Governance Bites #114: differences between Crown Entity and private sector boards, with Rob Everett

In this episode, Mark Banicevich talks to Rob Everett about the difference between Crown Entity and private sector boards. They discuss how accountabilities to shareholders differ to accountabilities to public sector boards and Ministers, and the challenges balancing political direction with independent governance. Mark asks about the impact of the board appointment process, differences in director capability, and differences in risk appetite and oversight. They discuss the approaches to strategy, innovation and compliance, and differences in tone around the board table and pace of decision-making. Rob talks about differences in performance expectations, and what each sector could learn from the other. He also shares advice for new directors. 
Rob Everett is an experienced director and CEO, with a background in law and financial services. He is currently independent chair of fund manager Simplicity, and has been a director of the biggest credit card issuer in the UK (MBNA), the biggest bank by balance sheet in Ireland (Merrill Lynch International Bank), Merrill Lynch-owned bank and broker entities in Turkey, and a school management board. Rob is a past CEO of the Financial Markets Authority and NZ Growth Capital Partners. He spent 18 years with Merrill Lynch in London, New York and Hong Kong. He now lives with his family in Wellington. 
#governance, #leadership, #corporategovernance, #boardcraft, #decisionmaking, #makingadifference, #ceo, #governancebites, #boardroom, #director, #crownentity

Transcript

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Hi, I'm Rob Everett. Until recently, I was the CEO of NZ Growth Capital Partners [NZGCP], the government venture capital fund. Before that, the CEO of the Financial Markets Authority [FMA], and I'm just about to take over as the Chairman of the board of Simplicity, the KiwiSaver Fund. And the topic we're going to talk about today is the difference in governance between a private sector board and a Crown Entity board. Hi, welcome to Governance Bites. I'm Mark Banicevich, and as you've just heard, I get the pleasure again to spend more time with Rob Everett. Rob, thank you very much for your time. Pleasure. It's been great catching up again, after, it's been a while since I've seen you, I think, hasn't it? You moved from the private sector to a Crown Entity having done 18 years at Merrill Lynch. What surprised you about the difference in governance? Yeah, yeah. Well, I mean, it is fundamentally very different in a Crown Entity, and it will depend from Crown Entity to Crown Entity, you know, they're not all created equal. Typically, your mandate, what you're there to do, and the powers you've got to do it, and the funding you've got to do it are much more set in a Crown Entity, and you have to stay within those boundaries. Whereas in the private sector, you know, at Merrill Lynch, to a certain extent, you know, you had a lot more freedom to devise business strategies and make really quite significant decisions for the business, you know, without interference, if you like, from the board or external stakeholders. So in a Crown Entity, you have to be very conscious at all times of, what is our mandate? And if that's set out clearly in statute, as it was for the FMA, which was new. Yes. So that's really helpful, because it gives you a really good sense of, what are you there to do, and what are you not there to do? Some Crown Entities or some government-owned companies have far less clear mandates, and the challenge in those sorts of organisations is working out where are your boundaries, so that what you don't do is spend a year devising a strategy and implementing it only to be told by somebody, "Actually,"you're not supposed to be doing that," either no one is supposed to be doing that, or the outfit over there that no one ever told you existed is doing that. So, so it's mandate, you know, the real difference is you've got a much more constrained mandate and set of powers. And generally in the private sector, you are constrained by what the markets will allow you to do, but actually if you want to pivot from building cars to, you know, building iPhones, you know, you can do that, there's no saying you can't, you just have to get the shareholders on board. Right, right. One of the interesting things about Crown Entities is that technically you report to a board of directors. You also have this conversation with the Minister. The Minister's role is really important. How do the accountabilities to Ministers in the public compare with accountabilities to shareholders or the private sector? Yeah, well, my experience is, you know, much more visibly and much more painfully, if I can use that expression, in that you never feel at any point as a CEO or board member of a Crown Entity, you know, anything but the relentless gaze of your monitoring department and your Minister, or you certainly should feel like that. Whereas, you know, my experience in the private sector was, yes, the shareholders cared about your share price, but particularly in a US investment bank, they didn't seem to care about pretty much anything else. So you had a lot of freedom. Whereas in a Crown Entity board, you know, you are there at the behest of the Minister, you are there to serve the Responsible Minister, and you can never