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Jane Diplock AO
Chairman, New Zealand Securities Commission

Thank you for your invitation today, although I am not sure how thankful I am for a speaking topic of such breadth and depth! Cross border comparisons of public sector reform are a major exercise, especially given a rich and varied experience of reform on both sides of the Tasman in the course of the past 20 years. It has been my privilege to have participated in some of that in Australia and also, over the past two and a half years, in New Zealand.

Let me start by reporting that the drive for reform is very much alive and well in Wellington today. The Parliament now has before it the most significant piece of state sector reform legislation for a decade - the Public Finance (State Sector Management) Bill.

The themes of reform, in this bill and in various other programmes for change, should be very familiar to Australians - public agency capabilities, public service values, corporate governance and accountability are top of the New Zealand agenda, as they are in Canberra and some State capitals.

In addressing your topic, I hope to give some insight into the drivers and substance of current reforms in New Zealand, and draw parallels with Australia along the way . I also have several observations of difference and some thoughts on the importance of trans-Tasman cooperation.

To start with, we should be clear that I am talking in a New Zealand context about the state sector - this includes all the agencies of central government and the Crown, but not the public sector per se which would include the machinery of local and regional government as well.

Use of the word "state" can be confusing in a trans-Tasman context.

I will generally equate the state sector in New Zealand with the Commonwealth in Australia.

If we step back a few years, New Zealand was the undisputed world leader in adopting what has since become universally known as the New Public Management model for governing and managing government agencies. Nowhere else were NPM structures and processes adopted so quickly and so comprehensively as in New Zealand from the mid 1980s onwards.

The state sector was radically restructured:

• to give each agency a sharp focus on its purpose;
• to introduce contractual arrangements between agencies and the executive arm of Parliament;
• to devolve management responsibility and refocus agencies on the delivery of outputs;
• to strengthen accountability mechanisms; and
• to put public finance management and reporting on a commercial footing.

The essentials of NPM are now found, in one form or another, throughout the developed world.

The New Zealand reforms continued into the 1990s, with a focus on separating policy development from policy delivery functions, and ground-breaking legislation to entrench fiscal management disciplines.

Mid decade, an American public policy specialist was invited over to review the reform process. Professor Allen Schick, of Maryland, produced a very lucid report entitled "The Spirit of Reform". Among his comments was:

"New Zealand has revolutionised public management without going through the protracted pilot testing and cautious implementation that have slowed innovation in some other countries. Measured by their bold objectives, conceptual basis, reliance on statutes and speed of implementation, the New Zealand reforms have been truly remarkable."

Over the same period of course, Australia was moving into similar territory at both Commonwealth and State level, if not with the same speed and uniformity of application during the early years.

It is widely accepted that the reform process culminated with the Public Service Act 1999 and the major financial management legislation of the same period, which altogether enable much greater flexibility in public sector management within more explicit accountability systems. The large scale privatisation of publicly-owned assets also warrants a mention here - it became far more of a feature of reform in Australia in 1990s than across the Tasman.

In Wellington the reform agenda has moved on significantly. As State Services Minister Trevor Mallard put it in a speech last November, the focus has "moved from managerialism and outputs to leadership and outcomes".

Current reform has two principal drivers. First, a general sense that strength and capacity of the state sector had become rundown. This was a view bolstered by some very high profile instances of failure among state sector agencies, one of which I will discuss more fully in a few minutes.

The second driver was the emergence of new thinking about "managing for outcomes' and with this, the benefits of a more coordinated "whole of government" approach to tackling the nation's major issues of social and economic development.

In response to the first of these drivers, the Government has expanded the size of the core public service which had shrunk markedly since the mid 1980s. Full time employee numbers in portfolio departments have grown 10% since 2000.

In response to the second driver, we see good beginnings of a concerted effort to build up the capabilities of the state sector and achieve greater alignment with Government policy objectives.

Renewed importance is being placed on leadership, on the recruitment and training of skilled staff, on deployment of information technologies, and on the importance of a public service ethos.

