Owner’s Expectations Manual for State-Owned Enterprises

8. BOARD GOVERNANCE

Governance framework

Crown company governance

The governance structure for all Crown companies is essentially the same. Shareholding Ministers appoint boards of directors to oversee the management of the companies and to appoint the company’s CEO. This is carried out under the terms of the Companies Act, the relevant legislation under which the company operates, and the constitutions of each company. CCMAU advises shareholding Ministers on director appointments and monitors the performance of each board.

Directors’ duties

The Companies Act sets out the legal duties of company directors, including the duty to act in good faith and in the best interests of the company, as set out in section 131 of the Companies Act.

Some of the other important directors’ duties set out in the Companies Act include the duty to:

• exercise powers only for a proper purpose (section 133),
• comply with the Companies Act and the company’s constitution (section 134),
• not agree to the company engaging in reckless trading (section 135),
• not agree to the company agreeing to incur an obligation that it cannot perform (section 136),
• exercise the care, diligence and skill of a reasonable director (section 137),
• comply with rules concerning transactions in which directors have a ‘self-interest’ (sections 139-144), and
• comply with rules relating to the use and disclosure of company information (section 145).

The fundamental nature of a director’s position in relation to a company is that of fiduciary. This is a relationship of high endeavour and trust, and the obligations on a director are strict.

Failure to diligently and properly discharge their duties can result in personal liability for company directors. This applies as much to Crown company directors as it does to company directors in the private sector. The Crown’s liability for Crown companies is limited in the same way as for other shareholders and there is no guarantee implied or otherwise that the Crown will meet the liabilities of a Crown company should it become insolvent. If a Crown company were to become insolvent and the shareholding Ministers did not wish to make any further investment in that company’s business, a receiver or liquidator would be appointed pursuant to the Companies Act. In the event of liquidation, the liquidator will endeavour to make such recoveries as are available for the benefit of the company’s creditors, which could include claims against directors for reckless or insolvent trading or other breach of duty.

Role of the board

Under the Companies Act, the board of the company is responsible for managing, by or under its direction or supervision, the business and affairs of the company.

The role of the board of a Crown company differs in some respects from the board of a privately owned company. For example, all decisions relating to the operation of a Crown company must be made by or pursuant to the authority of the board in accordance with its SCI. Further, under the constitution of each Crown company, shareholding Ministers, rather than the board, appoint the chair and deputy chair and set directors’ fees.

A Crown company board’s responsibilities include:

• appointing a CEO and managing and monitoring the CEO’s performance,
• providing leadership and vision to the company in a way that will enhance shareholder value,
• developing and reviewing company strategy,
• monitoring the performance of senior management,
• reviewing and approving the company’s capital investments and distributions,
• ensuring compliance with statutory requirements,
• providing leadership in its relationships with key stakeholders including, where relevant, industry groups, Māori and staff,
• preparing annually a draft SCI and delivering it to shareholding Ministers, considering shareholding Ministers’ comments on the draft SCI, and submitting a final SCI for the responsible Minister to table in the House of Representatives,
• developing annually a business plan and delivering it to shareholding Ministers at the same time as the draft SCI,
• holding management responsible for meeting the performance measures/milestones in the SCI and business plan,
• establishing appropriate governance structures (such as board committees and clear lines of responsibility and accountability between the board and management) to ensure the smooth, efficient and prudent management of the company, and
• reporting to shareholding Ministers in accordance with legislative requirements and the expectations set out in this manual.

In addition, the Companies Act requires each board, among other things, to:

• comply with the directors’ duties set out in the Companies Act, including the duty to act in the best interests of the company,
• provide an annual report and annual financial statements to the shareholder,
• comply with the solvency requirements set out in the Companies Act,
• hold annual meetings, except where the shareholder passes a written resolution in lieu of such meetings, and
• present special resolutions to the shareholder when necessary (for example, resolutions for the approval of major transactions as this term is defined in section 129 of the Companies Act).