forget it. And so that does change behaviours, and your willingness to do stuff that might be a bit esoteric is definitely conditioned. Yes, yeah. One of the challenges, as well, with a Crown Entity is that Ministers come and go. Yeah. And political agendas come and go. So at a Crown Entity, what are the challenges in balancing that political direction with independent governance? Yeah, I mean, I did eight years at the FMA, and I think we had five Commerce Ministers in that time. I did three years at NZGCP, and we had four Ministers in that time. You know, the three-year electoral cycle is a thing of madness. And then you're having government reshuffles, you know, on quite a constant basis. So your ability to be confident that the direction that you have been pursuing, which is often very much driven by the Minister, is going to survive the next Minister, you know, is really challenging. You know, and quite often, if you're a small organisation like NZGCP was, you know, getting into your Minister is a real challenge. So you spend a lot of time at risk of wheel spinning, thinking, "Are we supposed to be"doing what we were doing before? We've had a change of government, you know? Do they"still want us to be doing what the last law told us to do?" And the advantage the FMA had was you had a statute, you were independent. Yes, the Minister had influence, but it was pretty clear what you needed to be doing, and that didn't change. Yes. Whereas for a non-statutory entity, a government-owned company like NZGCP, you did not have that certainty of direction. Wow. And it made your need for direction and clarity from your Minister or your monitoring agency an all-consuming topic. And when you couldn't get that clarity, you had to decide, "Do I just not do anything?" And then everything grinds to a halt? Very demotivating experience. "Or do we push the envelope"and risk someone saying to us in six months' time, 'You know, what the hell"'were you doing? You know, we didn't say you could do that.'" So the views of the Minister and, you know, the government of the day as to what you are there to do and the sorts of ways you should implement that mandate, yeah, they are front of mind for a Crown Entity board and a Crown Entity CE [Chief Executive] at all times. Right. What impact does the board appointment process have on board dynamics in the two types of entities? Yeah, well, at times, and this has ebbed and flowed in my 10, 11 years in the public sector, you see board appointment processes being subverted by political decision-making. Whether that's grace and favour appointments, or whether, you know, a shift in policies is leading to different people being put on the board. And so certainly as a CEO, a long-term CEO like I was at the FMA, where the board, you know, turned over in total at least twice in the time I was there, three board chairs. Again, it can make things, you can really lack consistency and you're having to adapt quite quickly to a change of approach, a change of individual, a change of nuance, some of which is not articulated to you. So someone will appear on your board, and you think to yourself,"Okay, they've been put there for a reason. You know, is that a good reason?"Is it a bad reason? Do I need to worry? Do I need to go and ask someone, 'What was"'the Minister wanting to achieve here?" And to be told, 'Mind your own business.'" And so, yeah, you're in politics. I mean, you're dealing with a political environment, and sometimes it means you aren't as confident as you'd like to be that you fully understand, you know, what the design was for that board appointment. Yeah, right, right. Because as you say, you've got the direct influence of the Minister, you know, a letter of intent and things that comes forward each year, changing Ministers within a government and then changing governments who come with a completely different agenda. Yeah. And then those Ministers being very strongly involved in appointing board members, so influencing the structure of the board, as well. It can be really challenging. Yeah, and I do think, certainly compared to my experience in the UK [United Kingdom] with a five-year electoral cycle, - Yes. - and a very strong established civil service, one of the things I struggled with a bit in New Zealand is the constant chop and change. And you often feel like you're starting at zero again when you've got a change of government. And there are long periods where nothing is happening, because, you know, everyone's trying to work out post-election, you know, who's in what office. One year to clean up the last person's mess, one year to try and do what you want to do, and one year to get re-elected, right? Yeah. And as a government official, I guess in those jobs, it felt like you had your feet tied together, in terms of your ability to move forward quickly, knowing that in six months' time, you either had a new government, or you almost certainly had a new Minister, and that you were going to have to do this whole process again. And then people are saying to you, "Well, it's"six months before an election, you shouldn't do anything different. You need to wait for"the next lot to get in." And then they won't do anything for six months. So actually that's 12 months. So, yeah, the political cycle, you know, for a lot of the Crown Entities and government-owned companies, you know, slows things down. Can't we just get