Governance and Alignment Paper

May 2007

• ISBN 978-0-478-31041-2 (HTML)
• ISBN 978-0-478-31042-9 (PDF)

Introduction

This paper addresses the alignment and governance issues set out in the discussion document.

The discussion document noted that there are currently a range of relationships between the infrastructure bodies, but only one (relatively infrequent) forum for all five bodies to meet. When Australia first comprehensively reviewed its standards and conformance infrastructure, it was found that many issues developed as a result of individual organisations responding to change without a shared commitment to strategic directions.¹

The discussion document also noted that the variety of organisational structures and accountability arrangements raise questions about the ability of, and/or incentives for, the infrastructure bodies to appreciate and deliver on the government's strategic priorities for the infrastructure as a whole. More specifically, the different structural and governance arrangements may limit MED's ability, on behalf of the government, to align the infrastructure bodies with the government's strategic priorities.

In the area of governance, the discussion document noted that the types of organisational structures and accountability arrangements in place for the Standards and the Testing Laboratory Registration (TLR) Councils raised questions about the ability of, and/or incentives for, the infrastructure bodies to appreciate and deliver on the government's strategic priorities for the infrastructure as a whole. More specifically, these types of structural and governance arrangements could limit MED's ability, on behalf of the government, to align the infrastructure bodies with the government's strategic priorities. There were also implications for the ability of the Minister of Commerce (through the Ministry) to influence the strategic priorities of the bodies, where appropriate.

Improving Alignment of the Infrastructure

The discussion document set out three options on how alignment of the infrastructure might be improved:

1. Clarification of expectations could be included in the performance agreements between the Minister, Crown entities and government departments. This would provide Boards with an indication of the importance attached to cooperation.

   AND/OR

2. Sharing of Statements of Intent could also be a request or requirement of the bodies at the time they are being developed, to encourage a strategic discussion about priorities in the infrastructure as a whole.

   AND/OR

3. MED coordination could be more formalised through, for example, regular meetings at Chief Executive level (to replace SAM). This group could support coordination at other levels where necessary, such as technically between IANZ, MSL and MAPPS). Performance agreements could include regular reporting to ensure progress is being made. This option could also address other issues associated with the delivery of the government's objectives.

The findings of the current review point strongly to the desirability of improving the alignment of New Zealand's standards and conformance infrastructure. Like the earlier Australian review referred to above, the review has found that improved alignment between government and infrastructure bodies and between the infrastructure bodies themselves may go some way to addressing issues that arise in areas such as the development of standards, the use of the standards system by regulators, compliance with standards and the provision of information on standards and conformance.

Submitters are also strongly supportive of improved alignment with a view to:

• Improved use of the infrastructure by business and regulators. For example, the Standards Council called on MED to take on a new role as an "infrastructure facilitator" to promote the value of the infrastructure amongst other government agencies. The TLR Council also proposed that MED could take a greater role in promoting use of the infrastructure. The Ministry of Health argues that alignment could be improved by establishing an interdepartmental senior advisory group [Testing Laboratory Registration Council, Sub 6; Ministry of Health, Sub. 32; Standards Council, Sub 38(1)];
• Achievement of economies of scale and scope by infrastructure bodies. For example, one submitter argued that the perceived lack of government "control" of the infrastructure is a result of the small size of infrastructure bodies and the demands placed on them and that MED could convene a high level council with a policy co-ordination role [Conformance and Standards Pty Ltd, Sub. 14];
• Improved planning and strategic processes for infrastructure bodies. For example, one submitter argued that there needs to be a clear three year programme of development work so that all parties can adequately plan their inputs [Construction Industry Council, Sub. 22]; and
• Better coordination of New Zealand positions in international fora. For example; one submitter suggested that MED should establish a vehicle to allow for excellent communication and cooperation between all participants in the infrastructure, particularly with a view to coordinating New Zealand positions in the global conformity assessment community [Agriquality Limited, Sub. 34].

Given the widespread support for, and logic behind, improved alignment, the review has concluded that both options 1 (clarification of expectations) and 2 (sharing statements of intent) should be implemented. These options sit comfortably within the framework of the Crown Entities Act 2004 and to a large extent MED, in partnership with relevant infrastructure bodies, is in the process of implementing them already. At the same time, the implementation of individual aspects this review should provide the Minister with the opportunity to be a good deal more specific in terms of the strategic direction that infrastructure bodies might follow and how the infrastructure bodies might work together in an improved fashion.

Option 3 (MED co-ordination) might also be pursued through the proposed vehicle of a Regulatory Forum which would include the infrastructure bodies as well as regulators. This option is considered further in the Regulation paper. At the same time, this proposal would have implications for the resources required by MED to undertake standards and conformance work and this is also discussed in the Regulation paper.

Improving the governance of infrastructure bodies

This section covers the governance arrangements for the two Crown entities that are present in the infrastructure, i.e. the Standards and TLR Councils. The status of JAS-ANZ as a Treaty body established jointly with Australia has not been reviewed (given that this would require input from our treaty partner). The governance arrangements for those parts of the infrastructure responsible for providing measurement services (i.e. MSL and MAPPS) are discussed in the Metrology paper.

