State Sector and Crown Entities Reform Bill

I’m pleased to take a call on Part 1 of the amendments proposed by the Minister in respect of the Crown Entities Act 2004. It matters because the performance of Government in so many of our Crown entities depends on the strong leadership and the skills of the chief executives that are appointed. Now, for a large number of those Crown entities, Government is responsible for the appointment of the board, and the board is then responsible for the appointment of the chief executive, their terms of employment, and ensuring their performance.

The question for Parliament this afternoon in Part 1 of this bill is how far the Government, through the Minister of State Services and particularly the State Services Commissioner, is able to further interfere in the processes of that Crown entity. The question that I have for the Minister in the chair, Chris Hipkins, is how far he expects the provisions that are provided in this bill to go. The reason it matters is that there can easily be a culture of envy that gets in the way of getting the best performance for New Zealand out of its Crown entities.

I had the unfortunate ministerial experience of being appointed the Minister for ACC when it had lost over $4 billion in the preceding year. That entity is now in good shape and has a net balance sheet of over $20 billion. Every member of Parliament and every New Zealander has a huge interest in seeing that a Crown entity like ACC is well managed.

The question that I’ve got for the Minister in the chair, with the new provisions that are provided in clause 4, is how far does he expect the State Services Commissioner to go? In my view, while we might save, maybe, $100,000 a year on the salaries or performance payments that might be made to a chief executive of an organisation—like the super fund or ACC or one of our other very large entities, like Housing New Zealand—with the billions of dollars of assets that those organisations run, you would only need a 100th of a percent change in their performance for it to actually end up as a negative net balance of Government outcome. So I think it would be very helpful, with the new powers being provided to the chief executive, for the Minister in the chair to give the Parliament a greater degree of direction about how far we intend the State Services Commissioner to go.

I’m pleased and I compliment my colleague, Brett Hudson, the chair of the Governance and Administration Committee that took on board some of the concerns about the State Services Commission’s powers and provided some restraint on interference in that process by requiring a set of conditions to be set down in new section 117(2AA) about the sorts of factors that the chief executive would need to take into account—things like the legal, the commercial, and the operational context of the entity; what sort of information the board had; what commercial rates of pay would be appropriate; what the Government’s expectations are; and what the market information is about.

So while I think the select committee has taken a step forward, it’s not gone as far as National would prefer. We would actually want a statutory criterion that is judicially reviewable so that the State Services Commission is not driven by some sort of political motive of a drive to the bottom but really is interested in the best appointment.

I would, in closing, just make reference to the Ministry of Business, Innovation and Employment (MBIE): one of New Zealand’s largest entities in the State department. We, as Government, tried to secure a private sector person for that role and there was actually little interest with the rates. So if we are to get first-class people to be able to lead these major sector organisations, we do need to ensure that we are offering terms and conditions of employment that will deliver the quality of the public sector that we want.

So our own Government’s experience around the appointment of the chief executive of MBIE was actually quite telling. We thought that by having a very large economic development ministry that covers a very large range of electricity, immigration, labour laws, and building laws, we would be able to attract a candidate from the private sector who may be interested and apply some of that expertise to a major Government agency of that sort. Our experience was actually only receiving applicants from the public sector. I want to express full confidence in the appointment of the chief executive that was made for that agency, but it’s a reminder of the risks of what we’re doing in Part 1 of this bill in undermining our capacity to be able to get the very best person possible.

The further part that I would want to question the Minister in the chair on is that National members do have some concerns about some of the recent changes that have been made to chief executives’ employment. That is, there was an at-risk component of chief executives’ pay that this Government has decided to automatically provide for them. So there is no longer an at-risk component for chief executives who lead organisations that are clearly failing, and the removal of any sort of performance payment for those chief executives and simultaneously providing every chief executive with a week’s holiday.

Those issues are not specific to Part 1 of this bill, but I’d be very interested in getting an indication from the Minister in the chair—if you’ve got a board or an organisation like the super fund or you’ve got a board of an organisation like ACC that wants to include quite specific requirements in the performance of the chief executive, maybe for an organisation like ACC it’s about rehabilitation rates, a really important factor for that organisation, or whether the board of the super fund quite specifically provides performance requirements for the head of that super fund, managing nearly $30 billion of public money—whether the provisions that are being provided to the State Services Commissioner cut across the capacity for those significant Crown entities to be able to provide the very best of incentives for those organisations to perform?