on with it and change the length of the political term? Yeah, please. In your experience, how does the level of director capability or diversity compare between Crown and private sector? Yeah, that's a good question. I mean, I have largely been very impressed with the people I've come across on Crown Entity boards. You know, they've tended, because they're not getting paid really to do that job, so they tend to be very passionate. They tend to have achieved a bunch to be considered. I think sometimes what I've seen is they may feel it's their job to represent the kind of the sector they've come from on the board, and, you know, on the public sector boards occasionally err on the side of trying to be a representative of that sector rather than realise that they're on the board to act in the interest of the of the entity itself. So you see a little bit of that transition when people first come on to Crown Entity boards, but, you know, I think people work it out. I think in terms of quality of people, you know, like I said, I've been very impressed. You do in both private sector and public sector boards sometimes see people who are consciously building a portfolio of board roles, and you sense they're not as passionately supportive of what your entity does as everybody else. A stepping stone. And you can see those people a mile off. Certainly as a CEO or chairman of the board, and that's fine, people have got to build governance expertise. But, you know, I am a strong believer, as I've said before, if you're on the board, you should be doing everything you can to make that entity successful. And using as a stepping stone, you know, that's perfectly valid as long as you give everything you've got to that entity during that period. But, you know, I have seen on, particularly on some of the Crown Entity boards, you know, the occasional person who's really got an end goal in sight, and you're just on the way. Yeah, right. How would you compare the risk appetite and risk oversight between public and private? Yeah, well, I mean, I came from a US [United States] investment bank, so risk appetite for better or worse was, you know, fundamentally different. I think, you know, for someone like me, what I had to learn to accept in the public sector board and a public sector entity is that, you know, the number of people you have to consult with, the number of people you have to tell, you know, working out who needs to be on board and who they need to bring on board and who they need to bring on board and the chain of command, you know, sometimes you're hesitant to suggest anything even remotely radical because you're going to spend so much time you know, getting people on board with it that you think, "Well, for a quiet life, I'll just keep on doing what I'm doing." So I have found, you know, coming from such an extreme, you know, autonomous environment such as a US investment bank to a scenario where, you know, you can't change the carpet without, you know, five meetings at MBIE [Ministry of Business, Innovation and Employment] and a couple at Treasury, you know, that can test your patience, the politest thing I can say. But, you know, that's the beast you're in. Yes. It's taxpayer money, and you're accountable. You're accountable to everyone you meet on the street and in the supermarket and on the football field. So, you know, you just have to transition to an environment where in order to deliver to that accountability, you don't get the freedom of movement that you would like. Yes. And, you know, it is frustrating, and I don't know how people who've done those roles all of their career cope. You know, certainly for me, I thoroughly enjoyed, you know, that sense of, "We're here for the taxpayer, we're here to deliver value"for all New Zealanders." But the pace of your ability to change things can be intensely frustrating. I understand the low risk appetite, the being so risk averse. I remember how the media spotlight, you know, you were always in the media spotlight. Yeah. And one thing that stood out for me in particular, I remember one year when I was at the FMA when you were CE and we had a staff conference and that blew up in the media. Yeah. Of how much money was spent. Yeah. And you think, "Well, this is just how much it costs. And how important is it for an"organisation to bring their team together and learn and celebrate and all these"things?. Yeah. Every business should do that. You make an interesting point. One of the lessons I learnt as a CEO at the FMA, but also that I've taken into my board governance roles is that, you have to take that accountability to the taxpayer incredibly seriously, and it means you're going to be frugal and prudent on things that you wouldn't have done in the private sector. So I fly Jetstar a lot because, you know, I feel that that's actually the right thing to do. You know, ironically, if it was my money, I'd go on Air New Zealand. But, you know, I feel that's the right thing to do. But what that scrutiny can do, is it really creates an unhealthy risk aversion and a sense that you're in a second-class organisation because you're a public sector organisation and you can't do the things you would in the private sector. You can't spend the money, and then you're at risk that the quality of your staff starts to decline over time. So that sense that, "We're going to be"in the paper tomorrow, you know, we're going