Owner’s Expectations Manual for State-Owned Enterprises

4. SOE REPORTING AND ACCOUNTABILITY

Part 3 (Accountability) of the SOE Act provides a comprehensive outline of SOE requirements with regard to its key accountability document – the SCI – and reporting performance to shareholding Ministers and the wider public, through Parliament.

This section summarises the reporting requirements under the SOE Act and outlines shareholding Ministers’ other reporting expectations and how this works in practice. It also addresses SOEs’ accountability to Parliament through select committees.

The business planning process

The business planning process, which culminates in boards delivering a final SCI to shareholding Ministers, is critical in maintaining a strong and mutually supportive relationship between the shareholder and the company.

Most SOEs have a 30 June financial year. The following outlines the key steps in the business planning round for SOEs with a 30 June balance date.

Exchange of expectations statements

In or around December or January of each year, shareholding Ministers send an outlook letter to each board to detail the information requirements, the timing, and any specific issues the company is expected to address during the business planning round.

The board then sends a strategic issues letter to shareholding Ministers by the end of February, outlining the major issues the company expects to address during the business planning round.

Submission and review of business plan and draft SCI

Each SOE board provides shareholding Ministers with a draft SCI, supported by the company’s business plan. The business plan enables shareholding Ministers and their advisors to assess the draft SCI.

The SOE Act requires the board of each SOE to deliver its draft SCI to shareholding Ministers at least one month before the start of each financial year (ie the end of May). Shareholding Ministers’ preference, however, is that SOEs provide their draft SCIs and business plans at the start of May to allow time for meaningful review. If, for any reason, an SOE considers that it cannot meet this deadline, it should contact CCMAU as early as possible.

Sections 14(2) and (3) of the SOE Act set out the information to be contained in each SOE’s SCI, including the objectives of the group, the nature and scope of its activities and the performance targets by which the group may be judged in relation to its objectives. Each SOE’s SCI should clearly identify the information required by these sections of the SOE Act.

Shareholding Ministers expect the performance targets and measures in each SCI to be meaningful and related to the drivers of each SOE’s performance.

Once the business plan and draft SCI are received, advisors prepare a report for shareholding Ministers outlining the key aspects of each SOE’s future strategy. As part of this process, advisors will engage with the companies to clarify any questions arising out of the business plan and draft SCI. To facilitate the calculation of these indicators, it is expected that each SOE will submit with its business plan a full set of financial statements (including a profit and loss statement, statement of financial position and statement of cash flows) for the planning period.

Finalising, tabling and releasing SCIs

Under the SOE Act, shareholding Ministers may comment on the draft SCI, which may include a request for further information or clarification on certain matters. This may be in the form of a letter or, if required, in a meeting between shareholding Ministers, advisors and the board. The comment may also include an extension to the date by which the final SCI must be delivered to shareholding Ministers for tabling.

Boards are required to consider any comments by shareholding Ministers on the draft SCI no later than 14 days before the start of the financial year and deliver a final SCI to shareholding Ministers on or before the start of the financial year or such later date that shareholding Ministers have determined.

The responsible Minister is required to table the final SCI in the House of Representatives within 12 sitting days of its receipt. The SCI should be made publicly available only once this has occurred.

Once tabled, CCMAU will place a PDF copy of each SOE’s SCI on the CCMAU website. SOEs are also encouraged to make their SCIs widely available.

The business plan is not a public document and is not tabled.

If the board of an SOE wishes to amend its SCI after it has been tabled, it must advise shareholding Ministers and consider any comments shareholding Ministers have on the proposed modification(s). The SOE Act sets out the process for making amendments to an SCI during the year.

Key SCI content expectations

Objectives and nature and scope of activities

The board of each SOE is required to specify in the company’s SCI the group’s objectives, and the nature and scope of the activities to be undertaken.

The board of each SOE may wish to consider separately defining, in relation to the nature and scope of the activities to be undertaken by the group, the company’s ‘core business activities’.

In this context, shareholding Ministers consider that:

• the ‘nature and scope of the activities to be undertaken by the group’ defines the boundary outside of which the group may not carry out any business,
• ‘core business activities’ represents the core business activities to be undertaken by the group in line with its core competencies, and
• any business activities to be undertaken by the group that are not core business activities will be within the nature and scope of the company’s activities.

