can be managed to eliminate any potential negative consequences that would make the proposed appointment unsustainable has to be assessed before the appointment may proceed. All new directors receive guidelines on the government’s expectations, above and beyond those contained in the Companies Act 1993, which discuss conflicts of interest from the perspective of Crown company boards.

Terms and Conditions 30. Since 1992, there has been a convention that directors would serve a maximum of six years, made up

of two terms of three years. The intention behind this convention is to facilitate the introduction of new directors and to reinvigorate the boards. Directors serve longer than six years in exceptional cases, such as when it would be to the company’s severe disadvantage if the director was not to remain. Each case is considered on its own merits.

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31. Crown company director remuneration is determined by a methodology approved in 1997. The levels of remuneration reflect that the Crown is competing with the private sector for high-calibre directors. All Crown companies are reviewed by CCMAU in a process which involves Crown companies being compared to approximately 40 public listed companies and ranked according to several key characteristics. This results in companies of comparable size and complexity being banded together for the determination of ordinary fees.1

32. CCMAU has recently reported to shareholding Ministers that the current scale for Crown company

director fees is in line with the private sector fully listed companies, with no increase being recommended. Ministers have concurred.

33. Shareholding Ministers approve the total level (“pool”) of fees for each company on an annual basis.

How these fees are disbursed is the prerogative of the board but the total “pool” cannot be increased without shareholder approval. In addition to the ordinary fees, boards may receive an explicit approval that will affect how to remunerate directors who are members of major board committees and/or are directors on subsidiary company boards. Directors are explicitly excluded from undertaking consultant assignments for the company without the prior approval of the Responsible Minister. Such assignments are actively discouraged.

34. The companies reimburse directors for the expenses incurred in meeting their board commitments.

No director receives fees for any period beyond that which he/she serves as a director. No retirement allowances are paid.

Further Developments 35. CCMAU is assessing further potential improvements in the governance of Crown companies. These

include:

(a) Formalising performance reviews;

(b) Enhancing board induction programmes;

(c) Exit interviews with retiring directors;

(d) On-going director education and development;

(e) Redefining board and director core competencies (to support vacancy definition, candidate identification and board evaluation);

(f) Convening a panel consisting of experienced Chairs and recently appointed new directors.

This panel, to be convened in September, will be a developmental ground for innovations and a source of practical advice from practitioners for spreading and sharing best practice corporate governance amongst all Crown company boards;

(g) The Unit is also maintaining its monitoring of overseas governance practices to keep abreast

of developments in best practice corporate governance.

1 The fees review methodology is to be reviewed in 2002

ANNEXURE 1 : CODIFICATION OF THE APPOINTMENT PROCESS

IDENTIFYING AND APPOINTING CROWN COMPANY DIRECTORS

Introduction 1. The objective of the CCMAU appointment process is to identify and recommend for appointment the

candidate whose skills and experience best meet the Responsible Minister’s assessment of the skills profile for the particular vacancy (Individual Skills Profile). The Skills Profile is developed based on the government’s strategic overview for the company, the existing skills profile of the Board as a whole and based upon the advice of CCMAU (following consultation with the chair of the company).

2. Throughout the appointment process, the Responsible Minister is kept informed of the progress being

achieved in the filling of vacancies through CCMAU’s regular briefings with the Minister. However, it should be noted that the Minister has formal participation at key stages:

(a) Approving the Annual Board Skills Profile for the board of each company;

(b) Approving the Individual Skills Profile for all identified forthcoming vacancies;

(c) Seeking nominations from government caucus colleagues, based upon detailed skills profiles

for each position under consideration;

(d) Approving which candidates warrant invitations to consider an appointment i.e., shortlisting;

(e) Approving the preferred candidate to go forward to the Cabinet Sub-Committee on Appointments and Honours (APH) for appointment;

(f) Recommending to Cabinet and Caucus the appointment;

(g) Notifying the successful candidate and the company of the appointment.

3. Throughout this process, the Responsible Minister liaises as agreed with the Minister of Finance, the

other shareholding Minister.2 CCMAU will provide the appropriate documents to ensure that the Minister of Finance is formally involved.

4. In recommending candidates for consideration by the Responsible Minister, CCMAU draws upon a

number of sources. Two major sources of candidates are self-nomination and recommendations from Ministers and Crown company directors. Where specific vacancies are being considered, CCMAU also consults with, inter alia, The Ministry of Women’s Affairs, Te Puni Kokiri, Ethnic Affairs, Disabilities Directorate of the Ministry of Health and the Ministry of Pacific Island Affairs.

5. One of the strengths of the CCMAU process is that the Unit meets with the applicants whose attributes

appear to meet the basic competencies required of a director. In this way, CCMAU has compiled a database of prospective director candidates for consideration for appointment to any of the 63 Crown company boards. The process, known as “initial candidate screening” is described below.

2 By convention, the Responsible Minister takes the lead action in board appointments. Responsible

Ministers have opted for different forms of consultation with their shareholding colleague, depending on the degree of involvement successive Ministers of Finance have indicated they wish to have. The Minister of Finance will receive copies of papers relating to succession planning and consequential appointments.

Initial Candidate Screening 6. A key role for CCMAU is to create and maintain a database of potential director candidates. This

database is made up of potential candidates generated through word of mouth, recommendations and promotional activities such as advertising undertaken by CCMAU3. Currently, CCMAU’s director database comprises approximately 3 000 potential candidates. The database can be searched using the following key criteria:

(a) Gender

(b) Ethnicity

(c) Age

(d) Residential location

(e) Occupation

(f) Industry experience

(g) Areas for best contribution

(h) Academic qualification

It is intended that the database be constantly reviewed and that candidates whose competencies do not meet those required for directorships be removed.

7. CCMAU scrutinises all in-coming applications and meets with those people whose competencies and

skills appear to meet the basic expectations for filling a directorship vacancy. Preference is given to nominees who:

(a) Have demonstrated experience in governance in significant organisations with a commercial

focus; or (b) Have experience at chief executive or senior management level in organisations that have

commercial attributes; or (c) Hold senior positions in relevant professional areas, including, but not limited to science,

technology, finance, law, health, agriculture, social policy; or (d) Have relevant governance or management experience in community or professional

organisations. 8. Because a number of the Crown companies are in provincial areas and also because of the desire

that, over time, the boards should more closely reflect the demographic make-up of New Zealand, a number of candidates who do not meet the above criteria will also be assessed by CCMAU. Candidates who possess relevant experience but do not have a governance background are invited to participate in the Unit’s Prospective Directors Seminar programme.

9. The initial assessment of applicants considered by CCMAU takes the form of a meeting with a

member of CCMAU and an experienced Crown director. The meeting has the dual objective of assessing both the candidates’ competencies and skills, and providing the first step in the candidates gaining an understanding of the role and obligations of a Crown company director. This latter aspect is important as many candidates express an interest in directorships without understanding what is entailed in the role. In an endeavour to address this, the Unit’s website displays background information on governance.