to get criticised for this," you know, can be all-consuming. And I had to say to myself and my board at the FMA, you know,"We've done, in certain instances, we've done everything we thought was appropriate, and"we have to be willing to stand behind that and not change everything just because"some journalist has written a headline that makes it look different." Yes. And so as long as we're comfortable we've done what we've done right, some degree of willingness to take criticism needs to be built in. Yes. But you can imagine, you know, everyone's very sensitive to their reputations, everyone's very sensitive to the kind of taxpayer issue. You will sometimes find organisations running for cover, and as a result, you know, demotivating their staff when actually they don't feel that they did anything inappropriate. And there is a role here for politicians to stand behind their public sector sometimes, and in the, you know, this is probably going to be a controversial comment, but in the 10 years I've been in New Zealand, you know, my sense is that the politicians are using the public sector a little bit like a political football rather than thinking through, "How do I get the best out of my public sector?" Because it isn't by allowing the media to influence, you know, criticism on a daily basis. Yes. And so it's a difficult topic. But, you know, I do think in the public sector everyone has been scarred by some newspaper headline that, you know, their neighbours have read out to them and their parents have read out to them on the phone, and, you know, they feel they haven't got the ability to defend themselves. But it just comes with the territory. And, and I think, you know, this is my private sector background coming out, that if you feel you've done it right, you have to develop a little bit of a thick skin. And not everybody can do that. Yeah, absolutely. How does the approach to strategy, innovation, and compliance differ between the Crown Entities and private? Yeah, I think, you know, in line with some of the things I've already said, I think, you know, a lot of Crown Entities, a lot of government entities, you know, are pretty prescribed, including by statute. So your ability to create new strategy and innovate is actually quite limited. It's within the lanes. And sometimes board directors forget that. You know, "Why aren't we doing this? Why"aren't we going after those people?" I think of the conversations at the FMA. It'd be,"Well, 'cause we don't have the power to do that. It's not in the mandate. I agree"with you, I'd love to be over there slapping those people, but, you know,"there's a statute got passed by Parliament. You know, like it or lump it, this is the job." And so I think, you can innovate, I think, in how you deliver your strategy, but your ability as a Crown Entity board to go and do things that you're not mandated to do, it isn't there. And you have to accept, as for the last answer, you're going to get criticised for not doing things you're not allowed to do. Yes. And in my experience with the FMA, the whole time was people, including people deep into the industry who ought to have known better, saying, "You know, why aren't you going after these people?" And you'd be, "Well, yeah, it's a good question, but look at the law. The law doesn't give us"the power or allow us to go after those people. It's not in the mandate. You know,"let's lobby government to say maybe we should expand our mandate or change our"powers so we can go after those people. But if you can't, you can't." And I think that that is misunderstood by some people who go on public entity boards. You know, at the FMA, I used to put the key provisions of the FMA Act [Financial Markets Authority Act 2011] in the board pack every time. Yes. Because I wanted the board to be,"Oh, yeah, that's actually not something"we're supposed to be doing." Right. Yeah. Well, in my experience, as well, with the FMA, sometimes you'd have things that would be within the mandate, but you had very limited ability to do anything about it. Yeah, yeah. And financial advisers, under the Financial Advisers Act [2008] was a key example. Yeah. And the FMA is a really good example where that mandate has expanded over time - Yeah. - to do exactly what you're saying. Yeah. And it takes time. Yes. So again, public entity boards, particularly statutory entities, you know, if it's going to require a change in legislation and probably a change in funding, you have to be patient. And in the meantime, you're going to get criticised for not, you know, doing something about that thing over there. And you're kind of, "Well, what would we do?" You know, so it's just a different pace and a different mindset than I was used to in my previous jobs, which, as I've said, I accept we're at the extreme end of the kind of nimble, risk-taking spectrum. Yes. How about the, the appetite for innovation? You know, businesses now, for example, will be spending a lot of time and energy, should be spending a lot of time and energy thinking,"How is AI [artificial intelligence] going to impact us"now? Can we embrace it?" We've, businesses that I'm working with are starting to do outbound phone calls and take phone calls and stuff and using AI assistants. How difficult would it be to introduce those sorts of technologies into a Crown Entity? Well, I actually think it's part of the job of the board to, you know, be taking