Currently the Standards and TLR Councils have boards that are relatively large and encompass both governance and advisory/stakeholder functions. These arrangements are defined respectively under the Standards Act 1988 (with accompanying regulations) and the Testing Laboratory Registration Act 1972 and any change to them would require legislative amendment. Specific arrangements are as follows:

• The Standards Council can comprise up to 12 members up to four of which can be appointed by the Minister of Commerce and up to 8 of which can be appointed by the Minister on the advice of nominating bodies², although the Minister can appoint other members directly if the nominating bodies provide insufficient nominations;
• The TLR Council consists of 9 members, 5 of which must be appointed by the Minister and 4 of which must be appointed by the Council itself.

In the area of governance, the discussion document put forward the following issues for consideration:

1. How can the governance and accountability of the infrastructure bodies be improved to allow for better fulfilment of the government's objectives and strategic priorities and appreciation of the role of the infrastructure bodies in supporting these priorities?³
2. How can existing formal instruments for example, Memoranda of Understanding, be better utilised to support the Ministry's effectiveness in promoting the government's strategic priorities across the infrastructure?

and set out the following options to address these issues:

1. One option is to retain the status quo in governance regimes and accountability documents. The expectations of the organisation being agreed and set out once a year in their Statement of Intent or other documents, and little further active involvement from MED.

   OR

2. More active bilateral engagement between MED and the infrastructure bodies could be pursued to achieve greater understanding and alignment.

   AND/OR

3. Advisory and governance functions of the boards could be separated. Much smaller governance units could be put in place, which would allow representative perspectives to be channelled through advisory committees. Provisions for adequate training and support for the boards could also be increased.

Aside from the Crown Entities themselves, submitters did not comment on current governance arrangements. Both the Standards and the TLR Councils argued that current arrangements are "fit for purpose" and do not require amendment [Testing Laboratory Registration Council, Sub. 6; Standards Council, Sub. 38(1)]. The Standards Council noted that appropriate stakeholder representation is already achieved through the appointment process for the Standards Council and through industry advisory groups and boards established by the Council. The TLR Council argued that current arrangements are working well and that it has already separated its governance functions (the responsibility of the Council) and its advisory functions (provided through professional advisory committees). It recognised that a board of nine members is larger than is commonly the case for governance boards but suggested that the Council needs a high level of technical expertise when dealing with complaints and appeals, in understanding strategic issues surrounding new accreditation programmes and in appreciating the technical complexity of the global trading environment that New Zealand now faces.

The Ministry believes strongly, however, that the governance arrangements for the two Crown entities are in need of modernisation and simplification. This is because:

1. There is a blurring of governance and advisory functions for boards. Given the challenges facing these organisations in the current economic environment, it is important that both boards are able to focus on their governance functions. This is particularly important given the complexity associated with the tension between the main purpose of a public sector board to fulfil its public policy objectives and generating a profit consistent with running a financially sustainable business. The tension inherent in these two functions has already been recognised by the boards themselves which have both attempted to separate out advisory functions so that they can concentrate on governance. This is wholly appropriate given that Boards should take responsibility for obtaining the technical advice they need to carry out their functions;
2. The boards are too large. Experience indicates that board size is one of the key explanatory variables in quality of governance. Ideal board size appears to be around 6-7. Any larger and the board risks losing cohesiveness. Any smaller and it risks falling below critical mass. A survey of standards and accreditation agencies in other countries reveals that some have large boards that combine governance and advisory functions but that the trend is to favour of smaller boards in order to improve governance outcomes.
3. It is more efficient that the Minister directly appoints board members. MED has an increasing amount of experience in advising the Minister of Commerce on appointments to boards for which she is responsible. The MED process ensures that effective searches are mounted (if appropriate, these are international searches), that stakeholders are carefully consulted and that boards are equipped with the skills they need. Generally the Chairs of boards are closely involved in the process of advising the Minister on appointments. There would appear, therefore, to be little need to continue the process of appointments to boards based on the advice of nominating agencies or of boards themselves. This is not a sensitive issue and it is notable that none of the nominating bodies for the Standards Council sought to have the process continued in their submissions.

Overall, therefore, implementation of option 3 would appear to offer the best prospects of improving the governance of the Standards and TLR Councils and of achieving the government's strategic, policy and alignment goals in respect of these bodies. It is proposed that the governance and advisory functions of each board be separated and that each board be made responsible to the Minister for governance outcomes only in terms of the functions of each Council as set out under legislation. This would allow each Council to be responsible for obtaining its own advice streams – as is largely occurring already. A further proposal that the Standards Council should seek to obtain this advice on a sectoral basis in the form of Sector Advisory Bodies is set out in the Standards paper.

It is also proposed that the size of each Council be reduced to six members including the Chair. Reducing the size of Councils in this manner should provide for more cohesive governance units which can pursue both the public and financial objectives of each entity more effectively.

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