10. An essential feature of the screening process is CCMAU receiving an assurance that the candidate

does not have any known impediments to appointment. Reasons against further consideration of a potential candidate include, but are not limited to: business reputation (unsatisfied creditors, association with failed businesses), appearances before professional bodies’ disciplinary institutions, criminal conviction and conflicts of interest. CCMAU undertakes to refer only ‘trouble-free’ (to CCMAU’s knowledge) candidates to Ministers for consideration.

3 A recent advertisement seeking expressions of interest in Crown company directorships generated 850

responses.

11. Candidates are also requested to indicate their commercial and institutional interests to assist

determining where possible conflicts may arise in companies and/or sectors. 12. Because of Ministers’ wishes to add to the pool of directors, a number of candidates are appointed

who do not have previous director experience. In order to develop these potential first-time directors, CCMAU provides two seminars per year for the top 50 of the screened candidates. In addition to adding to a candidate’s general understanding of governance issues, the seminar provides another vehicle for assessing a candidate’s skills and competencies.

13. As mentioned, Responsible Ministers also seek nominations from Caucus colleagues, based upon

robust descriptions of the skills requirements needed for each board. Succession Planning 14. CCMAU initiates discussions with Chairs and Responsible Ministers on succession planning. It is

proposed that this process be strengthened by reviewing the composition of boards at least annually. This review will be based on the Annual Board Skills Profile. The review will comprise:

(a) A performance evaluation of the directors and Chair of each board undertaken by the Chair and

reviewed by CCMAU; (b) An assessment, in consultation with the Chair, of the skill requirements of the board as they

may develop over time; (c) Identification of development and educational opportunities for existing directors; (d) Skills-based requirements that are developed into an Individual Skills Profile for pending

appointments, which will be due to either retirement or replacement of existing directors. 15. The identification of a replacement Chair will also be key in the skills assessment and succession

planning process. 16. A report of the annual succession plan for each board, incorporating the Annual Skills Profile Review,

will go to the Responsible Minister (copied to the Minister of Finance) for comment and approval. 17. The incorporation of the Responsible Minister’s requirements and expectations at this stage of the

process will add rigour to the appointment process and will facilitate the candidate identification and selection process. It is intended that, in the future, the Responsible Minister will receive the Annual Board Skills Profile that will include recommendations from CCMAU on the preferred board composition along with the annual determination of shareholder expectations for the companies during the annual business planning meetings. These recommendations will comprise details of forthcoming retirements and the necessary skills make-up of the replacement directors.

18. CCMAU will refer Individual Skills Profiles to the Responsible Minister for approval prior to candidate

identification. CCMAU will consult with the chairs of each board in the preparation of the profiles. Candidate Identification 19. The skill profiles used to identify potential director candidates will be based on an objective

assessment on the competency and skill needs of the board, undertaken by CCMAU in consultation with the Chair of the company.

20. Annex 4 contains an outline of the key competencies required by non-executive directors which has

been compiled by the Institute of Directors and can be summarised as:

(a) An ability to add value;

(b) The capability for a wide perspective on issues;

(c) Integrity;

(d) Common sense;

(e) Organisational awareness;

(f) An appreciation of the role of the Crown as a shareholder;

(g) An ability to distinguish governance from management;

(h) Financial literacy;

(i) Critical faculty;

(j) Information oriented;

(k) A knowledge of the responsibilities of a director.

21. All director candidates should have these competencies. The Individual Skills Profile should be based

on these competencies, together with the sector, company specific and individual skills required by the Responsible Minister.

22. Each candidate should be selected on the basis of a skills assessment which take into account:

(a) Statutory requirements, both general and specific to that company; (b) Shareholder expectations; (c) Strategic imperatives facing the company; (d) Existing skills mix of the board; (e) Pending director retirements or replacements.

23. This process will commence with an assessment by CCMAU, in consultation with the Chair of the

board, of the collective and individual competency and skill profile of the board and individual directors.

24. The identified skills profiles for each board vacancy will be discussed with the Responsible Minister,

refined as necessary and submitted for approval to the Minister. Draft terms of reference will also be considered.

25. The profiles approved by the Responsible Minister will form the basis of CCMAU’s candidate selection

and recommendations to the Minister. 26. The process of Ministers approving defined skills profiles that drive the selection and appointment

process will reinforce sound succession planning, early candidate identification and will ensure that the candidate(s) with the most appropriate skills are identified.

27. In the case of reappointments, Ministers will also take account the annual director evaluations. 28. Director candidates can be sourced from:

(a) CCMAU database; (b) Self nomination; (c) Nominations by experienced Crown Company directors; (d) Ministry of Women’s Affairs; (e) Te Puni Kokiri; (f) Ministry of Pacific Island Affairs; (g) A number of CCMAU-organised networks; (h) Professional bodies and associations; (i) Ministers and Caucus colleagues.

The Process 29. Having agreed the required Annual and Individual Skills Profiles with the Responsible Minister,

candidates will be identified by CCMAU and submitted to the Responsible Minister. A summation of each candidate’s skills will be provided so that Ministers can undertake an objective assessment of the candidates against the approved skills requirements of the board and director vacancy(ies). CCMAU will provide a short list of candidates to the Responsible Minister for approval in a form that facilitates a direct comparison of each person with the position skills profile.

30. All candidates, from wherever they are sourced, will undergo CCMAU’s evaluation against the

approved Individual Skills Profile. If Ministers are unable to support any of the candidates put forward by CCMAU, the Skills Profile will need to be reviewed with the Responsible Minister to determine that it is still relevant. After review, the selection process would commence afresh. Circumstances may require Responsible Ministers to review and amend the Annual Board Skills Profile.

31. If Ministers or Caucus colleagues identify further candidates at any stage in the process, these will be

assessed against the approved skills profile. 32. Candidates supported by the Responsible Minister will be invited to proceed with due diligence. In

some cases, this will be limited to informal discussion with the company’s Chair and senior management. In other cases, a formal Chair/CCMAU interview may be conducted. Ministers also sometimes choose to meet with candidates personally and this is to be encouraged, particularly for positions, such as the Chair.

33. In due diligence, CCMAU and the company will provide each approved candidate with appropriate

background information on the company. Where the information is commercially sensitive, the candidate(s) will sign a confidentiality agreement. Due diligence is also intended to cover any perceived or actual conflicts of interest a candidate may have with regard to his/her appointment. Details of the preferred management of conflicts of interest with regard to Crown companies appear as Annex 3.

34. At the same time, CCMAU will discuss the candidates’ skills and competencies with their referees.

CCMAU will also discuss the candidates with the Chair of the Crown company. This discussion will encompass the Chair’s assessment of ‘best fit’ in terms of skills, experience and personal attributes.

35. Where candidates have already been “screened” by CCMAU, they are broadly aware of the need to

avoid conflicts of interest. Due diligence enables a specific review of the possible conflict that may exist.

