Speech Notes

Monday 13 September 2004

Hon Michael Cullen - Address to Te Awe Prospective Maori Directors Networking Function Ora Art & Design Space, 23 Allen St, Wellington

With your permission, I would like first of all to declare this evening’s function a seabed and foreshore free zone.

Tonight I would prefer to speak about some other issues which are of great importance for the economic future of the nation and of Maori: specifically the contribution of Maori directors, both present and future, to the management of publicly-owned companies.

However, there is one parallel to the seabed and foreshore question which it is useful to consider before we put it to bed for the night. And that is the fact that, while issues of ownership and the distribution of property rights are clearly important, the key requirement for meeting the needs and expectations of all New Zealanders is a robust regime of governance and management, and the skill and experience of the individuals to take on positions of responsibility.

Words on paper, be they the words in legislation or in statements of corporate intent, only take us so far. It is the people in responsibility – their qualities, skills, imagination, and attitude to risk – that make the difference.

There is ample evidence of this if we look across what is called the Maori economy. As you will recall, last year Te Puni Kokiri commissioned NZIER to undertake a study of the Maori economy.

What that confirmed is that the last decade has seen very strong (although sometimes volatile) rates of growth in Maori-owned businesses in the primary sector, alongside the emergence of a Maori services sector.

There is a major focus on resource-based industries, of course, especially farming, fisheries and forestry. This is the result both of long-standing Maori businesses, and more recently of assets transferred as part of Treaty settlements.

NZIER estimated the value of Maori agricultural output to be approximately $700 million, representing about 7.4 percent of New Zealand’s total agricultural output. Much of this is thought to be managed by self-employed farmers.

Maori are estimated to control up to 37 percent of New Zealand’s domestic fishing quota, generating approximately $299 million in fishing revenue. A significant portion of this activity is conducted by medium to large enterprises, with about 20 percent of New Zealand’s quota being jointly controlled by two Maori businesses: Sealord Products and Moana Pacific Fisheries.

Maori are estimated to control about 10 percent of the land on which New Zealand’s forest estate is situated, although Maori interests in forestry production are not yet significant.

The NZIER report also showed that there are strong showings in newer industries, such as tourism and consumer goods, including high-value export-oriented goods such as fashion.

The challenge, as for the New Zealand economy at large, is to expand further into these new industries (especially those based on advanced technology or attributes in which New Zealand has a unique natural advantage) and also to add value to an established resource-base through innovation and diversification.

Innovation is what transforms an old, familiar product into something new, something tailored to high-value niches of the global market where producers can charge a premium. And diversification spreads business risk by creating a range of revenue streams which enables businesses to ride out the inevitable ebb and flow of the business cycle. It is particularly important for primary industries, given the capacity for factors such as commodity price cycles, weather patterns and the exchange rate to rapidly change a profitable line of business into a loss-making one.

Maori feature prominently in some of our most innovative companies, both individually and in terms of businesses owned by tribal entities, managing commonly-held assets. While it is not essential that Maori owned and run businesses declare a distinct cultural identity, it is frequently a very important aspect of the brand and the mode of operation.

Maori culture is without doubt the unique flavour of New Zealand. And in addition to the enormous importance it has for how Maori live as Maori, it is a living treasure which can deliver significant economic benefits, be it in tourism, in branded consumer goods, or in products based on traditional Maori knowledge and practice. What Maori in business are illustrating is that Maori culture belongs in the boardroom and on the shop-floor as much as on the marae.

The other side of the Maori economy, of course, is a growing population of consumers with needs and aspirations that overlap significantly with mainstream New Zealand, but include a broader set of cultural and community priorities.

That is something that the state sector has come to grips with over the past couple of decades. There is still room for improvement, of course; but if we look at social services such as health and education, and at many of the other services that are provided by government agencies and companies, we can see important leaps forward in terms of understanding and serving the Maori market.

Just to take one example, Maori participation in tertiary education has expanded significantly in the last decade. That has been due to education providers engaging in targeted marketing, creating a learning environment that is more tailored to the needs of Maori learners, and making stronger links to Maori communities who influence the decisions that their members make to invest in tertiary study. Crown entities, in the form of wananga and other tertiary institutions, have been at the forefront of this.

Some may debate the point, but I would venture to suggest that the private sector on the whole has some distance to make up in regard to understanding and serving the Maori market.

What the state sector and crown companies have achieved is due in no small part to the quality of input from Maori directors and advisors. Of course, their influence goes well beyond providing advice on specific issues related to Maori customers to include a wide range of skills unique to each individual board member.

I think we can add to these a more general skill that Maori directors bring to the task of corporate governance. In recent years, many boards and management consultants have discovered something often referred to as the ‘triple bottom line’. That is the recognition that operating profit is only one indicator (albeit a very important one) of the success of a business.

Alongside shareholder return it is essential to assess the impact that a business has on the community who are its customers and the environment that ultimately supports its operations. Running a healthy operating surplus while damaging the environment and compromising the well-being of the community should not stack up as a good result.