Ministers expect the board of each SOE to operate in such a way that it does not lose focus on the company’s core business activities. This does not preclude expansion into non-core areas. Policy announcements in June 2006 encourage SOEs to diversify where they can demonstrate spill-over benefits that promote economic growth in New Zealand. Ministers will clarify such expectations with individual companies as part of the annual business planning round.

Financial and non-financial performance indicators

The SOE Act requires every SOE to operate as a successful business and, to this end, to be as profitable and efficient as comparable businesses not owned by the Crown, to be a good employer, and to exhibit a sense of social responsibility. Accordingly, shareholding Ministers expect SOEs to benchmark their performance against comparable businesses not owned by the Crown, either in New Zealand or overseas and to demonstrate achievement of the non-financial dimensions of operating as a successful business.

Shareholding Ministers expect SOEs to provide benchmarking information in their SCIs and regular quarterly, half-yearly, and annual reports. In particular, shareholding Ministers are interested in receiving information regarding the following areas of financial and non-financial performance:

• credit rating,
• profitability,
• service performance,
• social responsibility,
• commercial value, and
• other indicators that the board considers relevant or that shareholding Ministers advise from time to time.

Ministers are also interested in receiving other internal benchmarks that the board considers appropriate, e.g. comparison with different business segments.

Performance indicators (financial and non-financial) must:

• be meaningful to the SOE’s business and the SOE Act,
• be specific and measurable without ambiguity,
• be timely and capable of being audited, where appropriate,
• be within the SOE’s responsibility or power to control,
• be consistent with and influence, as appropriate, the SOE’s purpose and principles of operation or business,
• respect commercial sensitivity, where appropriate,
• encourage and reflect best practice, and
• where appropriate, ensure employee participation in, and ownership of, these indicators.

All SOEs should include in their SCIs a glossary of the terms used for financial performance indicators.

Estimate of current commercial value

Section 14(3) of the SOE Act requires the SCI of each SOE to include the board’s estimate of the current commercial value of the Crown’s investment in the SOE and its subsidiaries and a statement of the manner in which the value was assessed.

This is consistent with the expectation that the board has an ongoing fundamental understanding of company value; what value drivers are and the effect in terms of enterprise value.

Accordingly, shareholding Ministers expect the board of each SOE to comply with this requirement and provide an estimate of current commercial value of the Crown’s investment in the SOE in the SCI. If requested, the board should be able to fully explain, and justify, to shareholding Ministers the methodology used for the assessment, and the basis for any assumptions made. In general, shareholding Ministers prefer such valuations to be prepared using a discounted cash flow (DCF) methodology. However, it is recognised that this may not always be feasible and that alternative valuation methodologies may be more appropriate, particularly for smaller SOEs. SOEs may wish to consider having their valuations carried out by or peer-reviewed by third parties with specialist valuation expertise.

Reporting to shareholders

Quarterly reports

While not required under the SOE Act, shareholding Ministers expect each SOE’s SCI to specify that quarterly reports will be provided to shareholding Ministers no later than the end of the month following each quarter. This is a standard reporting expectation that applies to all Crown-owned companies.

Shareholding Ministers expect the financial information and commentary in each SOE’s quarterly report to fully and accurately summarise the company’s performance against budget, identify the cause of major variances, signal any potential developing issues, and highlight major achievements for the quarter. This is expected to include:

• financial statements including profit and loss statement, statement of financial position and statement of cash flows,
• non-financial information, especially key performance indicators for the business, and
• any other performance measures in the SCI that are not already covered.

This information should be provided on a current quarter and year-to-date basis, with a comparison against budget for each. SOEs may also wish to provide data for the relevant period in the previous year.

Additionally, shareholding Ministers expect quarterly reports to include the following information:

• full-time equivalent staff numbers, and
• a clear statement of the SOE’s outlook for the rest of the financial year in terms of achieving its SCI targets, key opportunities, threats, and management plans.

Quarterly reports are confidential to shareholding Ministers and their advisors and are not made public, although Cabinet receives a summary report on each SOE’s performance and outlook.

Half-yearly reports

SOEs are required to deliver their half-yearly report to shareholding Ministers within two months of the end of the first half of each financial year, ie by the end of February. The SOE Act does not specify the information to be presented in half-yearly reports; rather, the content is specified in each SOE’s SCI.