36. Crown companies adopt the same regime for managing conflicts of interest as required by the

Companies Act 1993 and followed by directors in the private sector. This includes the normal mechanisms, such as interest registers and mandatory notifications by directors if an issue arises in deliberations that might create a perceived or actual conflict of interest. Successive Responsible Ministers have required Crown directors to be informed of the government’s desire to avoid conflicts or, where possible, that they may be managed in accordance with legal requirements. Draft letters attached as Annex 4 are guidelines on how Responsible Ministers wish boards to manage any conflicts of interest that may arise. The guidelines are in addition to and consistent with the requirements of the Companies Act 1993. The intention is to review the guidelines to ensure that they replicate the policies stated in the recent Cabinet Office circulars regarding Crown entities.

37. Assuming that all aspects of the candidate’s due diligence and the Unit’s referee checks prove to be

favourable and the Responsible Minister gives his/her approval to the preferred candidate, CCMAU will draft the memorandum to the APH for the Responsible Minister’s signature (on behalf of both shareholding Ministers and in accordance with CO (99) 10). The Terms of Reference for the position will also be finalised.

38. The Responsible Minister’s certification that the necessary processes have been completed will be

included in the (APH).

39. The Responsible Minister, in his/her shareholder capacity, will consult with the Minister of Finance, if this has not previously occurred4, prior to the memorandum proceeding to the Cabinet Office. CCMAU will have separately provided the Minister of Finance with copies of the relevant documentation.

40. If, as a result of discussion at Cabinet or Caucus the Minister decides not to appoint the recommended

candidate, CCMAU will be directed to identify additional candidates. The Minister will also direct CCMAU to evaluate candidates identified by Cabinet or Caucus against the Skills Profile and to report back accordingly.

41. Following Cabinet’s endorsement, the Responsible Minister signs on behalf of shareholding Ministers

the letters of appointment and the formal advice to the appropriate company secretary. A courtesy letter is sent to the Chairperson.

42. Each new director is formally advised of:

(a) Duration of appointment; (b) Designation of appointment; (c) Statutory basis for the appointment; (d) The Government’s requirements concerning the management of conflicts of interest from a

Crown company perspective.5; (e) The terms of reference for the board, including details of the shareholding Ministers’

expectations for the company; (f) Confirmation of the expectation that each Chair will undertake annual performance reviews on

the performance of the director and the board and the results will be shared with the Minister and CCMAU;

(g) Confirmation that the Director may be removed from office by the Shareholders without the

need to show just cause; (h) The level of board fees approved by the shareholders for the company.

43. Each director is required to formally accept the appointment, and in so doing, so notes that his/her

appointment may end at an earlier date. Each undertakes to maintain an understanding of the requirements of the position.

Extraordinary Vacancies 44. The procedure outlined above addresses planned vacancies and retirements of directors. There will

be times when unanticipated vacancies arise. Reasons can include early retirement of a director, death or disability or the Responsible Minister and/or CCMAU may have identified concerns in the performance of a company that requires changes to or additions to the board. In all cases, the candidates considered for appointment will undergo the same evaluation process that has been described in this memorandum.

Induction 45. The appointment process does not end with the director assuming the position. Each new director

requires an appropriate induction. This takes two forms:

(a) CCMAU conducts brief, sector-specific induction programmes; (b) The Chair actions formal induction into all aspects of the company.

4 See footnote 1. 5 Candidates receive letters that elaborate upon a director’s obligations in terms of the Companies Act

1993.

In addition, where the new director is unfamiliar with the role and obligations of a director, CCMAU will require the director to participate in the Institute of Director development programmes. The company will facilitate this process.

Post-appointment Audit and Director Evaluation 46. To assist CCMAU to monitor the quality of its appointment process, the Unit liases with the Chair of

each company to discuss the performance of the new director. 47. Since 1995 CCMAU has managed, on behalf of Responsible Ministers, a director evaluation process.

In the view of the Institute of Directors, the government has largely led the private sector in this initiative. Initially, the process focused only on individual directors’ contributions. In this regard, the evaluations are an important component of succession planning and determining whether a director should be re-appointed. More recently, the annual evaluations are viewed as empowering new directors to seek advice on their performance and development in situations where Chairs continue to be reticent over commenting on director performance.

48. The results of the director evaluations, which are conducted annually by the Chair, are reported to and

retained by the Unit which collates this information and advises the Responsible Minister of board and director performance. This is usually in conjunction with the Unit’s reporting on the Annual Board Skills Profile.

49. In 1995 CCMAU issued guidelines on how board and director evaluations should be undertaken. The

guidelines are being reviewed to ensure that they continue to reflect current best practice. Director Retirements 50. Directors are appointed for terms of up to three years and subject to their contribution being

satisfactory and their skills continuing to be relevant, are generally appointed for a second term. In exceptional circumstances, a director may serve beyond the conventional six years.

51. A director’s appointment may end in one of two ways; either he/she is not re-appointed when his/her

term ends, or he/she may be asked to resign before the end of his/her term on performance grounds, or if the Responsible Minister seeks to make changes to a board’s skills mix. This removal for whatever reason should be on the advice of CCMAU.

52. The Companies Act 1993 empowers shareholders to dismiss a director, but to date, these powers

have not been used by Crown shareholders. Instead, directors whom the Crown shareholders seek to remove have been given the option to submit their resignation. The emphasis has been on facilitating a director with the opportunity to exit with dignity.

Remuneration 53. Company directors receive fees for their contribution from the sum approved by shareholding

Ministers for board fees each financial year. Fees are met from company resources. 54. Company constitutions provide for the shareholding Ministers to approve a level of fees on an annual

basis. These fees consist of “ordinary fees” to meet the contribution involved by each director attending board and committee meetings. In some cases, board fees are augmented by “special fees”. That is, fees approved to recognise directors who are members of major board committees and/or directors on subsidiary companies and are paid out of the approved pool. In exceptional circumstances, particularly when boards are actively involved in major issues, such as establishing or significantly restructuring a company, Ministers have approved additional, special purpose fees.

55. Directors are remunerated for their contribution to the company, and on average their time

commitment is of the order of two to three days per month. Chairs generally contribute about two days per week.

56. Ordinary board fees are based on unit rates per director, with a double loading and a quarter loading

being added for the chair and deputy chair, respectively. Shareholding Ministers approve a total sum with the actual distribution from the pool being determined by the board. Director candidates are advised of the level of remuneration in the course of their due diligence.

57. The unit rates per director used in assessing board fees are based upon a methodology approved by

Cabinet in 1997 (APH (97) M6/4 refers). This entailed the banding of Crown companies with public listed companies of comparable size and complexity. Using the bands, a scale of fees has been assessed which is intended to provide internal and external comparability for the Crown companies. The current scale of fees6 is:

Company band Unit rate per director A $28,000 B $25,000 C $22,000 D $19,000 E $16,000

58. Crown company directors do not receive a retirement allowance or any equivalent fee at the end of

their terms. 59. Expenses incurred by directors in meeting their obligations such as homes and accommodation for out

of town directors are reimbursed by the company to which they have been appointed. All fees are reported in each company’s annual report.

