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State Owned Enterprise Boards should set the direction of travel and drive high-performance cultures in SOEs that use their considerable assets to match - or exceed - private sector performance.
This was the governance challenge issued by Mark Weldon when he addressed a gathering of SOE directors at a function run by the Crown Company Monitoring Advisory Unit (CCMAU) in Wellington on Wednesday. Since then there have been a number of reports on the speech and requests for its release. Accordingly, the speech is released.
In acknowledging the criticality of the SOE sector to the New Zealand economy, Weldon pointed out the dismal performance of the sector relative to most of its publicly listed peers.
"In the year ended 30 June 2008 total SOE revenues were over $10 billion, total assets around $39 billion, and the number of full-time staff employed was over 17,000... Yet the performance of the sector is a serious concern, with only 2.9% return on assets, and a 2.6% return on equity across the entire portfolio in this period," said Weldon.
He attributed the poor performance largely to governance confusion, where Boards are torn between political and commercial objectives and do not have the mandate to encourage informed risk taking or move beyond focusing on "stationary" medium-term goals.
The current government has made some very positive steps to clarify and simplify the commercial focus of SOEs.
Yet much more is needed, including from SOE directors, according to Weldon. He suggested a applying "litmus test" for value creation, whereby SOE Boards imagine what they would have to do to maximise shareholder (i.e. taxpayer) value, were their SOE to undertake a partial float in two to five years.
"Whether or not such an event comes to pass is immaterial... Having a clear plan to grow shareholder value over a defined period of time, and having a clear mechanism by which that value creation would be measured, should act as a clear strategy at Board level, and crisp strategy execution at management level," said Weldon.
Critical activities outlined in the speech include: benchmarking, transparent reporting of material changes in value, setting clear medium-term performance targets that are made public, and other "back to basics" activities.