The last point I would want to make in respect of Part 1 of this bill is to get some clarity from the Minister as to how different the practice is intended to be following the passage of this bill, which National is supporting, around those new Crown entities that have come under these powers. In other words, there are Government State departments and others right now of which the State Services Commissioner, effectively, has a veto over the terms and conditions of their employment. So what I’d be really keen to get an indication from the Minister on is, with the passage of this part of this bill, is the intention to simply extend the practice that currently exists over a range of Government agencies and Crown entities? Is the intention to simply extend that to all Crown entities, or are these provisions, in fact, going to be used to up the ante and for the State Services Commissioner to have their fingers deeper into the operational elements of these sorts of Crown organisations that Parliament and Government entrust to those boards? Those matters are important.

I want to stress to the House that across these Crown entities we are talking about north of $100 billion worth of Government assets. We’re talking about Crown entities that manage over $15 billion a year in public funds. The way in which we structure those organisations, and the degree to which they are autonomous, and the degree to which they are constrained by these extra powers of the State Services Commissioner deeply matter to New Zealand, how we do as a country, and how well our public services do. National is of a view that we want a connected Public Service, but we also want an accountable Public Service. That is, we don’t want to go back to the gliding-on days—so well illustrated with the, sort of, Yes Minister approach to Government—where we have an amorphous, massive Public Service where nobody is accountable for anything. So while we’re happy to have some extension of these State services powers, it’s absolutely critical that chief executives are accountable.

Thank you, Madam Chair. In the second reading speech this morning, I did point out that while we have reached a consensus in the select committee on this bill proceeding and the recommendations back to the House, there were some areas where the National Party members wanted to see different provisions in the bill, and they are in Part 1. As we move to this, I have some questions for the Minister. Particularly, they’re around the State Services Commissioner’s ability to direct, in effect, the boards around the terms and conditions of chief executives’ pay and conditions. For instance, subsection (2AA)—which clause 4 puts into section 117 of Crown Entities Act—states: “When considering the terms and conditions of a chief executive, the State Services Commissioner must have regard to the following”, and it is that very phrase that we expressed concern to officials about in the Governance and Administration Committee, because, in practical terms, what does “must have regard” mean?

Our argument to them was that in respect of all the words that could be used or the structures that could be used, “must have regard” is a much lower threshold than some others, because it is not required to substantiate a level of evidence to have achieved X—a threshold, if you will. It is simply—well, in English, at least—having to show in some minor way that you’ve had regard to something. So I would like to hear from the Minister, particularly as it is his policy, what his expectations on the State Services Commissioner are and how “must have regard to” will be evidenced in reality and, indeed, in the documentation the commissioner will have to provide.

In terms of those elements that the commissioner must have regard to, I don’t have any particular argument to make with the criteria that are there. They are the things I think that we would expect that the commissioner should have to take into consideration. What is absent is any indication of the weighting of any of those particular conditions. So, on face value, does that mean that each of them is of an identical importance to the other? If that were not to be the case, either in law or in practice, that creates some level of potential uncertainty, certainly, at least, in reviewing legislation, because, of course, one of the elements is Government expectations. We appreciate that a Government’s expectations for CEOs of Crown entities are very important, but equally so is information provided by the board with respect to the skills and abilities of the candidate, or the performance of the existing chief executive and the nature of the commercial business.

So when we have these elements, along with the public interest and market information, what weighting is the commissioner supposed to apply to each of them? How does he or she show that the weighting has been applied appropriately? And how, in the legislation, is it confirmed that the boards of those entities will know in advance—and sufficiently in advance, I think, to plan their business and appointments—what those weightings are? At the moment, we have the conditions. That’s fine. But if it turns out that the expectation or the reality is that Government expectations form 95 percent of the decision, and the rest of the elements get a mere veneer of treatment at best—and I’m not suggesting that that is the intention, but in the absence of those weightings it could be—then we could end up with some serious distortions which actually undermine the intent, certainly, of the select committee in reaching the recommended amendments that we have, but also, I would argue, undermine the boards themselves, particularly in the context of some of the operations they have, particularly the ones that are more commercially oriented or minded, such as the Superannuation Fund, and particularly in the reality of the world, and the investment world, that the Accident Compensation Corporation lives within.

That flows on, actually, not just to the weighting for each of those. If we look at subsection (2B), in clause 4, and indeed new subsection (2AB)—actually, I’ll start with (2AB) first: “The State Services Commissioner must provide reasons for refusing consent to any proposed terms and conditions.” from the boards, and those conditions or criteria in new subsection (2AA) are the route by which he or she will reach that conclusion. I have concern in regard to “must provide reasons for refusing consent”, and my question to the Minister is: does he really believe that just simply saying “provide reasons” is sufficient to ensure that what the commissioner comes back with—because this will be the heated part: when he or she disagrees with what the board, nominally considered an independent board, puts forward. Is simply saying “must provide reasons” enough?