Establishment Boards 60. Although not boards in the terms of the Companies Act 1993, it is necessary when a new company is

to be formed to appoint an establishment board to initiate and manage the incorporation process. This process includes the assessment of whether a business is feasible, the draft business plan, the draft Statement of Corporate Intent, the sale and purchase agreement and the resources necessary to form and run a company. Essentially, the “board’ is a group of appropriately skilled advisers, reporting to the Responsible Minister in conjunction with CCMAU and Treasury. Members are selected for their specialist expertise and may be, although this is not guaranteed, subsequently appointed to the incorporated board. Terms, fees and conditions are decided on a case by case basis recognising the complexity of the establishment and the likely time commitment. Cabinet approves all terms and conditions on the recommendation of the Responsible Minister.

6 This scale is an extract from the Cabinet’s 1997 approval, as confirmed by shareholding Ministers in August

1999. There are no Crown companies in Band A.

ANNEXURE 2 : CCMAU’S PROCESS FOR SCREENING PROSPECTIVE DIRECTOR CANDIDATES

ANNEXURE 3 : CONFLICT OF INTEREST LETTERS FOR THE THREE SECTORS

CONFLICT OF INTEREST LETTERS

Date <<Title>> <<Initials>> <<LastName>> <<Address1>> <<Address2>> <<City>> Dear <<Title>> <<LastName>>, Crown Company Directors: Management of Conflicts of Interest As you are a new appointee, it is necessary that you be advised of the expectations of shareholding Ministers with regard to the management of conflicts of interest that may arise in the course of your term as a director. As you will be aware, directors occupy a fiduciary position, which requires a director to act bona fide in what the director considers is in the best interests of the company. Accordingly, directors are required by law not to place themselves in a position of a conflict of interest other than to the extent allowed under the Companies Act 1993 and the company’s constitution. It is expected that you will make yourself familiar with the obligations required of a director in terms of the Companies Act 1993. Nothing in this letter obviates your responsibility in this regard. However, it is important that you are aware of the additional expectations of the shareholding Ministers with regards to conflicts of interests. Shareholding Ministers expect that no director on the board of a Crown-owned company or subsidiary company will undertake work for the company. This expectation is not intended to preclude a director from undertaking assignments for the board which properly fall within the definition of a director’s duties, but would preclude the director carrying out, say, a consulting assignment for the management of the company. Shareholding Ministers also expect that directors in Crown-owned companies should not be placed in a conflict of interest through the involvement of an organisation with which the director has an ongoing substantial commercial or professional interest or employment, with a Crown-owned company of which they are a director. Two situations that could create a conflict of interest where Crown-owned companies engage organisations in which directors have such an interest are: 1. Where the organisation has been engaged for a one-off, specific assignment; and 2. Where the organisation engaged has an on-going involvement with the Crown-owned company. With regard to the first situation, shareholding Ministers consider that, provided the concerned director declares his/her interest in the organisation to be engaged for the assignment and takes the appropriate actions under the Companies Act 1993 and the company’s constitution (eg. Refraining from voting), it is unlikely that the organisation need be excluded from undertaking the assignment. To exclude the organisation could unduly penalise organisations from competing for business, especially when they are in highly specialised areas. However, boards of Crown-owned companies will also need to consider whether the affected director should be party to the service to be provided by his/her organisation to the Crown-owned company. Shareholding Ministers expect a director in this situation to distance himself/herself from the provision of

service or advice although, in a highly specialised sector, this may not always be possible. The company’s board should give careful consideration to a director’s involvement in deliberations on the assignment. The second situation referred to above causes shareholding Ministers greater concern, i.e. where the organisation engaged has an on-going involvement with the Crown-owned company. The situation can arise from the company engaging, say, legal, accounting or other professional advice or services. Many of these firms are sources for a large number of directors and the potential for conflicts of interest is high. In principle, the conflict of interest provisions in the Companies Act 1993 and the company’s constitution should provide adequate protection against allegations of conflicts of interest, but shareholding Ministers have additional concerns that those provisions do not entirely remedy. A director who frequently stands aside from board decision-making places a greater burden on the remainder of the board. This can also deny the board the skills and experience of a director, which is not (generally speaking) in the best interests of the Crown-owned company. There is also potential for Ministers and boards to be significantly distracted by allegations of conflicts. The need to address each allegation can be time-consuming. Accordingly, shareholding Ministers wish to convey to all directors that Crown-owned companies should not engage in an on-going arrangement with an organisation in which a director has an interest of the nature outlined in this letter. Shareholding Ministers are of the view that Crown-owned companies should be beyond reproach. Following the expectations of shareholding Ministers described in this letter should ensure that this is so. In the event that exceptions to these measures appear appropriate, they should be referred to the shareholding Ministers. Yours sincerely, Signed by Responsible Minister

Monitoring Government Companies

By Ron Hamilton

Reprinted with kind permission of Ron Hamilton

© Ron Hamilton

This paper was prepared by Ron Hamilton, Director of Appointments and Governance in the Crown Monitoring and Advisory Unit (CCMAU), New Zealand. The paper draws on the experience of members of the Unit in developing the monitoring regimes for Crown companies and is not necessarily representative of the views of CCMAU. Given the diversity of jurisdictions and structures of enterprise owned and controlled by the State across the globe, recipients should not depend or rely upon these best practice guides as a substitute for proper professional advice or as a basis for formulating business decisions.

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CONTENTS

What is to be Monitored Monitoring Purchase Interests Monitoring Ownership Interests Who Monitors The Place of Governance in a Monitoring Agency Complementary Monitoring Advice Annexure 1 Outlines some of the means for Monitoring the

Government Shareholder’s ownership interests

Annexure 2 Represents a typical contract between the

Responsible Minister and the Monitoring Agency

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1. What is to be monitored?

The Government pursues a range of objectives through its entities and is exposed to a range of risks. Identifying and understanding these objectives and exposures is a key consideration in the design of a monitoring regime.

2. Monitoring purchase interests

The Government purchases services on behalf of its publics. The focus of the purchase monitoring is to ensure that the government receives good value for money – the product or service is to a satisfactory quality and entity the appropriate nature; and that the price reflects efficient production of the purchase. The purchases may be from government-owned entities or from the private sector. For example, a government-funded entity may purchase public good weather forecasts from the supplying organisation. Or a government-funded entity may purchase public good radio and television programmes from state or private sector broadcasters.

3. Monitoring ownership interests

The Government owns a number of entities. It may purchase services from these entities but, for the purposes of ownership monitoring, this is academic.

The key ownership interest is in ensuring the sound management of the entity in which the government has invested. Is the entity maintaining and enhancing its value? Value is, of course, more than the entity’s financial value – it includes its human and intellectual capital, its organisational integrity and its social responsibilities to its various stakeholders.

The government may also have a political interest in the entities. It is concerned that there is no political fall-out from the activities of the government entity. Issues management may be an important component of the government’s monitoring vehicle. In general, there needs to be a separation of these concerns in the management of the entities. The structure of the corporate vehicle is pivotal.