Role of the chair

The key requirements of the chair’s role are to:

• provide effective leadership and direction to the board and company, consistent with the owner’s expectations, to maximise shareholder value,
• ensure effective accountability and governance of the company, consistent with the requirements of relevant legislation,
• develop and maintain sound relationships with shareholding Ministers, their advisors and other stakeholders,
• meet shareholding Ministers’ expectations by ensuring a process is in place to undertake an annual performance review of the board as a whole, as well as of the chair and directors individually,
• maintain an ongoing review of the board’s membership profile, with regard to the skills needs of the board in relation to the successful governance of the company, as well as succession planning for both the chair and directors’ roles,
• actively observe the ‘no surprises’ policy, ie chairs are expected to advise shareholding Ministers and/or their advisors of any material event or circumstance that could affect shareholder value, cause embarrassment, or be of significant interest to Ministers,
• ensure that the company’s governance arrangements and risk management policies are continually reviewed and updated to reflect current best practice,
• provide the necessary guidance and support to other members of the board to ensure that they contribute effectively to the governance of the company (particular regard is to be given to the induction of and mentoring of new members),
• provide the necessary guidance and support to the chief executive and his/her senior management team to ensure the company is managed effectively, and
• generally act in a manner consistent with the obligations of a director as required by the Companies Act and other legislation.

Role of the deputy chair

Most, but not all, boards will have one member of the board appointed by shareholding Ministers as deputy chair. Naturally, the principal role of the deputy is to act in situations where the chair cannot be present to fulfil one or more of his/her duties. The degree to which the deputy chair takes on the authority and responsibilities of the chair will depend on the circumstances and, particularly, on the length of the chair’s absence. In situations where no formal deputy chair has been appointed, the chair and board will develop a procedure to select a director to act during the absence of the chair (in accordance with the company’s constitution).

The deputy chair may be delegated by the board specific roles as required and in general will be expected to provide a level of leadership and mentoring as would be expected of a senior director. The deputy chair will often lead the board’s periodic evaluation of the chair’s performance, as well as taking a significant role in the board evaluation generally.

Boards should not assume that the deputy chair appointment will inevitably lead to a subsequent appointment as chair.

Board committees

Board committees (or sub-committees) exist to increase the overall effectiveness and efficiency of the board. These committees have no legal standing or distinction from the board itself, and all board members remain accountable for the decisions taken in any and all board committees. When a committee is established by a board, its terms of reference and its powers, duties, reporting procedures, membership and duration of office should be clearly recorded.

Board committees can be standing or ad hoc in nature, and might typically encompass such areas as audit (finance and risk) and remuneration. However, apart from the recommendation of an audit committee below, there is no prescribed or optimum number or type of committees, and boards should only set up new committees after serious consideration of the need for them and of the potential benefits to the governance of the particular company.

The establishment of an audit committee is particularly important. It is expected that such a committee will give the board assurance in terms of risk management and compliance, as well as to probe in greater detail the company’s financial management, reporting and internal controls. Membership of an audit committee will include directors who are financially literate. Best practice dictates that the chair of the audit committee not be the chair of the board. The audit committee should meet at least three times a year and a statement to this effect should be recorded in the annual report.

Fees and expenses

The document Directors’ Fees and Reimbursement Guidelines, posted on CCMAU’s website has comprehensive information on shareholding Ministers’ expectations with regard to the payment of directors’ fees and expenses in Crown companies. Directors are also encouraged to refer to the Office of the Auditor-General’s guidelines on controlling sensitive expenditure at http://www.oag.govt.nz/2007/sensitive-expenditure/.

In the setting of board fees for the year, no allowance is made for membership of committees. Ordinary fees are calculated to cover the full expected duties of a director, including any committee membership. However, the amount approved by the Minister in any one year for board fees is a global amount that the board can allocate as it considers appropriate. Therefore specific fees can be ascribed to committee membership by a board if considered appropriate, as long as a proper process is applied to the allocation and the total amount paid in fees for the year does not exceed the amount specified by the Minister.

Directors: appointment process, terms of appointment and succession planning

Directors are generally appointed to Crown company boards for a term of three years, and may be reappointed at the expiry of that term, subject to their contribution having been satisfactory and their skills continuing to be relevant to the board. In some circumstances directors may serve more than two terms, where a critical business need has been clearly demonstrated to Ministers. Each case is considered on its own merits. Directors need to be aware that the same process that was followed for their original appointment will be applied again if they are eligible and available for reappointment at the expiry of their term.

Shareholding Ministers are accountable to Parliament for the appointment of directors to the various Crown boards. Appointments are made by the responsible Minister for the particular board, and the process is managed by CCMAU.