that outside-in view of the world, right."What is happening elsewhere and why are we"not doing that?" Yes. You know, if it's AI, which of course is all around the board tables at the moment. You know, management are obviously very busy doing what they have to do today and struggling to really prioritise something that feels very kind of future-focused. It's just the nature of a lot of those jobs. So to me, a lot of the job of the board is to understand those trends that are developing, and if they look like trends that this organisation, whether it's public entity or private sector, but I think particularly in the public sector, ought to be thinking about making that happen. You know, whether that's in the KPIs [key performance indicators] of the CEO, whether that's, you know, chatting to management team about,"Okay, what are we doing about AI for instance? You know, how are we...?" You know, cyber security was the one before and will be the one after. Yes, indeed. You know, sometimes the management team and the CEO can't see the wood for the trees. And occasionally, a good board is not just looking at what they can see internally. They're looking at the horizon and saying, "Who could we talk to that's"going to help us understand what's on the horizon so that we keep the management team focused on, 'Oh, okay, well, if that's definitely coming, rather than wait for it"to arrive, we start preparing now.'" And AI is a great example, but, you know, sometimes the board has to be asking those future-focused questions. Absolutely. And an interesting board or an interested board will be bringing people from outside in all the time to talk to them so that they can develop that radar of what they might need to look at. Yeah, right, yeah. That's a good insight. What's the difference in tone around the board table? You've already talked about the pace of getting things done, so presumably that'll impact the pace of decision making in the boardroom. Yeah. Are there any other ways that the discussion around the board table or the tone around the board table differs between the two entities? Well, my experience has been that in a private sector entity more gets left to the CEO. And you know, and quite rightly, you're taxpayer accountable. In a public sector entity, the board, you know, do get more involved in the big decisions. And where you have a big board, not all of whom will think the same, you know, that can sometimes be a torturous process to get to the point where the CEO and the management team have got a clear set of directions. So a thing I learnt at the FMA, you know, with a couple of great board chairs, was there's been a great debate around the board table about a particular topic. At the end of it, saying, "Okay, so did we"reach a decision? Are we really clear on what the instructions to me, the CEO, and"the management team are? Because if we're not, we need to get to that point." And so there is a risk, I think, with public sector boards where, you know, there's a lot of time for, you know, consultation around the board table, of ending up just with a mishmash of quite different views, and the CEO wandering away thinking, "I'm actually not 100% sure what the collective board view was." So I think as a board chair, that's something you should be doing in the wrap-up. And if not, the CEO needs to be able to say, "Okay, can we be really clear"here, what you want me to do differently, or what you would like me to"do with this?" And if the answer's,"Nothing much," great. But I think in a public sector board, you know, there's more people involved in the decisions than I was used to in a private sector board. Where the top board really felt very distant from day-to-day operations, very distant. Yeah, right. How do performance expectations differ? How do they measure performance differently? And well, we alluded to that a little bit in our last conversation, and how's reporting different, and those sorts of things? Yeah, well, exponentially, off the scale different, I would say. You know, again, I'm used to a scenario where performance was quite brutally assessed, which was share price, revenue. Other than that, get on with it. You know, and you would like, frankly, a bunch of other things to be in that mix, but weren't. Particularly as a public company. Whereas for a public sector entity, you know, your reporting documents, your reporting requirements are, you know, exhausting, and you can spend, as a public sector CEO, easily a third of your time doing reporting mechanisms into government, which don't to you feel like great added value. But again, you know, you're generally operating off taxpayer money. You know, you've got to be accountable for that. Someone somewhere needs to be able to go, "Is this best bang for the buck?"Is having these guys do all of these things really delivering the outcomes we want?" Yeah. I think the problem with a lot of performance reporting, or a challenge with a lot of performance reporting is, "Okay, we did all of this and that happened." Fine. But is there really causation? Yes. Because, you know, the FMA, I had no qualms in saying, "We're all working really hard, really busy, doing everything we can." But identifying the behaviours that had changed and the data that it had changed was really difficult, partly because you didn't have the historical data so you didn't know what your base was. Yeah. Yeah, right. And