For the purposes of this discussion, it is assumed that the entities are based upon the corporate model. That is, there will be a shareholding (if a company) or responsible Minister who appoints a governing board. The board will be empowered to appoint, remove and monitor the management through the chief executive.

4. Who monitors

In the company model, it is the shareholding Ministers who have the responsibility for monitoring the company. As government shareholders, the Ministers will be accountable to Parliament for the performance of the company. Notwithstanding that the company may be directly questioned by a Parliamentary Select Committee, it remains that the shareholding Ministers are accountable.

In most situations, the Ministers will have agencies to undertake the actual monitoring. These may be departments that will include ownership monitoring among its functions. Departments may also be responsible for purchase monitoring and the management of the regulatory environment in which the company operates. In principal, departments can create internal boundaries between these functions. In practice, the maintenance of these boundaries is difficult to maintain. Not only are there natural tensions between the practitioners of these roles, if there is a single Minister responsible for both purchase/regulatory issues and the ownership of the service provider, that Minister will be perceived as having conflicting interests. For example, a Minister in charge of the broadcasting regulatory environment who is also the Minister responsible for State owned broadcasters – where there is also a private sector broadcaster –will be perceived as having a conflict of interest. To some extent, this perceived conflict may be minimised if the Minister receives ownership monitoring advice from one distinct monitoring agency, not affiliated with the regulatory agency.

In New Zealand, the case has been made for the separation of purchase monitoring – either departments or defined purchasing agencies; and an ownership monitoring agency. In the latter case, the roles of purchase and ownership Ministers have, sometimes been combined, creating misunderstandings over which capacity a Minister fulfils sometimes operates. The preference is for ownership Ministers to be separated from purchase and regulatory roles.

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Two shareholding Ministers have proven to be a workable option. There is a responsible Minister, who manages the ownership of the entities, and the Minister of Finance. The latter has balance sheet and fiscal issues that are monitored separately by the Finance Minister’s agency. For the purposes of this discussion, this “government balance sheet interest”, which is also another form of ownership interest, is set aside. These issues demand a different monitoring philosophy and do not readily combine with ownership monitoring. Indeed, there can be tensions between the two monitoring regimes. However, these tensions can be healthy.

Conflicts may arise when the Minister of Finance “owns” the ownership monitoring vehicle where the ownership portfolio is allocated to other Ministers. In effect, the Minister of Finance could be construed as monitoring the performance of his or her Cabinet colleagues – a potential source of political tension. This concern has been resolved in the New Zealand context through the monitoring agency, which is a semi-autonomous body (SAB) attached to Treasury for “pay and rations” but is directly accountable to the Responsible Minister (one of the shareholding Ministers). The arrangement has been formalised through the Agency entering into a purchase agreement (a form of contract) with the Responsible Minister. The Minister of Finance (and the Treasury) has no involvement in the setting of the Agency’s purchase agreements.

The other shareholder, the Minister of Finance, receives advice from the Treasury. The two agencies consult but have the right to differ in the nature of the advice provided. To reiterate, the Unit provides ownership investment advice to its Minister; the Treasury reports to the Minister of Finance from the perspective of any impact on the Crown’s balance sheet.

5. The place of governance in a monitoring agency

Appointing and monitoring the boards of directors is an integral part of ownership monitoring. Why? The role of the board is directly linked to the performance of the company. Without going into detail on the functions of the board, this body has the stewardship of the owner’s investment. It is the board which is accountable to the owner and to the stakeholders. It is the board that who ensures that the company has the resources to effect the expected outcomes. It is the board who, through the appointment of the chief executive, shapes the performance of the company. If the company is not performing to the owner’s expectations, the owner must first approach the board for accountability. In the most extreme circumstances, the owner may remove members of the board.

The owner, in the case of government companies, appoints the board in his/her capacity as shareholder. It is also the owner who removes one or more members of the board. It is sensible to limit the length and number of consecutive terms a director may have.

In governments, it is the owner who is accountable to Parliament. If this accountability is to be adequately addressed, the owner – who is also the Responsible Minister - must appoint directors who are capable of meeting ownership expectations.

It follows that, as the responsible Minister requires expert advice on the performance of the company, he also requires expert advice on the board’s membership and performance.

By being attached to the performance monitoring function, the Minister’s governance advisers are integrated into the setting of performance goals for each company, the overview of the company’s business strategies and hence, the skills required by the board. In New Zealand, the integration of monitoring and governance has avoided the potential pitfalls of formal communications between the monitors and a separate appointments agency. The governance advisers assist the monitors as issues that might have an impact on governance arise. When appropriate, the owner receives governance advice integrated into performance advice.

More importantly, the integration better equips the governance adviser to advise on the skills and competencies that make up an effective board. In stating this, it goes without saying that the process demands an adherence to a skills-based appointment process. Anything other than this – such as patronage or representation – will diminish the skills bank of the board.

The responsible Minister, acting as shareholder, appoints the board within the terms of the Companies Act and each company’s constitution. The accountability regime precludes the Minister delegating the appointments to any other person. This does not preclude the Cabinet from over-seeing the appointments – for Cabinet is equally accountable (as the Executive) for the performance of government in meeting the community’s expectations. As a general observation, Parliaments are not

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convenient vehicles to assess the responsible Minister’s performance with regard to the companies; Parliamentary Select Committees could usefully monitor Ministers’ governance decisions.

The United Kingdom has gone a significant way towards assisting Parliament in assessing the Ministers’ governance decisions. There is an Office of the Commissioner for Public Appointments, who arranges for each agency responsible for providing appointment advice to follow transparent and robust appointment processes. The Commissioner can also comment on Ministers who makes appointments outside the appointments framework. This instrument could work equally well in New Zealand or in other Westminster environments.

The owner also requires administrative assistance to manage and review board fees approvals. It is sensible to allocate this role to the governance component of the monitoring agency.

6. Complementary monitoring advice

Governments, by their nature, are often unfamiliar with business drivers and disciplines. This can sometimes extend to the qualifications of their monitoring agency. In such cases, the formation of an advisory board consisting of experienced business people can provide informed quality assurance on the monitoring agency’s advice to the responsible Minister. The board can report directly to the Minister or can be an additional resource to the monitoring agency. A secondary value of such a board is that it can be a “sounding” board for the agency to test policy advice in a commercial environment.

7. Monitoring vehicles

Annex 1 outlines some of means for monitoring the government shareholder’s ownership interests.

Annex 2 is a representation of a typical “contract” between the responsible Minister and the monitoring agency.

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ANNEXURE 1 Monitoring vehicles Performance monitoring: Vehicle Availability Public Minister Monitor Board Shareholder’s expectation letter to board

No Yes Yes Yes

Statement of Corporate Intent

Yes Yes Yes Yes

Strategic Plan No Yes Yes Yes Business Plan No Yes Yes Yes Quarterly Reports No Yes Yes Biannual and annual reports

Yes Yes Yes Yes

“No surprises” advice

No Yes Yes Yes

Board appointments

Yes Yes Yes Yes

Governance:

Board, Chairman and director evaluations. Board skills profile Access to strategic plan – to identify future skills requirements Sound and frequent consultations between Agency and chairs

Skills required in agency membership

Governance Understanding of corporate model Understanding of shareholder relationships Familiarity with boardroom practice Familiarity with roles of chairman, director, management. Ability to identify board competencies Ability to identify skills requirements Access to candidate identification vehicles. Understanding of role of director induction. Ability to identify and deliver governance training requirements.

