Kill the ballet, pretend you're for sale,Weldon tells SOEs

Friday 26th June 2009

Glitzy sponsorships aimed at the political elite should be the first thing that state-owned enterprises axe if they are serious about better commercial performance, says the NZX CEO Mark Weldon.

In a speech to a Treasury seminar, Weldon also urged SOEs to behave as if they would be privatised in the next two to five years because that would focus boards on creating value rather than their current concentration on political and media risks at huge cost to the New Zealand economy.

With annual revenues of $10 billion, assets worth $39 billion, and more than 17,000 employees, SOEs were a huge part of the economy, but showed very weak commercial performance.

"Performance of the sector is a serious concern with only 2.9% total return on assets, and a 2.6% return on queity across the entire portfolio" in the year to June 2008," Weldon said. "These returns are unusually low. The SOE sector is a drag on national growth and productivity."

To be performing so poorly suggested there were systemic problems about the SOEs were organised and which inevitably held them back. Describing SOE governance as "New Zealand's most important governance challenge, Weldon identified the following key problems:

The 'no surprises" policy between SOEs and Government Ministers. "No commercial board would be sensitive to Ministers' interests - how can SOEs compete? This is, at least in part, explicitly political, not commercial";

The Statement of Corporate Intent process "eviscerates any sense of the board being the final custodian of the company" and, by including questions of corporate profile and personality "passes the custodianship of corporate culture to government";

Having the Treasury and the Crown Company Monitoring and Advisory Unit looking over SOEs' shoulders inevitably confused responsibility for strategy. "These are smart people, but they're not business people. The long-term consequence of having so many reviewers of strategy is logically to have boards that choose to do nothing bold/stand still".

"The result of all these governance arrangements is that SOE boards will logically focus on political and governmental outcomes as much as they do on commercial objectives."

That in turn created weak financial performance, overly conservative business strategies, substantial lobbying, risk avoidance, and "a predilection for sponsorship of 'high culture' events with glamorous openings like ballet, opera etc, despite SOE's generally having operations based in communjities have very little overlap with such high culture events".

"One major signal SOE board could send in line with the current government's requirement to foc us on business and financial performance would be to exit those sponsorship activities that have opening events at aimed at the Wellington elites and redirect that spend to regional communities.

"Symbolic acts such as this would send strong cultural signals right through the organisation in a manner out of all proportion to their monetary level."

Weldon suggested SOE boards should behave as if they would be privatised in two to five years.

"Whether or not such an event comes to pass is immaterial. It is the right question because, were such an event to occur, you would want to ensure the maximum return to your current shareholder from the sale of any stock."

Such improvements were fundamental to New Zealand's desire to catch up living standards with Australia.

"Simply put, it will be tremendously difficult for New Zealand to succeed without a materially improved performance across the SOE sector," Weldon said.

Businesswire.co.nz

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