then you end up in a reporting scenario where you think, "Yeah, I'm reporting all this stuff, but I actually"myself don't know what that tells the people I'm reporting to." Yes. And so it, you know, it can be, it can be frustrating because in the public sector you are often working very hard to contribute to outcomes, but you don't control the entire outcome. And so you can get into the mindset that your reporting is meaningless because, you know, you weren't really in control of that end outcome 100%. But that's life. Yeah. You know, and I think Treasury have been very focused the last few years on trying to narrow that gap and trying to be much more specific in reporting about,"Well, what did we change?" Yes. Not, "What changed?" "What did we change?" And that. Which can be very difficult to measure. It really can. Yes. What can private boards learn from public sector and vice versa? Yeah, I think instinctively it's about the mandate piece. So although I found it quite constraining to come into a public sector entity that had, you know, a very clear set of guardrails that it really couldn't step outside, I think in the private sector sometimes you get a dilution of strategy or pivots going on that aren't properly versed with the board and aren't properly tested with shareholders and other stakeholders. And so you get the risk of organisations, you know, going off on tangents and pivoting where actually no one's sat down at a governance level and said, "Oh, so you"want to pivot from this to that." And of course, the CEO is going to say,"Well, it's not really a pivot, it's just a development of the strategy." But, you know, I certainly felt in the private sector that sometimes you had quite radical changes of direction, and you really wondered who had decided that. And who had looked at it that wasn't the person who stood to make all the revenue out of that change. And so I think even though I found it occasionally frustrating, a clearer sense of, "What is our company here to do? What are our shareholders expecting?" You know, "What is the direction we have set for ourselves?" And if we're going to change it, do it mindfully. Yes. Don't let it just happen because someone's got a pet project that suddenly ended up taking over the company. Yeah, that's, that's a really valuable insight. And you see a lot of good companies fail because they've done a bunch of mini pivots that actually hadn't been properly thought through, and they diluted the thing they were good at, and ended up doing a bunch of things they would like to be good at, but aren't. So I do think there's a read-across. Yeah, right. Anything the other way? Well, speaking with my private sector kind of background, I would say, and this is really for the public sector boards, more a message for the kind of government apparatus. You know, if you've got good people in those jobs, whether that's the board or the management jobs, which, you know, you should have, you know, let them, you know, let them have a degree of ability to make decisions and take risks, you know, within the controls. Otherwise, you're not getting the best out of those people. You know, it's the stuff that's incredibly difficult and challenging that brings out the best in the best managers and the best executives. And so, you know, if you want the public sector to perform at the level it needs to perform at, you know, there does need to be room for people to own decisions and take some risk. And, you know, that might be reported differently, it might be governed differently, but it should still be happening. And I have seen a retreat from risk in the public sector in the last 10 years. And I don't think it's healthy. Yeah, absolutely. Thank you, Rob. I've got one final question for you. What advice would you give to a new director? Only do it if you clearly see where you're going to add value. So don't take it because you like the sound of it. Don't take the role because it's a great stepping stone. Take the role because you've got a sense of where you can fill a gap or do something the current board can't do. And then constantly reassess that with the board chair and the CE, "You know, what can I bring? You know, what value do I add?" I think, you know, being a board director that isn't really sure where they're adding value, that's a bad place for a director to be. Yes. So I think if you're not sure, either on the way in or as things have developed around you, you know, go and ask. Go and say, "How can I, how can I help? What can I do that's different?" You know,"Is there any something specific that I'm on the board for that maybe I didn't quite realise?" I think that would be my advice. Find a thing that you bring, and leverage it to the hilt. Yeah, great. That's advice that has come up in a way before but not in that way. And I, yeah, I really like that. That's really great valuable advice. Thank you, Rob. Thank you again very much for your time. My pleasure, thank you. Wonderful to catch up. Lovely to see you. And I'll look forward to seeing you soon. Yeah. And you. Next episode. Thank you. Thank you for watching this episode of Governance Bites. We have more episodes on YouTube and your favourite podcast channel where I interview directors and experts on various topics relating to boards of directors and governance. We'd love to see you back, and please like, subscribe, and share the videos and podcasts.