We have the time now to reflect on this and to say “Officials, maybe some slightly different wording here would be useful.”, to give confidence to the public, and particularly to the boards, that if the commissioner is going to disagree with him, he or she has got to elucidate the grounds for that disagreement very, very clearly and comprehensively. That will give confidence—confidence to the boards, and confidence, I would also argue, to the public, and, indeed, to members of this committee.

That also has relevance to subsection (2B): “The State Services Commissioner must provide the boards of statutory entities with advice and guidance on the terms and conditions”, and I do believe this is just simply an oversight, and we in the committee are, therefore, as guilty of that as anything else, But the Minister might note that while we would believe in practice that a good commissioner would see that these are natural linkages here, in law there aren’t. So the commissioner can apply weightings to criteria, legally at least, anyway he or she wants to, and he or she is not obliged to actually give guidance to the boards that is consistent either with the criteria that he or she will apply, or, indeed, with the weighting that any one of those criteria could have applied.

I think it’s actually tidier legislation if we were to take this opportunity to ensure that there is absolutely no misunderstanding or confusion that these things all operate together—that the conditions themselves are not simply for reflection in one area to make a decision but form very much a part of the guidance responsibilities he or she has to those boards, and, indeed, are also a very important part of the reasons, the documentation, should the commissioner determine that they’re not going to consent to the proposed terms and conditions for those boards. If we were to look at those, I think each of them is very important, and I think if we can ensure that wording is there that is very clear and links them together, we create a situation where there’s a great deal more confidence from the boards in particular, but, because we are making laws for the country, also from the public.

Now, the other matter I want to just traverse in this call—there wasn’t a huge number of submissions on this bill but we did get a few—is that the submissions we got were very well reasoned and came from very respectable and reputed bodies. The Institute of Directors was very clear that their view—and this is the nature of their organisation—is that the autonomy of a board is paramount, and that if you take one role, one item of responsibility, from the host that a board has, the most important one for them to exercise their independence in is the appointment and terms and conditions of a CEO.

They argued quite strongly that setting fixed terms would mean, potentially, the possibility of people choosing not to seek a role, and would impair the board’s ability to structure those terms and conditions in a way that’s most, in their view, appropriate for their entities. And while, yes, they can be reappointed, there is no doubt that having that term limit means that the structure of the expectations has to be around that term. It can’t possibly go beyond it, because there is no guarantee of continued employment beyond that. I think—and we did reflect this to officials in the committee, as well—that when we have a reasoned submission from a reputable organisation that exists for strengthening the ability of directors in both public and private sectors, then we do have a duty to show the consideration to that. I’d like to hear from the Minister how he believes that five years will work effectively.

Thank you very much, Madam Chair, for the opportunity to speak to this bill. I acknowledge my colleagues from the Governance and Administration Committee, who listened to the seven quite detailed submissions that we received on this bill.

As has already been acknowledged, new section 117(2AA), in clause 4—the new provision in this bill—was the part that caused the most rigorous discussion at select committee. That is the provision that “When considering the terms and conditions of a chief executive, the State Services Commissioner must have regard to the following”—and we have five criteria listed below. But I’d like to point out that there are words after that that haven’t been mentioned yet. It’s those five areas that are listed in the bill, which you are able to read. It also states “(among any other relevant factors):”. So it’s important that, while we’ve heard that the National members within the committee felt that this bill didn’t go quite far enough, the Government members felt that the right balance was struck. It’s always difficult to get that, getting that right balance between enabling a person with the appropriate skills and experiences to lead those significant organisations, which are a wide variety of Crown entities, and the fact that we want to make sure that we have a consistent approach right across the public sector—trying to get that balance. It’s not the private sector; we do not have the same free rein and the same mentality that goes there. So trying to get that balance right is important.

One of the points that remains there that really sticks with me is that, for those skilled and experienced people who choose to be chief executives within Crown entities, financial remuneration is not the only motivation to take that role; there are many other motivations that put people into those positions, and one of them is delivering good-quality public services to New Zealanders. So I think it’s important that we take note that, in that subsection, 117(2AA), from the advice we received from the officials who briefed the select committee and the Government members, we felt that that balance was about right: that there was a good, clear description in those five criteria within (2AA), and there was also that ability for the State Services Commissioner to have regard to any other relevant factors. So there’s a good amount of flexibility there. And also the words “must have regard to”—so there’s a requirement that those things must be taken into play.