Performance monitoring

Corporate finance Economics Data base management Understanding of how business functions Legal Organisational analysis. Policy analysis Project management Knowledge of the industry

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Tools required

Director, company and candidate/skills data base. Company performance data base Sectoral/industrial data base Access to business and economic activity data base.

Typical routine performance monitoring

A routine financial analysis might include:

Return on equity Return on assets Current ratio Equity ration Cash flow EVA is an increasingly used tool

In addition, the analyst would be expected to develop non-financial performance indications including, where possible, industry standard comparators. For example, in a forestry situation, private sector forestry production, returns and international uptake could be relevant. For a television company, the impact of the national economy has on advertising revenue, across the various communications media. In essence, given that the company is not listed, the analyst is trying to replicate a market assessment of the worth of the government’s investment. In summation, successful monitoring requires both generic monitoring skills and knowledge of the specific sector or industry to which the entity belongs. Centralising the generic skills in a specialist monitoring agency is likely to encourage the improvement in the skills of performance monitoring.

There may be economies of scale. Where similar skills are required for ownership monitoring and associated functions (for example, board appointments) across a range of entities, there will probably be advantages in combining the functions in one agency. It is important that this does not undermine the accountability function. It is vital that the monitor does not actually influence performance. Based upon the New Zealand model, a typical monitoring agency may consist of:

Chief Executive Principal Advisers for each Sector Account managers Corporate governance specialist (reporting through the Principal Advisers (clients)) to the Responsible Minister Corporate services: finance, legal, secretarial.

An advisory board could consist of four or five experienced private sector directors, preferably covering a range of industries and fully familiar with the precepts of corporate governance. At least one should have a familiarity with stakeholder relationships, including minority groups. The head of the monitoring unit should be an ex officio member.

ANNEXURE 2

PURCHASE AGREEMENT

Between

THE MINISTER FOR STATE OWNED ENTERPRISES

And

THE EXECUTIVE DIRECTOR OF THE CROWN COMPANY MONITORING ADVISORY UNIT

For the Period 1 July XXXX to 30 June XXXX

Executive Director

Minister for State Owned Enterprises

Dated: Dated:

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GOVERNING PRINCIPLES In reaching this Agreement between the Minister and the Executive Director both parties agree to be bound by the following principles:

• Both parties will keep each other informed of key developments as they impact on the performance of the State Owned Enterprises and the formal outputs outlined in this Agreement.

• The Minister may from time to time, after discussion with the Executive Director, change the

priorities and outputs detailed in the attached Agreement in light of any changing circumstances and the Government’s key objectives.

• It is normal practice when there is a change of Government that a review of the Purchase

Agreement occurs. As a result of the new Minister for State Owned Enterprises reviewing the XXXX/XX Purchase Agreement in January XXXX, CCMAU is now also bound by the following:

! Providing advice on ownership aspects relating to the achievement of the Crown’s

social, economic and cultural strategic objectives;

! Minimising asset sales;

! Providing information and assistance for reviews; and

! A ‘no surprises’ component – trends and risks will be identified and Minister/s will be briefed.

• The Minister and the Executive Director have agreed to the outputs and the proposed policy

initiatives that are set out in this Agreement, together with the associated prices for these deliverables.

• This report covers services and advice provided by the Crown Company Monitoring Advisory

Unit (CCMAU) in respect of State Owned Enterprises, and companies which are monitored within the ambit of Vote State-Owned Enterprises (as per Schedule III or as subsequently agreed).

STRATEGIC CONTEXT In providing monitoring and policy advice to the Minister for State Owned Enterprises CCMAU will take account of the Government’s key policy goal of developing an economy that adapts to change, provides opportunities and increases employment, and while closing the gaps, increases incomes for all New Zealanders. In respect of commercially-oriented Crown-owned companies, this goal will be provided by:

• promoting the efficient use of resources in the economy by Crown-owned companies;

• encouraging businesses to develop a stronger capacity to adapt successfully to changing conditions in international and domestic markets; and

• providing advice on ownership aspects of Crown commercial enterprises that assists in

maximising shareholder value. A key aspect of this role involves CCMAU facilitating successful relationships between the government (Ministers and Officials) and the companies (Chairs and Chief Executives). CCMAU will:

• monitor companies performance and the director appointment process as well as their performance; and

• advise the Crown on its investment in the companies with the objective of maximising

shareholder value.

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OUTPUTS During XXXX/XXXX the Minister will purchase the following outputs [GST inclusive] Output D1 Relationship management $X.XXX million This output involves the Unit providing monitoring and relationship advice and support to the Minister of State Owned Enterprises and other shareholder Ministers as appropriate. It is expected that this advice will provide the following services:

• Monitoring and Relationship management • Ministerial Support • Business Planning • Policy Advice • Assisting in new SOE Establishment

Activity One – Monitoring and Relationship Management This involves CCMAU advising shareholding Ministers on Crown-owned companies, reporting and performance. This will support Ministers in assessing performance and communicating objectives and targets to boards. An assessment is made of the extent to which the objectives and targets have been met so that Ministers can hold boards accountable for their performance. Within this activity the following processes will be provided:

• Advice on quarterly, six monthly and annual reports.

• Representation and advice on annual general meetings.

• Regular Ministerial and portfolio briefings in the form sought by the Minister. Schedule II sets out the timelines required for this advice. Activity Two – Ministerial Support This involves CCMAU providing ongoing support to the Minister through advising on Director appointments and also answering Parliamentary questions and Ministerial correspondence. Activity Three – Business Planning This involves CCMAU:

• providing advice on developing shareholders’ expectations for each company

• ensuring that companies receive outlook letters and statements of shareholder expectations as set out in Schedule II; and

• management of business planning processes, including assessment of SOEs and Crown-owned

companies business plans and draft SCIs. This includes developing a close understanding of market dynamics and strategic responses.

Activity Four – Policy Advice From time to time the Ministers will require advice from CCMAU on how the performance of the State Owned Enterprises and Crown-owned companies can be improved. This may include:

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• advice on strategic directions and capital restructuring;

• asset reconfiguration proposals;

• implications of contractual disputes;

• impact on Treaty settlements;

• contributions to the sales processes of selected assets as required by the Government; and

• addressing major issues which have arisen with particular SOEs or Crown-owned companies. Activity Five – New SOE establishment This involves CCMAU advising, where applicable, on the establishment of new SOEs and Crown Companies. Activity Six – Appointments and Governance This consists of managing the director appointments process, identifying qualified candidates for Ministerial consideration, monitoring director performance and providing advice on governance issues in accordance with the Cabinet approved CCMAU director selection and appointment process [CAB (99) M24/22 refers]. The policy advice must also meet the quality standards contained in this Agreement and in the Estimates of Appropriations. The Ministerial Expectations and Performance Measures for Appointments and Governance are set out in Schedule I. QUALITY STANDARDS FOR POLICY ADVICE The main activity of CCMAU is the provision of commercial and policy advice for Ministers with the key accountability factor being feedback from Ministers on the extent to which they view this advice as being of high quality. The objective of this advice is to contribute to the expected outcomes outlined in Schedule I. High quality advice should generally meet the following criteria:

• Purpose: the aim of the advice is clearly stated and it answers the questions set.