Crown company directors hold office at the pleasure of shareholding Ministers and accordingly, under the constitutions of the companies, may be removed at any time by notice in writing to the board of the company.

Shareholding Ministers, board chairs and CCMAU are continually reviewing board composition and skills requirements as well as term expiry dates and succession. In the case of every expiry of a director’s term, or vacancy arising for other reasons, this process will result in the development of a skills profile for every board. Following agreement by the responsible Minister, a specification will be prepared for each individual vacancy. The specification for the vacancy will be used by CCMAU to guide the search for suitable candidates for the responsible Minister’s consideration for short-listing and for appointment.

If a director is to retire, he or she will receive a letter from the responsible Minister confirming that fact well in advance of the expiry of the term. If a director is being considered for reappointment, he/she will receive a letter from the responsible Minister at the same time as new board appointees are advised of their appointment. It is CCMAU’s aim to have all board appointees notified at least one month in advance of the commencement of the new term of office.

Conflicts of interest

Directors must disclose any relationships and/or matters that give rise to an actual or potential conflict of interest. Directors should refer to sections 139 to 149 of the Companies Act 1993 for further guidance on what may need to be disclosed. The board must have in place a process for disclosing and dealing with conflicts of interest, including the maintenance of an interest register, and should ensure that all board members are aware of the existence and nature of any disclosure of interest made.

Crown company constitutions provide that a director who is interested in a transaction may not vote on a matter relating to the transaction but may:

• vote on any matter which relates to the company indemnifying, or effecting insurance for, directors and employees of the company,
• attend a meeting at which a matter relating to the transaction arises and be included among the directors for the purposes of determining the presence of a quorum,
• sign a document relating to the transaction on behalf of the company, and
• do anything else as a director in relation to the transaction,

as if the director were not interested in the transaction.

Relaxation of the rule prohibiting directors from voting on a matter in which they have an interest can only be exercised by the shareholding Ministers.

In addition, shareholding Ministers generally expect that directors who are interested in a transaction will absent themselves from deliberation on the matter, unless the board or committee resolves that this is not required.

Further information, including examples of conflicts of interest and guidance on how to manage them, can be found in the Office of the Auditor-General’s publication entitled Managing conflicts of interest: Guidance for public entities.

Other issues to raise with shareholding Ministers

It is also possible that a director may be placed in a situation where, as a result of circumstances which are not related to a directorship of a particular company, continuing to act as a director of that company might nevertheless place the company or the shareholders in a position of embarrassment. A director who is placed in such a situation must take the initiative and raise the matter with the shareholders, via the board chair. While there are no set criteria for such situations, examples of the types of issues the shareholders would expect to be advised on include:

• where legal proceedings have been, or are likely to be, brought against the director,
• where the director has been, or is likely to be, subject to negative media or public scrutiny,
• where the director is placed in a situation of actual or perceived conflict of interest,
• any issue affecting the director’s ability to contribute to the board, eg as a result of other time pressures, extended overseas travel (ie more than two months), illness etc,
• where the director is appointed to any position as an employee of the Crown, or intends to undertake significant contract work for any Crown agency, and
• any other similar circumstance which may place the company or the shareholders in a position of embarrassment.

If any of the above circumstances arise the director concerned should, in the first instance, discuss the matter with the board chair, who will then advise the Minister if appropriate.

Board and director expectations

The board charter or code of practice

A board is expected to have a charter/code of practice to provide guidance to directors to assist them to carry out their duties and responsibilities effectively, and in accordance with the highest professional standards. A board charter should not be an exhaustive statement of obligations. If read in conjunction with the law applying to company directors and the constitution of the company, it should present a complete picture of the legal and ethical responsibilities imposed on directors, including any specific requirements arising from the business of the company and the wider sector in which it operates.

In 2004, the Securities Commission developed a set of Principles of Corporate Governance. They were written after consultation with a range of sectors and acknowledge that different types of entities can take different approaches to achieving consistently high standards of governance. While the Principles do not in themselves impose any legal obligations, they are supported by shareholding Ministers. It is expected that a company’s board charter will at least cover the Securities Commission’s Principles, adapted as necessary to fit the Crown environment and the particular company’s circumstances.

It is also expected that annual reports will report fully on the companies’ corporate governance practices. The manner and style of such reporting is up to the company itself but it should at least provide a report that incorporates a reference to each of the Securities Commission Principles set out below and how the board has achieved those principles.