So I’d be interested to hear from the Minister the views on that, because the Government members of the committee certainly felt that that balance was about right in terms of how we would be looking at the appointment of chief executives of Crown entities going forward. Thank you, Madam Chair.

Thank you, Madam Chair. I’m very pleased to follow on from the contribution from the member opposite, Ginny Andersen, because she does touch on an issue which was of great interest to the Governance and Administration Committee, and that was around the submission of the Institute of Directors. It was an in-depth submission, but they showed very strongly held beliefs about the role of a board and a board of directors, and their almost singular role, one could argue, in the appointment of a CEO.

The Institute of Directors made some really interesting points. It has been said before, so I won’t labour this point, but, in their view, appointing a CEO is one of if not the most important functions of a board, and the important functions of the board include setting the terms and conditions of employment, including remuneration. I do remember from their submission, as I imagine all of us did, that they made that point on a number of occasions and in a number of different ways, because we were interested in that view and questioned them. But they were very firmly of the view of the fact that in section 117(2A) in clause 4 “the board must obtain the written consent of the State Services Commissioner before—(a) finalising the terms and conditions; or (b) amending any or all of the terms and conditions once they have been finalised.”—in a way, it diminished and took away some of that autonomy that boards have in the appointment of directors of Crown entities.

From our point of view, from the National point of view, we want the best people available to fill the role of chief executive in Crown entities, which themselves have large budgets, a lot of responsibility, sometimes a high degree of public service, and public accountability. We would like to think that choosing people to be those chief executives can be done in a way that really is enabling—unfettered, if you like—boards to go about choosing that candidate for the role. So while the Institute of Directors does not support the proposed change, we do, having noted on the way through some real concerns that the provision that is being inserted into this bill will have an impact not only on the ability of boards as they go about making appointments to Crown entities but also, perhaps, on the other side of the ledger, the type of person who is going to be prepared to put their name forward for those roles. The last thing that we need in New Zealand in the Public Service and on statutory boards are people, who are considering putting their names forward for a role as chief executive, being dissuaded from doing that by the requirement and fettering that section 117(2A) in clause 4 displays in saying that “the board must obtain the written consent of the State Services Commissioner”.

The member who spoke previously also traversed section 117(2AA) in clause 4, which outlined the terms and conditions of the appointment of a chief executive and those five terms that the State Services Commissioner must have regard to. Yes, they’re there for all of us to see, and no doubt my colleagues will traverse them, because they are quite substantive. She did note “among any other relevant factors”, but that does not take away, in any way, the provision in section 117(2A) in clause 4 where written consent for an appointment of a chief executive must be given.

Madam Chair, I am interested in—[Time expired]

Thank you, Madam Chair. I’ll just take a short call, just to reflect on some of these—

💬 Chris Bishop: Oh, come on. Give it a good go.

Not as short as you, the member for Hutt South.

💬 Hon Kris Faafoi: He’s a very efficient speaker!

Very efficient. Efficiency is—“P E”, for efficiency.

💬 Brett Hudson: Much better than our bus network.

That’s true. Now, let me just reflect on the submissions that we heard, because they were interesting. What I discovered is that there is no difference, actually, at central government compared to local government. Sometimes people think when you are an arm’s-length organisation, that gives you more autonomy and freedom with the entity, but what I found that many forgot is that they are funded by public money—and it’s that that really brings into account that word “accountability” but also puts that “public” back into the Public Service. That’s what I want to focus on, because that’s where we had a bit of a tussle—that’s been traversed by previous speakers—around really saying, “Look, if we pay more, we get more, and we get this better person.” But really that’s a bit of a myth, and I don’t subscribe to “Paying more means you get more.”

💬 Hon Kris Faafoi: You know you’re pretending.

And you have the entities listed—

CHAIRPERSON (Hon Anne Tolley): Order! Order!

They’re a very rowdy bunch, Madam Chair.

CHAIRPERSON (Hon Anne Tolley): From behind you.

Thank you.

💬 Hon Kris Faafoi: It’s support.

Ha, ha! That’s his way of showing public service to me.

But, look, you’ll see that there are several Crown entities, for example, that are really out of step—in fact, 22 of them: 14 autonomous Crown entities and 10 independent Crown entities—and so this really brings them into line.

