Owner’s Expectations Manual for Crown Research Institutes

3. SHAREHOLDER ROLES AND RESPONSIBILITIES

Shareholding Ministers’ role and responsibilities

Both shareholding Ministers, the Minister of Research, Science & Technology and the Minister of Finance, are ‘responsible Ministers’ in terms of section 10 of the CE Act.

The Minister of Research, Science & Technology generally takes the lead shareholder role, particularly in his/her capacity as the formal point of contact with boards.

The role of the Minister of Finance as a CRI shareholder reflects the importance of the sector to the Crown’s economic and financial objectives.  From time to time, the Minister of Finance may delegate some of his/her responsibilities to an Associate Minister of Finance.

Under the CE Act, the role of shareholding Ministers is to oversee and manage the Crown’s interests in, and relationship with, CRIs and to exercise any statutory responsibilities given to them, including under the CE Act and the CRI Act.

In practice, shareholding Ministers’ responsibilities include:

• appointing and removing directors (including chairs and deputy chairs),
• commenting on the content of draft SCIs and business plans, including any aspects that may be inconsistent with statutory requirements and the Operating Framework for CRIs,
• supporting the CRIs’ medium- to long-term strategic direction,
• tabling final versions of SCIs in the House of Representatives,
• developing and communicating the government’s ownership policies, in particular through the Operating Framework for CRIs,
• monitoring board performance and taking necessary remedial steps should boards fail to meet the targets in their SCIs and business plans,
• consulting with boards as issues arise,
• tabling annual and half-yearly financial reports in the House of Representatives,
• taking decisions as a shareholder, eg approving a major transaction under the Companies Act or other transactions where such approval is required under a company’s Statement of Corporate Intent (SCI), and
• passing resolutions at annual meetings or special meetings, or agreeing to pass written resolutions in lieu of such meetings.

Shareholding Ministers’ powers

Shareholding Ministers’ statutory powers in relation to CRIs are set out in the Companies Act, the CE Act and the CRI Act.

Generally, shareholding Ministers have statutory powers to:

• exercise their rights as a shareholder under the Companies Act,
• subject to the requirements of the CE Act and the CRI Act:
  • direct the board to alter certain provisions of the company’s SCI,
  • determine the level of dividend payable by the company in respect of any financial year or years, and
  • require additional information from the company.

Shareholding Ministers are required to exercise their powers in a manner that is consistent with the purpose, and principles of operation, of a CRI.

Ministerial directions

Shareholding Ministers have no power to direct CRIs to have regard or give effect to a government policy unless specifically provided in another Act (section 105 of the CE Act).

Section 15 of the CRI Act gives shareholding Ministers the power to direct a CRI to alter certain provisions of its SCI and/or determine the level of dividend payable by a CRI in respect of any financial year.  Before giving such a direction shareholding Ministers are required to consult with the board of the CRI.  They are also required to table notice of the direction in Parliament, and to publish it in the Gazette as soon as practical after giving the direction to the board.  This ensures that shareholding Ministers are accountable to Parliament for the exercise of their statutory powers.

In addition, section 7(6) of the CRI Act requires directors of CRIs to have regard to any whole-of-government direction given under section 107 of the CE Act that relates to Crown entity companies.  Section 107 allows the Ministers of Finance and State Services to direct jointly Crown entities to comply with specified requirements for the purpose of both supporting a whole-of-government approach and, either directly or indirectly, improving public services.  Such directions may be given only to one or more categories of Crown entities, and not to individual Crown entities.  Thus, CRIs would only be required to have regard to a whole-of-government direction that applies to all Crown entity companies.

Before giving a whole-of-government direction, the Ministers of Finance and State Services must consult with the entities to which the direction is proposed to apply and those persons that the Ministers consider are representative of the interests of persons likely to be substantially affected by the proposed direction.  As soon as practicable after giving the direction, the Ministers must notify the entities to which the direction will apply and present the direction to the House of Representatives.  The direction comes into force 15 sitting days after it is presented to the House of Representatives, unless the House resolves, in that period, to disapply the direction.  As soon as possible after the direction comes into force the Ministers are required to publish it in the Gazette and on the internet.

The Prime Minister also has the ability under section 43 of the CRI Act to give directions to CRIs in times of national emergency.