The responsible Minister is required to table each half-yearly report in the House of Representatives within 12 sitting days of receipt. Half-yearly reports should be made publicly available only once this has occurred.

Annual reports

SOEs are required to deliver their annual report to shareholding Ministers within three months of the end of each financial year (although shareholding Ministers’ preference is that each SOE will provide them with a draft version of the annual report before it is finalised). The required content is outlined in section 211 of the Companies Act and in section 15 of the SOE Act. Among other things, the annual report is required to contain information necessary to enable an informed assessment of the operation of the SOE, including a comparison of the performance of the SOE with its SCI. The annual report should:

• provide a comprehensive report on the company’s business so that members of the public are able to clearly understand the nature and scope of the company’s operations, and
• strive to meet current best-practice disclosure guidelines including those relating to governance practice.

The responsible Minister is required to table each annual report in the House of Representatives within 12 sitting days of receipt. Annual reports should not be made publicly available until after this has occurred.

Table of key reporting dates

The table below shows the key dates for the business planning round and regular reporting. The table relates to SOEs with a 30 June balance date. The deadlines will shift in accordance with any other balance date a SOE may have. For example, an SOE with a balance date of 30 September will be required to submit its annual report by 31 December.

Business planning round
December/January	Shareholding Ministers send outlook letters to boards. The outlook letter details shareholding Ministers’ expectations of, and information requirements for, the business planning round.
By 28 February	Boards submit strategic issues letter to shareholding Ministers, setting out the major strategic issues faced by the company.
By end of April	Boards submit their business plan and draft SCI to shareholding Ministers.
By 16 June	Boards consider shareholding Ministers’ comments (if any) on the business plan and draft SCI.
On or before 1 July (or such later date as shareholding Ministers determine)	Boards deliver the final SCI to shareholding Ministers.
Within 12 sitting days of receipt by shareholding Ministers	The responsible Minister tables the SCI in the House of Representatives. SCIs should be made publicly available only once they have been tabled.
Quarterly reports
Within one month after the end of the quarter, ie 31 October 31 January 30 April 31 July	Boards deliver quarterly reports to shareholding Ministers. CCMAU prepares a report which is presented to Cabinet. Quarterly reports are not made public.
Half-yearly report
By 28 February	Boards deliver a half-yearly report to shareholding Ministers. Each report must include the information specified in the SCI.
Within 12 sitting days of receipt by shareholding Ministers	The responsible Minister tables the half-yearly report in the House of Representatives. Half-yearly reports should be made publicly available only once they have been tabled.
Annual report
By 30 September	Boards deliver an annual report to shareholding Ministers
Within 12 sitting days of receipt by shareholding Ministers	The responsible Minister tables the annual report in the House of Representatives. Annual reports should be made publicly available only once they have been tabled.
Annual meeting
By 31 December	Each SOE is to hold an annual meeting no later than six months after its balance date and no more than 15 months may elapse between the date of one annual meeting and the next. An annual meeting does not need to be held if everything to be done at the meeting is dealt with by a written shareholder’s resolution. Where relevant, resolutions are expected to note: that shareholders have received the company’s annual report for the most recent financial year the appointment of the company’s auditor the Board’s decision (if any) as to the payment of a dividend. Shareholding Ministers should not be asked to confirm, approve or ratify the payment of any dividend as this is a decision for the Board.

Other expectations

Provision of official information

SOEs are subject to the Official Information Act 1982. In handling requests made under this Act, SOEs are expected to respect the underlying principles of, and comply fully with, the Act in terms of making information available to the public within the stated deadlines unless there is good reason for withholding information.

‘No surprises’ policy

Ministers expect boards to be sensitive to their interests. Boards must be mindful that Ministers are accountable to a wider audience and the affairs of the companies, positive and negative, can impact on the responsible Minister. This is referred to as the ‘no surprises policy’, further detail of which is set out below. A failure to keep Ministers informed on significant issues at appropriate times can create situations that may divert attention from a company’s day-to-day business.