In my experience, certainly from managing the performance review committee of a chief executive in local government, that five-year term works well. There are some provisions there to stay on an extra two, or you choose to readvertise the role and apply on the open market for five years, but my experience told me this: the arm’s-length autonomy actually means you need to actually rein them in a little bit more. You appreciate what they do there in the market place, but they sometimes forget that the very funding they get is public money, and I think—and the Minister will clarify this—that’s the point of this. Let’s get some consistency. Let’s say that this Government is putting back the “public” and “service” into the Public Service by saying we want our senior leaders in our whole-of-government approach to be accountable and to give that trust and confidence back.

The narrative won’t be that we have highly paid CEOs who are actually running public entities; it will rather be that the services that they provide are providing value. So things around paid performance and that risk—look, if they want to do that, then by all means go and find that role in the private sector. Sell more cars, sell more tyres, do what you need to do and get that performance bonus. But what we’re saying in the Public Service is that you get paid a decent wage—much more than a living wage, I might add—and your service is part of that. You made that choice. You didn’t come into the Public Service to try and exceed some of your board expectations. Maybe you did, but therefore that risk component has been built into it in a different way. Madam Chair, I commend this bill.

Thank you, Madam Chair. I’m happy to respond to a few of the issues that have been raised so far. I want to thank the Opposition for their constructive work through the Governance and Administration Committee to improve this bill and for their support for it. They’ve raised a number of issues, and I start with the ones raised by the Hon Dr Nick Smith around how far Governments should go. I think that that is a very reasonable question to ask and to have answered. I welcome the work of the committee to add in the criteria that the State Services Commissioner should consider in deciding how far to go in agreeing or not agreeing to a proposed remuneration package put forward by a Crown entity board. I think that they’ve done a good job of doing that. Market conditions are still a factor that they need to consider, and that’s specifically listed as one of the criteria that the State Services Commissioner will need to consider.

The Government’s expectation certainly is that they should be paid a fair market package, but they shouldn’t be at the top of the market. This was a view that was expressed not just by this Government but by the previous Government as well. We all know of a notorious situation not long before the election where the then Minister of Finance and the then Prime Minister both agreed with the State Services Commissioner that a remuneration package was too much, and the board of that particular Crown entity chose to offer it anyway—much to the frustration of the then Government of the day, in a sentiment supported by the then Opposition of the day, that that was out of kilter with what was a reasonable expectation, even on a market salary. So I think that addresses that particular factor.

Public service is a factor in taking on these roles, and that’s something that we need to consider. One of the tests that the State Services Commissioner would reasonably apply is: would a lower salary package affect the ability to recruit the best person for the job—you know, the most competent person to be the chief executive? And if the answer to that question is yes, then I think that would have a significant bearing on any recommendation that they might make or any decision that they might make.

The other main issue that’s really been raised—well, there are the issues raised by the Institute of Directors around what this means for the overall autonomy of the board. The issue there is the board will still make the appointment and they’ll still make that appointment independently. They will still recommend the salary package. So they’ll still determine the salary package. It simply will require now the agreement of the State Services Commissioner.

Now, that comes to the final question that, I think, Nick Smith asked, which was: is this about extending the status quo—i.e., widening the status quo—or going deeper? The answer is, and I think it will be to his comfort, that it is about widening the status quo, because there are already Crown entities where agreement is required. This extends it to a larger group of Crown entities. We think that system works quite well.

Brett Hudson raised an issue, a very legitimate one, around the “must have regard” clause. I think that’s something that this Parliament has learnt a little bit about in recent years. The closest analogy that I can think of off the top of my head is the remuneration of members of Parliament, because it’s an issue that we’re grappling with. Where previously the Remuneration Authority were responsible for making judgments about that, based on a set of criteria, the Parliament didn’t like what was happening. We felt our salaries were growing too fast. So we changed that from criteria that they should consider, or must have regard to, to a set formula. So we were much more prescriptive. The result of which is that we then ended up in a situation where we were getting even bigger pay rises and the Remuneration Authority were saying to members of Parliament, “This is the pay rise that we are required to give you, though we do not think you deserve that much money.”

So the flip side to a “must have regard to” criterion is that you go to the other extent where you end up with a very specific criterion and you remove all the subjective judgment from the exercise, and then you end up in a situation where you can have the completely opposite effect—both ways; either too little or too much—to what you had intended. So there is always going to be a degree of subjectivity when it comes to determining what an appropriate remuneration package is.