Securities Commission Principles of Corporate Governance

Shareholding Ministers expect the boards of Crown companies to comply with the Securities Commission Principles of Corporate Governance, including those set out below.

• Directors should observe and foster high ethical standards.
• There should be a balance of independence, skills, knowledge, experience, and perspectives among directors so that the board works effectively.
• The board should use committees where this would enhance its effectiveness in key areas while retaining board responsibility.
• The board should demand integrity both in financial reporting and in the timeliness and balance of disclosures on entity affairs.
• The remuneration of directors and executives should be transparent, fair, and reasonable.
• The board should regularly verify that the entity has appropriate processes that identify and manage potential and relevant risks.
• The board should ensure the quality and independence of the external audit process.
• The board should foster constructive relationships with shareholders that encourage them to engage with the entity.
• The board should respect the interests of stakeholders within the context of the entity's ownership type and its fundamental purpose.

Relationship with shareholding Ministers

The board is appointed by shareholding Ministers, through the office of the responsible Minister. The chair and the deputy chair are also appointed by shareholding Ministers. Although the responsible Minister may meet with the board as a whole from time to time, the usual conduit for informal communications is between the Minister and the chair, or through CCMAU.

Ministers expect the board 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 elsewhere in this document. 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.

Consultancy services

Shareholding Ministers expect that no director on the board of a Crown company or subsidiary company will undertake consulting work for the company. This is not intended to preclude a director from undertaking assignments for the board that properly fall within the scope of a director’s normal duties, but would preclude the director carrying out, for example, a consulting assignment that would normally be contracted to a third party.

In the event that an exception to this rule appears appropriate, the circumstances should be referred by the chair, in advance, to shareholding Ministers for approval.

Gifts, facilitation practices and bribes

Directors are solely remunerated for their contribution to the board through the fees they are paid.  They should not seek to financially benefit in other ways from their position as a director.

No director, or any member of a director’s immediate family, may accept gifts, entertainment, discounts, loans, commissions, or other favours from individuals or organisations, if they could influence, or be perceived as influencing, a business decision, or be considered to be extravagant or unduly frequent. This is especially important if the company or individual is soliciting business or information from the Crown company concerned.

Board attendance

The membership of a board of directors is structured so as to ensure that the competencies and skills necessary to conduct the board’s affairs are present. Although all directors carry equal responsibilities, the appointment process has the aim of ensuring the necessary balance. As with most teams, the absence of a director can have a negative impact on board deliberations. It is therefore expected that boards will agree on a schedule of meeting dates at the commencement of the year, with the intention that directors manage their commitments to ensure attendance.

There has been a general convention that missing two or more meetings in a year, whether consecutive or not, should at least raise initial questions over a director’s motivation and commitment to membership of the board. It is not intended to deny the board’s authority to allow a leave of absence where a director demonstrates sufficient justification for missing one meeting. However, missing two or more meetings must raise doubt whether that director should continue on the board.

Partial attendance, if frequent, is more problematic. Not only is this disruptive to board discussions, it means that the director may lose continuity in board outcomes and again denies the full board the benefit of his/her expertise. Whether the partial attendance is in person or via electronic media, the outcome is perceived to be the same. Boards are encouraged to raise this as an issue with the shareholder, if a solution cannot be found.

If a director misses three meetings through a year this is to be regarded as a trigger for signalling concern to the responsible Minister. The Minister will communicate the concerns to the affected director and, unless extenuating circumstances can be demonstrated, will seek the director’s resignation.

Directors standing for Parliament

The period before a general election has implications for the directors of Crown companies, particularly if they are selected as parliamentary candidates. Directors who have been selected to stand as a candidate in a parliamentary election should advise the chair of the board immediately and, equally, chairs need to advise shareholding Ministers, through CCMAU, as soon as any members of their boards have been identified as candidates.

In order to ensure that governance of a company is not distracted by a director’s election activity, and to prevent the possibility of any conflicts of interests, real or perceived, arising during this time, Ministers have developed a protocol that they consider should be followed where a director is standing for Parliament.

Any Crown company director who is formally selected to stand as a candidate for election to Parliament, or placed on any political party’s list, will be invited to stand down from his/her board position with effect from nomination day, or such earlier day as may be determined.