• Logic: the assumptions behind the advice are explicit, and the argument is logical and supported by the facts.

• Accuracy: the information in the paper is accurate and all material information is included.

• Completeness: the advice demonstrates a sound knowledge of the Crown company’s business,

the environment within which the company operates and the consequences of shareholder or company actions.

• Options: an adequate range of options is presented and the benefits, costs and consequences

of each option are assessed. This analysis should be sufficient to demonstrate why a particular course of action is recommended over its alternatives.

• Consultation: other Government agencies and affected parties have been consulted and

possible issues identified.

• Practicality: the problems of implementation, technical feasibility and timing have been considered and are consistently reflected in the recommendations.

• Presentation: the format meets Cabinet Office and Ministerial requirements; the material is

effectively, concisely and clearly presented; has short sentences in plain English; and is free of spelling, grammatical and numerical errors.

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• No Surprises Component: trends and risks have been identified and Minister/s have been briefed.

From time to time the Minister may request urgent advice which may involve compromising the completeness of reports in some circumstances. Prior to dispatch reports will;

• have analysis and presentation checked by a colleague with relevant skills and experience;

• in the case of joint reports, be reviewed by Treasury;

• be vetted by the Principal Advisor or a designated advisor; and

• incorporate external review where CCMAU does not have all the expertise required internally and the advice would otherwise be incomplete, and the importance of the report makes additional peer review necessary.

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SCHEDULE I

EXPECTED OUTCOMES XXXX/XXXX By the end of June XXXX the Minister will have reached the view that CCMAU has achieved the following: On-going Activities

• CCMAU maintains a relationship management regime and has liased appropriately with directors and executives in facilitating relationships which encourage a ‘no surprises’ approach to reporting on SOE activities;

• CCMAU has liased successfully with other stakeholders in ensuring the new SOEs are

commercially successful; and

• CCMAU has added value to the Crown’s commercial companies. In providing monitoring and ownership advice CCMAU will have provided reports which:

• support the establishment of appropriate goals for the entities being monitored;

• identify the ongoing performance of the companies against the goals and objectives that have been set;

• identify the risks which might emerge given the operations of the companies (both individually

and collectively);

• where appropriate explore options with regard to acquisitions, divestments and mergers; and

• focus on meeting agreed priorities as identified above and as agreed with the Minister for State Owned Enterprises.

In providing the advice CCMAU should seek to enhance the quality of that advice through a process of testing of ideas and concepts with market leaders in the private sector as well as undertaking internal quality assurance processes. During XXXX/XXXX CCMAU will give particular attention to the following issues:

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MINISTERIAL EXPECTATIONS MINISTER’S EXPECTATIONS HOW CCMAU WILL FULFIL THESE

EXPECTATIONS DATE FOR COMPLETION

Minimise asset sales

Take this into account when providing advice.

N/A

SOE A Ltd Consult with the Board of A Ltd on the proposed cessation of “y” services by 31 March XXXX. Review the options for the future of A Ltd.

Provision of advice to Ministers on the section 13 consultation process. Evaluate options and advise Ministers accordingly.

30 September XXXX. 31 October XXXX.

B Corporation Ltd New directions for “B” Board; Charter; amendments to SCI. Structure of subsidiaries.

Advice on the Charter development and implementation. This includes advising on the value implications of policy proposals. Advice on appropriate ownership structure.

31 December XXXX. 30 June XXXX

C Ltd Review capital structure, review of charter in the company’s Act, review C’s proposed distribution structure.

Evaluate C Ltd’s plans and projected capital requirements. Liaise with interested parties to ensure process and deadlines are met. Consider and report on feasibility against other priorities.

31 December XXXX 31 December XXXX 31 March XXXX

D Ltd Potential involvement in establishment of new business venture.

Commercially oriented advice on the strategic and commercial aspects of this policy proposal.

Timely advice following the receipt of any proposal.

E Ltd Wind-up

Assist E Ltd in winding up.

30 June XXXX

F Corporation Ltd Offshore development

Timely and comprehensive strategic and commercial advice on offshore involvement.

Timely advice in accordance with F Corp’s commercial timeframe.

G Ltd Review of longer-term strategic direction.

Provide timely advice to the Minister on the outcome of the review and its implications for shareholders value.

31 March XXXX.

H Ltd Wind-up.

Co-ordinate with Treasury and Board to facilitate wind-up process.

31 March XXXX

I Corporation Ltd Review capital structure.

Analysis and report on financial implications of Company’s proposed changes to its capital structure.

31 December XXXX

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APPOINTMENTS AND GOVERNANCE MINISTERIAL EXPECTATIONS DATE FOR COMPLETION AND

QUALITY MEASURES Manage director candidate identification 1. Develop and agree with Ministers clear competencies and other

criteria for directors. 2. Details of all curricula vitae are to be entered into the database. 3. Curricula vitae are pre-screened to identify provisionally eligible

candidates. 4. Provisionally eligible candidates are screened using an interview

process carried out by the Director – Appointments & Governance where appropriate and a SOE/CROC director.

5. Screening assessment and referees’ comments to be recorded in director database.

All incoming curricula vitaes pre-screened within week of receipt. 60% of provisionally eligible candidates screened within three months of identification, balance over six months. Entry of screening process data into database within one of screening interview.

Manage appointment rounds on behalf of shareholding Minister/s 1. Initiate and evaluate assessment of Chair/Board and skills needs. 2. Identify and assess possible new directors for referral to Ministers. 3. Submit recommendations to Ministers on appointments and

reappointments. 4. Prepare Appointment & Honours papers. 5. Complete appointment documentation.

Complete with timeframe agreed with Minister. This is expected to be July XXXX and February XXXX. Complete by mid August for the September term appointments and by 31 January for the March XXXX appointments.

Director induction Induction for new directors.

Conduct two sector specific seminars per year.

Director development Develop a new programme to further develop director skills.

30 November XXXX.

Director Candidate Preparation Conduct two potential director seminars.

Normally held in May and November.

Monitor company governance Promote and enhance sound governance within boards. Manage board governance communications in consultation with the Director – Appointments & Governance.

Annually review performance of Chairs and monitor and regularly review performance of all Crown-owned company directors.

Receive board succession plans Implement programme to receive succession plans concurrently with the issuing guidelines for director assessments

Chairs will be reminded of their obligations by 31 August XXXX.

Advice on director fees Provision of recommendations for the annual approval of board fees for the XXXX/XXXX financial year by the shareholding Minister

Paper to shareholding Ministers by 31 August XXXX.