While some in the business community have had a hard time adjusting to the notion of the triple bottom line, I suspect it is something that comes naturally to Maori who have grown up with a strong sense of connection to the land and responsibility to the concentric circles of whanau, hapu, iwi, maori and ultimately the whole community. This does not make the task of balancing competing interests any easier. But it is essential that directors have the skills to think through issues with a pluralistic frame of reference, setting financial analysis alongside social and environmental objectives.

That is and will continue to be an important task for directors of crown companies and other crown entities.

SOEs, CRIs and other entities play important roles in the development of the New Zealand economy and the well being of our communities. In each case there are sound reasons for public ownership, and hence important public good objectives that need to be balanced with commercial and other considerations.

They are also, in some cases, very large and complex businesses which are pivotal elements of the national infrastructure and represent very large investments of capital on the part of the Crown.

For example, the SOEs are important to the Crown’s balance sheet, with total assets of around $11 billion, representing about 9 percent of the Crown’s total assets.

Meanwhile, Crown entities encompass a diversity of organisations, from schools and hospitals to Radio New Zealand, Te Papa and the Commerce Commission, and account for almost half of the state sector administrative budget and employ two thirds of the state workforce.

It is therefore vital that the people we appoint to the boards of the companies are highly competent the roles and responsibilities of directors.

There are two key management issues across the Crown entity and SOE sector which occur also in privately owned businesses but have an added layer of complexity due to public ownership.

The first is an ongoing need for leadership in transparency and accountability.

Last week the Finance and Expenditure Select Committee reported back the Public Finance [State Sector Management] Bill. This Bill will ensure New Zealand continues to set the world benchmark for public management.

The bill stems from the 2001 Review of the Centre and integrates the Fiscal Responsibility Act into the Public Finance Act 1989, amends the Public Finance Act and the State Sector Act 1988 and creates a new Crown Entities Act.

There are some provisions which will impact directly upon Crown entities:

Crown Entities will be required to report to Parliament annually not just on their finances but also on their intended and actual performance.

The bill also sets a framework for board fees, requires that fee levels and staff remuneration are disclosed in the annual report, outlines board members’ duties and makes it clear that the Minister can remove them for non-compliance and that they are not entitled to compensation should they cease to hold office for any reason.

This should prevent a repeat of the large sums of money paid in recent years by the Tourism Board, the Fire Service Commission and the Lotteries Commission in circumstances which damaged public confidence in the institutions of government.

These elements of the bill are intended to ensure that the very highest standards of ethical behaviour are following within the wider state sector. Crown boards are inevitably more visible than their private sector counterparts. Public displays of profligacy or poor business management both embarrass the shareholders and directors but, more seriously, distract from the running of the venture and public confidence.

The second key management issue across the sector is the issue of shareholder investment in value adding projects (acquisitions, growth, diversification and so on). As a long-term investor and owner, the government is asking boards to consider the long-term direction of companies or crown entities and to develop business strategies that match that kind of timeframe. We are seeking to maximise both the value of the companies and the stream of dividends we receive over the long-term.

So the question arises regarding major expansions to capability and options to diversify into new lines of business and new markets. The first thing I would stress is that, where a sound business case can be provided, shareholding Ministers may be prepared to invest substantial amounts in projects. One such example is Kiwibank.

With the trend towards globalisation, some SOEs businesses performance are directly related to offshore commodity markets (Landcorp is an example), and several SOEs are now actively involved in offshore ventures, mainly through acquisitions.

This has led to a debate on core vs. non-core activities. Generally offshore investments are non-core and higher risk. Consequently they should only be considered where they will enhance rather than adversely impact on the core business and will add value. One example would be Meridian Energy’s purchase of Power Facilities Pty Ltd - an Australian hydro business.

Now that the Government's balance sheet has been consolidated, it is my job to consider the overall capital requirements across the broad range of the government’s investment activities. The expansion plans of SOEs and Crown entities need to be seen in this context. The government has constrained resources and must out of necessity allocate these sparingly after careful consideration of the merits of the many calls on them.

What we are seeking is for SOEs in particular to participate in a longer-term conversation with the government about overall capital requirements. We for our part need to develop better methods for comparing alternative uses for capital across the whole of the portfolio. Moving to a credit rating benchmark will provide government with a useful basis for comparison.

This is not that different from the scrutiny you might expect from a private sector shareholder with competing investment priorities, or a large holding company with diversified interests.

There may inevitably be some tension between individual business strategies with their capital requirements and the shareholding ministers’ need to engage in cohesive capital budgeting across the whole of the Crown’s portfolio of assets. I believe however that that tension is creative, and that the dialogue between boards and shareholding ministers is an essential component in finding ways of adding value and minimising risk.

So there are unique challenges involved in contributing to the leadership of crown companies. We need the right mix of skills and leadership to balance not only the familiar expectations of successful business practices and corporate responsibility, but also the additional requirements on crown companies that go along with handling public resources and acting for the public good.

However, I can say, as a shareholding minister, that I have every confidence in the New Zealand business community (and the Maori business community) to provide those skills and meet the challenges that lie ahead.

Thank you.

ENDS

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