Under the ‘no surprises’ policy, shareholding Ministers expect to be informed well in advance of any material or significant events, transactions and other issues relating to SOEs that may be contentious or could attract wide public interest, whether positive or negative. Examples of matters that could fall within the ‘no surprises’ policy include, but are not limited to:

• changes in CEOs,
• potential/actual conflicts of interest by directors,
• potential/actual litigation by or against the company, its directors, or employees,
• fraudulent acts by the company’s directors or employees,
• breaches of an SOE’s corporate social responsibility obligations,
• significant company restructuring,
• large-scale redundancies,
• industrial disputes,
• significant acquisitions and divestments,
• significant health and safety issues,
• the release of significant information under the Official Information Act 1982, and
• imminent media coverage of any activities that could attract critical comment or on which shareholding Ministers could be asked to express a view.

Shareholding Ministers expect boards to:

• understand wider government policy issues as part of their decision-making,
• be aware that the Crown has interests that are wider than those of ordinary shareholders in private companies,
• be aware of the potential implications of company-specific issues on the Crown and/or its balance sheet, and
• be sensitive to the demand for accountability placed on shareholding Ministers from both Parliament and New Zealand taxpayers.

Shareholding Ministers’ expectations in relation to the ‘no surprises’ policy are not intended to detract in any way from directors’ statutory obligations.

Depending on the details or circumstances of the issue, communication can be by way of a telephone call, e-mail, letter or a meeting between the board and shareholding Ministers. Boards should advise of the details of the issue and what the board intends to do to respond. CCMAU is the first point of contact for most issues and will pass on relevant details to Ministers’ offices.

Visits by MPs

SOE boards and executives should be aware of the potential political implications of engaging with MPs, either through visits or briefings. Accordingly, SOEs should contact the Minister for SOEs office before agreeing to or organising any visits/briefings. SOEs are encouraged to set an agenda before any such meeting and to ensure that visitors adhere to that agenda.

Accountability

Select committees

Select committees have wide powers to require witnesses and advisors to appear before them and to give evidence. Among other roles, they play an important part in assessing the performance of SOEs.

There are several reasons for which an SOE may appear before a select committee.

• An SOE could be asked to advise a select committee on legislation under formation.
• An SOE may wish to make a submission on a bill as a witness.
• A select committee may receive a petition from private citizens regarding an SOE, which may then be called in for a review.
• Every select committee has the power to launch an inquiry, and could call an SOE in to provide evidence.
• In addition, SOEs are regularly required to appear before the Finance & Expenditure Committee (or another select committee delegated by the Finance & Expenditure Committee) for a financial review. Normally the chair and CEO of the SOE are expected to appear before the select committee. It is not usual for external legal representation to attend. SOEs should view these financial reviews as opportunities, rather than impositions, to emphasise the importance of what they do.

Shareholding Ministers expect to be advised before an SOE appears before a select committee. They also expect the boards and management of SOEs to be open and forthright in their dealings with select committees.

If the chair of an SOE has concerns about providing information to a select committee, shareholding Ministers expect these concerns to be raised with the committee, rather than refusing to provide the information. If, notwithstanding the SOE’s concerns, the select committee requires the information to be provided, the Chair may request that the committee receive the information as private or secret evidence. Chairs are encouraged never to refuse to answer a question outright.

Shareholding Ministers expect SOE boards and management to be aware of, and to familiarise themselves with, the Standing Orders of the House of Representatives before appearing in front of select committees. Boards may wish to consider obtaining specific training in this regard.

In particular, the Standing Orders provide rules relating to Parliamentary privilege. Parliamentary proceedings are subject to absolute privilege, to ensure that those participating in them, including witnesses before select committees, can do so without fear of external consequences. This protection, enshrined in the Bill of Rights 1688, is an essential element in ensuring that Parliament can exercise its powers freely on behalf of its electors. There must be no pressure placed on individuals to deter them, or action taken against them as a direct consequence of their giving evidence to a select committee. Any such action might be regarded as contempt of the House, with potentially serious consequences for those involved.

Further information on select committees can be found in the State Services Commission’s Officials and Select Committees – Guidelines at http://www.ssc.govt.nz/officials-and-select-committees-2007 and in the procedural guides Natural justice before Select Committees and Working with Select Committees on the New Zealand Parliament website at http://www.parliament.nz/en-NZ/PubRes/About/Procedures.

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