Particular care around political neutrality needs to be exercised at election times. This is a time when behaviours, relationships and expectations among employees of publicly owned entities, board members, Ministers and other Members of Parliament that would otherwise be unexceptional may be perceived as having greater significance. Chairs and boards should pay particular attention to the ‘no surprises’ expectation during an election.

Confidentiality and security of information

Access to information from and about a company is a fundamental requirement for a director to carry out his/her duties. It is equally fundamental that the director has a duty of care with regard to the use made of the documents and their security.

Board papers remain the property of the company and it is usual for them to be returned to the company on the retirement of the director. Directors must ensure the security of board papers while in their possession.

The following suggestions are offered in situations where board documents are provided to directors in electronic form. In agreeing to accept documents electronically, a director should certify that:

• if on an individual’s personal computer, documents are electronically filed so that no unauthorised user can access the material either deliberately or inadvertently (this may require the director to seek technical advice on file storage to provide this certification),
• if received and stored via another organisation’s IT system and server, the director has initiated the necessary steps to ensure internal file security and the means by which unauthorised access, deliberate or accidental, may be precluded or identified, and
• on resignation, confirmation by the director that the electronic versions of the documents have been deleted to the same extent as if physically destroyed.

Director induction and development

Director induction

Directors are appointed to boards for the contribution they are expected to make to the board and the company. They have been selected for the governance competencies and industry-relevant skills they hold. However, it must be recognised that even the most experienced new director will join with only a minimal appreciation of the company concerned and of the nature of governance in a Crown environment.

Ministers expect that an appropriate induction plan will be put in place by the board for all new directors.

There are three parts to a director’s induction by the board.

• The first part is a detailed introduction to the company, including its business components, the company’s business strategy and the roles of key members of the management team. This may include visits to key sites of the company’s operations. Equally important, is that new directors receive an early understanding of the manner in which the board’s business is conducted, together with the roles and responsibilities of board committees. The chair is responsible for setting up this induction programme, and a new director should expect a programme to be set in place within the first two months of his/her appointment.
• The new director should expect to be provided with a director’s manual, or similar document, prior to the first meeting. The manual should, in addition to the over-arching business and governance policies and values of the company, include such detail as key contacts in the organisation.
• CCMAU will then provide a briefing on the sector in which new directors find themselves. Attendance at the CCMAU briefing, while strongly recommended, is not compulsory.

Board and director performance evaluation

The Crown requires that each board undertakes periodic evaluation of its performance. The board evaluation is an important contribution to the process by which responsible Ministers consider the skills make-up of each board when they deliberate on appointments and reappointments. However, its prime function is as a basis for the mentoring of directors by chairs and fellow directors and it therefore forms a vital element in the seamless process of director induction and development.

There is no longer one prescribed process for evaluation. However, there is a general requirement for Crown company boards to evaluate annually the performance of individual directors, the chair of the board and the board as a whole.

Individual boards are able to develop processes for themselves that best meet their needs – provided that the minimum expectations (as set out below) are met. Boards may find it useful to have access to tools to assist them in this process and, therefore, default evaluation templates are available from CCMAU, if required.

Shareholding Ministers expect that each board will have a process in place that meets the needs of the board and the minimum stated requirements. The key deliverables from this process will be:

• formal high level board feedback to CCMAU on overall board performance, key focus areas for continuing development, and assurance that the process has been appropriately implemented,
• individual director performance assessments and development plans that will be implemented by the organisation (these plans are to be retained by the board and not shared with CCMAU), and
• a board succession plan which is annually updated which advises the shareholder of gaps in current board composition and risks going forward as director rotation occurs.

Boards are not required to submit individual director or chair evaluation reports to CCMAU. However, CCMAU does require written confirmation that an appropriate process has taken place. CCMAU will confirm its requirements each year, but chairs should anticipate a minimum requirement to report that a suitable evaluation has been undertaken, briefly describing what that process was and what the high-level outcomes were – with particular reference to overall board performance. The advice should include commentary on any significant issues that chairs consider should be brought to the attention of shareholding Ministers or CCMAU.

Director development

As part of the performance assessment for individual directors, there should be a discussion and agreement between the chair and each director on areas of focus and development for the next 12 months (including situations where agreement is reached that nothing is required by way of formal training or development). As part of the annual fee-setting process, boards can propose an amount as an allowance for director training and development that can be submitted for approval by the Minister along with the requested board fees in any year.

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