The monitoring function

As owner of the CRIs, the government is obliged to manage its investments in the best interests of New Zealanders. The monitoring function is, therefore, central to ensuring that relevant legislation, ownership policies and shareholding Ministers’ expectations are clearly communicated and that CRI boards have appropriate regard to them.

The shareholding Ministers’ monitoring function is similar to that undertaken by equity holders in the case of private sector companies.  However, shareholding Ministers face certain constraints, including the following, that are not faced by private sector equity holders.

• Shareholding Ministers cannot divest themselves of ownership of the CRI without empowering legislation.
• Unlike listed companies, CRIs do not have a share price that shareholding Ministers can use to monitor company performance.

For these reasons, it is important to monitor CRIs and receive timely and relevant information from them.  The CE and CRI Acts, therefore, give shareholding Ministers certain powers over and above those of ordinary shareholders, eg the power to require information.

The success of this monitoring regime relies on:

• a common and clearly understood framework of accountability and governance,
• the implementation of best-practice corporate governance policies and procedures by CRIs,
• clear and focused board accountability,
• independent advisors being familiar with and understanding the CRIs they monitor and the sectors in which they operate so that shareholding Ministers receive expert advice.

The roles of advisors

Shareholding Ministers receive ownership advice on CRIs from two main sources: CCMAU and the Treasury.  This advice may be supplemented by input from other agencies on issues that affect the environment in which the CRIs operate, such as the research, science and technology portfolio.

Both CCMAU and the Treasury are required to develop and maintain a detailed knowledge of each CRI’s operations and operating environments to assess whether individual CRIs are meeting shareholding Ministers’ expectations.

Advisors focus on:

• the environment in which the CRIs operate,
• protecting and enhancing shareholder value,
• performance against financial and non-financial objectives,
• establishing ownership objectives for individual CRIs and the CRIs as a whole,
• developing ownership policy advice for shareholding Ministers.

Advisors also contribute advice on general policy that affects CRIs in consultation with other departments, as appropriate.  However, final decisions on all CRI issues remain with shareholding Ministers or Cabinet.

CCMAU and the Treasury share some monitoring roles including:

• advising on strategic issues, ownership policy issues, investment and diversification opportunities, and capital structure , and
• analysing business cases presented by CRIs for significant and major transactions (where the CRIs are required to seek the approval of shareholding Ministers).

Each agency brings a different perspective to the monitoring role.  These complementary roles are described below.

CCMAU's role

CCMAU advises the Minister of Research, Science & Technology.  It has lead agency responsibility for:

• routinely monitoring the CRIs’ financial and non-financial performance,
• advising on restructuring issues, and the impact of wider innovation system policy positions on CRIs (in this latter role CCMAU has frequent interactions with the Ministry of Research, Science & Technology (MoRST), the Ministry of Economic Development, the Foundation for Research, Science & Technology (FRST) and other government agencies), and
• issue management, which includes advising shareholding Ministers on ministerial correspondence, requests under the Official Information Act 1982 (OIA), parliamentary questions and other issues that arise.

CCMAU has sole responsibility for advising on board composition and performance and managing the director appointment process.

CCMAU is the daily point of contact with the CRIs and should be sent all routine reports (quarterly, half-yearly and annual reports) and other process-related documents.

The Treasury’s role

The Treasury advises the Minister of Finance and Associate Ministers of Finance.

The Treasury manages the Crown’s finances and is the government’s principal advisor on economic and financial issues.  Therefore, it focuses on both economic efficiency and the fiscal impact of CRI performance, ie the impact on the Crown’s balance sheet, economic efficiency and welfare, and the regulatory/policy interface.

The Treasury may take the lead on issues relating to wider ownership and innovation system policy formation.

Relationship with officials

Boards, particularly chairs, are expected to work closely and cooperate with CCMAU and Treasury officials as the conduit of information and advice to shareholding Ministers.  It is expected that a good working relationship will develop between CCMAU and the Treasury and CRI board members and senior managers.

Boards may wish to invite officials to be present during parts of board meetings or annual business planning sessions, if required, to discuss issues or to clarify shareholder expectations.  Such invitations are entirely at the discretion of each board.

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