The ultimate test, and the ultimate safeguard from the abuse of power there, is really with the board of the Crown entity, because the board of the Crown entity still needs to recommend the ultimate salary package. The State Services Commissioner can agree or disagree to that. If the State Services Commissioner disagrees and the board continues to have concerns about that, then they do have, I guess, the ultimate course of action, which is to resign their positions and force the issue back on to the Government.

Madam Chair, I wasn’t going to take a call, but I’ve become now more concerned after listening to the Minister, the Hon Chris Hipkins’, attempt to answer some of those questions. My concern is that this legislation risks politicising the public sector. I think I can set the scene first by my own experience as a Minister, in 2008, when the Ministry for Primary Industries—or the Ministry of Agriculture and Forestry as they were in those days—came into my office. The director-general in those days was Murray Sherwin, and he said to me, amongst his senior leadership team, “We were here to serve the wishes of the previous Government. The Government has changed and we are now here to serve the wishes of your Government.”—completely apolitical. I think New Zealand is hugely lucky to have such an apolitical State Service, whereby their job is to serve the Government of the day.

Then we have this legislation before the House, and I think we’re at risk of actually finding the Government having a role in politicising the State service. I want an absolute assurance that that’s not the reason this legislation is before the House today. When you look at clause 4, “Section 117 amended (Employment of chief executive)”, you get to the situation where ACC, for example, wants to employ a new chief executive. The board goes through a recruitment process and makes a decision. It knows the capabilities of the person it is attempting to employ. The board knows the expectations of that new potential chief executive. So it starts discussing an employment package around days off, amount of holiday pay, and, most importantly, salary, and it comes to an expectation of what might successfully engage that person to become the chief executive of ACC—the sort of process that works with every board in the country, whether it be a private board or a Crown entity. But then, having finalised that package to the satisfaction of the potential chief executive, whoops, there’s one more important step. They’ve got to rush off to the State Services Commissioner and get the State Services Commissioner to approve those negotiations.

The State Services Commissioner hasn’t been involved in those negotiations. He has no idea how capable this new chief executive may be. The only people who know that are the people who did the recruitment process—in other words, the board—and if it’s a case like ACC, the board’s actually appointed by the Government. But then you look at what’s got to guide the State Services Commissioner, and you look at section 117(2AA)(a), (b), (c), (d), and (e), and look at (d), “Government expectations:”. That is politicising the Public Service. That’s what that does. The Government now steps in and starts to determine whom they want employed as the chief executive of ACC, because no longer do we have the independence we used to have with State entities.

I think this is very dangerous legislation before this House, and I’m just not convinced that the Minister himself has got his head around the issue. The last thing this country wants is to see the situation they have in the United States of America, where a Government changes, a new president comes in, and all the institutional knowledge of the Public Service is, effectively, thrown out because they’re all political appointments. That’s where we could potentially head, and I just say to the Minister that I hope he’s given this real thought as to the danger of this legislation. I’m sure there wasn’t an attempt when they introduced the legislation for that to be where it might lead to, but I’m concerned it could lead to that.

I go back to my opening statements about the way that I first engaged, as a new Minister, with the Ministry of Agriculture and Forestry, as it was in those days; the way I was absolutely assured at the start that the Public Service was there to do its job in an apolitical manner. If there’d been an election the next day, they’d have gone and started delivering the agenda of the next Government that was about to be installed. What we don’t want is a Public Sector in this country that is in any way politicised, and when you look at the process of appointments of chief executives, whereby the responsibility to find a chief executive rests first of all with the board, then they’ve got to get the permission of the State Services Commissioner, and then the commissioner has to follow Government expectations, we’re in trouble.

I think the Hon David Carter raised a very legitimate point, which is around preserving the political neutrality of New Zealand’s public services. I think that’s something that we should all jealously guard in this House. It’s something that New Zealand is internationally recognised for. It’s something that we should be incredibly proud of.

With regard to Crown entities, I’d point out that, actually, Crown entities are probably one of the most political parts of the Public Service because the boards of those are political appointees. The boards of all of the Crown entities are appointed by Ministers through a Cabinet process, through a collective process, obviously, but it’s a political one—unlike, say, a chief executive of a public sector agency where that is appointed by the State Services Commissioner independent of Ministers. So actually there are more safeguards within the core Public Service for that political neutrality than there is within the Crown entities sector.

Ministers send letters of expectation, for example, to the boards of Crown entities, setting out what their expectations are—and this is not something that this Government’s introduced; it’s something that has existed for a very long time—for how that board will operate. So it seems to me: why would a Government be sending a letter of expectations to a board around these matters, and then the commissioner, potentially, could be recommending something that was completely contrary to the expectations that the Government have sent to the board. I think that would set them up for—if the board has to consider Government expectations, then the commissioner should also have to consider Government expectations.