Review of fees scale Report to Responsible Minister on movement in private sector fees and the implications they may have on Crown company fees.

30 September XXXX.

Seek director assessments Seek and evaluate director assessments.

Chairs will be reminded of their obligations by 31 August XXXX.

Preparation of Manual Prepare and distribute detailed manual on board appointment process (as approved by Cabinet and other 1999) and relevant “best practice” issues for board governance.

31 July XXXX.

Promote best practice Formalise an interactive network for sharing “best practice” developments.

30 November XXXX

Ongoing reviews Review codified appointment process and recommend means to strengthen, where necessary, and to enhance transparency in the appointment process.

30 November XXXX

Assist other agencies Assist other agencies with identifying candidates for Crown entity appointments.

As required.

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SCHEDULE II EXPECTED TIMELINE FOR REPORTS AND PAPERS FOR THE MINISTER Timing Requirements for SOE Reports and other documents The timelines indicated are for the most part set out in the State Owned Enterprises Act 1986. The timing indications assume that the SOEs have a 30 June balance date. The timelines for companies with non-June balance dates have a similar timeline adjusted appropriately. Non-SOE companies monitored by CCMAU have similar business plan timelines. Type of Report Date Comments Business Planning Rounds For those SOEs with June

balance dates

Shareholding Ministers Outlook letter from shareholding Ministers to Boards.

December/January The Outlook letter details the information requirements for the planning round.

Board Submit outlook report, draft business plan and draft SCI to shareholdings Ministers.

Before 31 May (s14(1)-SCI)

Boards should endeavour to deliver these documents as early as possible (before 31 May).

Shareholding Ministers Comments from shareholding Ministers on draft documentation.

By 16 June (S14(4))

This usually takes the form of a meeting with shareholding Ministers and advisors, followed by a letter with shareholding Ministers’ comments.

Board Deliver final business plan and SCI.

By 30 June (S14(4))

The completed SCI must be delivered before the commencement of the financial year, or such later date as determined by shareholding Ministers.

Shareholding Ministers Tabling of SCI.

Within 12 sitting days of receipt (S17(2)(a))

Annual reports Board Report of Board, audited financial statements and auditor’s report to be delivered to shareholding Ministers.

Within 3 months at the end of each financial year (i.e. by 30 September).

Shareholding Ministers Tabling of annual report.

Within 12 sitting days of receipt (S17(2)(b))

Annual General Meetings Board Each Board is to call an AGM.

At least once in each calendar year. S120 of the Companies Act 1993.

Each SOE is to hold an AGM at least once in each calendar year and no more than 15 months may elapse between the date of one AGM and the next, nor may the SOE hold an AGM later than 6 months after the balance date of the company.

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Type of Report Date Comments Half-yearly reports Board Half-yearly report to be delivered to shareholding Ministers.

Within two months after the end of the first half of each financial year (by 31 August) (S16(1))

Shareholding Ministers Tabling half-yearly report.

Within 12 sitting days of receipts (S17(4))

Each report must include the information specified in the SCI.

Quarterly reports Board Quarterly reports to be delivered to the shareholding Ministers. The requirement to deliver quarterly reports is usually set out in the SCI.

Within one month after the end of the quarter.

CCMAU prepares a report for Cabinet following receipt of the quarterly reports. Those not received in time will be omitted from this report with a note as to the reason of omission. Feedback will be given to SOEs where appropriate.

Ministerial Correspondence Drafting of responses for Ministerial correspondence for approval by the Minister and/or other Ministers on referral.

Drafting replies provided within 10 working days of receipt for any correspondence with priority accorded to correspondence marked urgent. Draft reply within 5 working days for Prime Ministerial correspondence. Ministerial correspondence is currently running at an annual rate of 600 letters per annum.

Parliamentary Questions Drafting of responses for Parliamentary Questions as requested by the Minister

Questions of the Day to the Minister’s office by 11am Responses to Written and Oral Questions to the Minister’s office by 5.00pm two days before the due date stamped on the questions. Parliamentary questions are currently running at 330 replies per annum.

Official Information Act requests

Drafting of responses to requests under the provisions of the Official Information Act 1982 either made directly to CCMAU or which have been referred to CCMAU by the Minister or other parties.

All requests handled within the timeframes set out in the Act. Draft replies will be with the Minister five working days before the statutory deadline for reply. Requests for official information are currently running at 55 requests per annum.

Principles and Better Practices Corporate Governance in Commonwealth Authorities and Companies

Australian National Audit Office

Reprinted with kind permission of the Australian National Audit Office

Permission has been granted to reproduce the material on a non-exclusive, non-transferable basis without charge for the specific purpose requested subject to no commercial usage or sale and inclusion of an acknowledgement giving the full title of the source, the author or author body, publisher and date of publication, followed by the words ‘Commonwealth of Australia copyright reproduced by permission’.

© Australian National Audit Office

Published: 01/06/1999 Corporate Governance in Commonwealth Authorities and Companies

Note: These guidelines have been prepared as guidance for boards and directors of State-owned or controlled enterprises and authorities in matters of good corporate governance and are not intended to be exhaustive. Given the diversity of jurisdictions and structures of enterprises owned and controlled by the State across the globe, recipients should not depend or rely upon these best practice guides as a substitute for proper professional advice or as a basis for formulating business decisions.

Contact details: The Auditor General Telephone: 61-2-6203-7500 Australian National Audit Office Telefacsimile: 61-2-6273-5355 Australia Website address: http://www.anao.govt.au

Commonwealth Association for Corporate Governance The Commonwealth Association for Corporate Governance (CACG) was established in April 1998 in response to the Edinburgh Declaration of the Commonwealth Heads of Government meeting in 1997 to promote excellence in corporate governance in the Commonwealth. The CACG has two primary objectives: # to promote good standards in corporate governance and business practice throughout the

Commonwealth; and # to facilitate the development of appropriate institutions which will be able to advance, teach and

disseminate such standards. The activities of the CACG have been supported with material assistance and/or funding from the Commonwealth Secretariat, World Bank, New Zealand Government, KPMG International, Shell International and Anglo American Corporation. A list of sponsors, members and affiliates of the CACG are given at the end of this document, including interested parties with whom the CACG consults on all policy matters. The CACG Guidelines, representing a definitive set of Principles for Corporate Governance in the Commonwealth, was released in November 1999. These guidelines were adopted by the Commonwealth Heads of Government at its biennuel meeting in Durban, South Africa in November 1999 and endorsed by the Commonwealth Business Leaders Forum. Copies of the CACG Guidelines in either printed form or electronic form may be obtained from Philip A. Armstrong by way of e-mail: paa@enf.co.za. For further information on the CACG and for permission to reproduce or translate all or any part of the CACG Guidelines, contact: Geoffrey T. Bowes Chief Executive Commonwealth Association for Corporate Governance P.O. Box 34 HAVELOCK Telephone: 64-3-574-2502 Marlborough Telefacsimile: 64-3-574-2519 New Zealand e-mail: g.bowes@xtra.co.nz