I do think that the Hon David Carter has raised a legitimate point around preserving that political neutrality, though, and I was concerned in the contribution of the Hon Dr Nick Smith, where he talked about the desire of the previous Government in making an appointment to the chief executive job role for the Ministry of Business, Innovation and Employment that they specified that they wanted someone from the private sector. In fact, that would be contrary to the State Sector Act. The commissioner makes the appointments for a Public Service chief executive. The idea that the Ministers in the Government were directing the commissioner as to who it should appoint would seriously undermine the political neutrality of the Public Service.

So I think thus far in this debate, the only evidential basis we’ve seen for any undermining of that political neutrality is actually from the illustration that Dr Smith raised with regard to the previous Government.

Thank you, Madam Chair. It’s a real honour to speak, and I’ve been listening very carefully to both sides of the committee with their debates. I’m fortunate enough to not be on the Governance and Administration Committee. I’m on the Transport and Infrastructure Committee, but I see that the membership there is—there are some highly talented people there: Brett Hudson, Virginia Andersen, Kanwaljit Bakshi, the Hon Jacqui Dean, Paul Eagle, the Hon Peeni Henare, Raymond Huo, and Jian Yang. So we’re in good company.

Essentially, this piece of legislation is to control the pays of—at last count there were three entities who didn’t comply with the State Service Commission’s guidelines. So we’re talking about three people at the moment, but we support this bill, because we understand that it’s a tidy-up process, brings the powers for Crown entities—namely, the terms and conditions of employment for CEOs. It effectively gives the State Services Commissioner a right to veto appointments, because if he doesn’t agree to the salaries or the conditions, that’s, effectively, a veto.

However, limiting the terms to five years—I think that’s a good call. But I’m a little bit worried about the direction that the coalition Government are going in terms of public services under their governance. There’s a little bit less of the accountability coming in here. For example, in admissions in hospitals, we had a time limit and that, effectively, saved lives in emergency departments, and I see that they’ve been kicked to touch. I see that CEOs’ salaries—the performance part of the salary is going to be paid out so there’s no incentive there, and automatic payouts for risk share. So for people that don’t understand what that means in terms of a salary, if they didn’t meet the target, they lose that payment. And I see it’s all going to be swallowed into one.

Now, Treasury have warned that this bit of legislation might impact competing to get good CEs, because we have to compete with the private sector. I see Minister Hipkins is keen on dropping measurement and setting of performance standards since they got into power. So they’re more insistent on knocking the top rung of the ladder than pulling up the bottom.

I see the 8,600 members of the Institute of Directors state the bill may undermine good governance and take away too much power. Appointing and managing CEOs is one of the most important conditions that a board does. It’s important that these functions are kept at arm’s length. As I said before, we’re talking about three entities that didn’t follow the rules. But I talk in relation to the New Zealand Superannuation Fund and Adrian Orr. I know that that got some coverage for a million dollar salary, but he runs an organisation that has $38 billion worth of assets under management. So you need—

💬 Brett Hudson: Was.

—was. He was. And you want the top people in charge of that. They paid $6 billion worth of tax. So I think that you need to pay the money to attract the top people. I don’t want inferior people running big organisations where we’re dealing with a lot of money.

So we support the bill. I’ll just quote here, with this Government, “rich pricks” populist attacks are common from the other side of the House, and it’s unhelpful when the serious business of governance is involved. We support the bill.

Thank you, Madam Chair. Now, this bill, in essence, as I said earlier today, has the intention to strengthen integrity, openness, and, of course, accountability in the management of the public sector. So the intention is well-known and, of course, good. The challenge here is how to maintain a balance.

There are all sorts of conflicting themes here. One, of course, in Part 1, we can see, focuses on employment and remuneration. So these are important matters when it comes to hiring top chief executives. So Part 1 focuses mainly on the Crown Entities Act. It requires the boards of statutory Crown entities to obtain the State Service Commissioner’s written consent to the terms and conditions of the employment of a chief executive. So this is new, because, at the moment, it is, basically, required to consult with the State Services Commissioner. So now it’s required that these Crown entities get written consent from the State Services Commissioner. Also, for some Crown entities, this already applies, but now this bill will expand its scope to include many more Crown entities.

The bill also specifies a term of employment for a chief executive. This, again, applies mainly to Crown entities, because, in the State sector, most of these chief executives are already employed under a five-year term. So, under this current entities Act, there are no specific references to terms of employment for an entity, and this bill will set five years as a term. So the balance here is: how do we have this term or this kind of remuneration and, at the same time, have the ability to attract top or experienced chief executives? Now, the New Zealand Superannuation Fund, in its submission, does provide some good points, which I think we should point out, and, hopefully, the Minister will be able to elaborate or answer some questions on.

In its submission, the New Zealand Superannuation Fund states, “There is a broad spectrum of Crown organisations with diverse risks, challenges and complexities and their demand for knowledge and specific skills varies within the public sector.” So they are opposed to what we call a one-size-fits-all approach to the employment of chief executives. I think this is a valid point, mainly because the New Zealand Superannuation Fund outperforms many other funds. Specifically, they mention that “Since the inception of the Fund in September 2003, the Government has contributed NZ$15.02 billion to it. As at 28 February 2018, the Fund has returned 10% [per annum] (after costs, before New Zealand tax).” So this is very impressive. How can we be sure that we are able to attract top chief executives and, at the same time, make sure the New Zealand Superannuation Fund will continue to perform?

In its press release—of course, a public release—the New Zealand Superannuation Fund also mentioned that the remuneration for all Guardians of New Zealand Superannuation staff, including CEOs, was paid for from the fund, not from parliamentary appropriations. So this is another point. I hope that the Minister will give us an assurance that we will be able to make sure the New Zealand Superannuation Fund will continue to perform well. The reason why I’m asking the Minister to explain this is because the Minister specifically mentioned, in his interviews with the press, that this bill will target the New Zealand Superannuation Fund. So my question that I hope the Minister will—[Time expired]

Thank you, Madam Chair. I have a number of questions for the Minister in the Chair. I have three questions, in fact—all three are for clarification. The Minister in his last intervention noted that there needed now to be agreement between the board and chief executive on the appointment of State services and on the appointment of a chief executive. I’m assuming he was referring to clause 4(2) but then we go on to 4(2A), which really is the kicker in Part 1, which says, “the board must obtain the written consent of the State Services Commissioner …”. So I’d like the Minister to just clarify which of those two clauses he was referring to when he made the intervention, because while “agreement” sounds entirely reasonable, I think “consent” is an entirely different matter. It comes to the very point of Part 1 of this bill, so I do seek some clarification. In the context of the comments that the Minister was making, which clause was he referring to, because I think it does matter for the Hansard for the Minister to be very clear about what he understands about Part 1 of this bill?

The second query I have for the Minister is around his outlining of good process—good due process—in the appointment of chief executives in the State sector and Crown entities. The Minister did mention that Ministers will send a letter of expectation to Crown entities in the sure and certain knowledge that they will get a reply and there will be discussion about that and so the Crown entity then goes on understanding very fully the priorities and the expectations of the Minister. I was interested in those comments because we have a couple of examples right now where there are—is it two or three?—Crown entities which have not received letters of expectation. Ōtākaro is one of them and the other one is—

💬 Hon Nicky Wagner: Southern Response.

Yes, Southern Response. So we have two Crown entities which haven’t received a letter of expectation from their Minister, the Hon Megan Woods.

So where does that leave this Minister in terms of being a champion of good process in ministerial work with a Crown entity where the Minister, in this case Megan Woods, has not even submitted—has not even sent—a letter of expectation to these two Crown entities so that they are, effectively, operating under the previous Government, which by the way was a very good Government and set some very good letters of expectations? Maybe this is an acknowledgment by that Minister, in particular, in this Government that the letters of expectation sent by the Hon Gerry Brownlee were in fact not only set for purpose under the former National Government, but also so exemplary that they would continue under this new regime for now—what?—11 months.

So I am interested to hear from the Minister around whether he believes—and it was his words in the contribution he made about good process around the appointment of chief executives and how important a letter of expectations was. The Minister said so himself. I’d like him to therefore explain and perhaps outline the conduct and inner thinking of his fellow Minister who has failed to do that, so that for 11 months there have been two Crown entities which have been rudderless in this current Government. He can tell the committee whether he believes that that is good process.

The third issue, which I would like to traverse and seek the comment of the Minister on, is around clause 4(1): “A chief executive of a statutory entity is appointed for a term of not more than 5 years, but may be reappointed.” This is what I’m interested about in this clause: the reappointment process—“may be reappointed”. So what exactly does that mean? I’d like the Minister to come to his feet when I’ve finished my intervention and explain to the committee what that—[Time expired]

I move, That the question be now put.