There is also new focus on ensuring proper control and accountability right across the state sector, the landscape of which has changed dramatically over the past 20 years. Large components have moved outside the core public service - the 37 government departments that account for only around a third of the State's total expenditure. The public service accounts for only 13% of all public sector employment (which, in this instance, includes local government organisations as well).

Turning back to the 1980s again, a distinctive feature of the New Zealand revolution was the rapid and broadly-based conversion of commercial activities within old departmental structures into state-owned enterprises, or SOEs. Many of these were subsequently privatised.

Today, there are 16 SOEs, holding about $11 billion in total assets and continuing to play a significant role in the New Zealand economy. Biggest among them are New Zealand Post and three electricity generation companies. SOEs—which can be likened to Government Business Enterprises under Australia's Commonwealth Authorities and Companies Act—are subject to all the commercial imperatives facing private sector companies while remaining accountable to shareholding Ministers.

Then, there is a plethora of so-called Crown entities, some arranged as companies, and the rest as statutory bodies or single member commissions. They have many and varied public policy or commercial functions, and some have a delicate mix of both.

There are around 140 such entities, ranging from the office of the Race Relations Commissioner, to universities, to research institutes, to airport operators. Together, Crown entities account for 50% of state sector spending.

The new "whole of government" approach has raised critical issues about performance and accountability, particularly among these Crown entities. Indeed, corporate governance has emerged as a key topic on the reform agenda. At the New Zealand Securities Commission—itself a Crown entity with particular statutory obligations—we have been uniquely positioned to watch the growing importance of corporate governance issues and to help drive the reform process.

Of course, Australia also has a strong focus on public sector corporate governance. I noted with interest some comments earlier this month by Dr Peter Shergold, Secretary to the Department of the Prime Minister and Cabinet, who sees effective corporate governance as crucial for both maintaining traditional accountability standards and improving performance in the Commonwealth Government.

Dr Shergold pointed to four factors elevating the importance of governance concepts and practices through government operations. These were:

• the contracting out of service delivery;
• increased recognition of the value of private and community sector experience on public agency boards;
• the devolution of management authority in public agencies; and
• an increased use of political advisers in Ministerial offices.

These are all very pertinent considerations in New Zealand as well. And I see some strong trans-Tasman similarities in the structures and practices that are being embedded in public agencies to promote better performance and to strengthen accountability. That said, New Zealand is taking a somewhat different route from Australia towards embedding those structures and practices.

Corporate governance is, in fact, one of three broad strands in current state sector reform in New Zealand. At this point, I want to briefly discuss each of the three strands, starting with state sector capability and the move to "managing for outcomes" before turning back to issues of corporate governance.

Building, and to some extent rebuilding, capability involves a range of programmes and initiatives, mostly inspired by the so-called Review of the Centre in 2001 - an officials report examining the strengths and weaknesses of New Zealand's public management system.

The Review of the Centre awarded high marks for operating efficiency and transparency and for the quality of reporting. But it also highlighted shortcomings in the development of leaders, the recruitment and training of staff with the right knowledge and skills, and also in the ability of agencies to work together.

We now have a new Executive Leadership Programme for growing the talent pool at the top levels of the public sector. As many as 40 senior managers are inducted into the programme each year, each given mentoring support, opportunities for further academic study and/or management training that should prepare them for chief executive-level roles in the medium term. There is also more resource and more encouragement for higher education in public policy and management. And of course this includes the Australia-New Zealand School of Government, launched in 2002 as a joint venture among universities and governments on both sides of the Tasman.

There are now 40 New Zealand public sector managers on the Executive MPA programme. Professor Allan Fels, former ACCC Chairman and foundation Dean of the trans-Tasman school, rates the education and personal development of future leaders as one of the most significant challenges facing governments everywhere.

This is a challenge well recognised in Wellington, where filling vacancies at the top of state sector agencies has become a major issue at times. The Government has turned to Australia on a number of occasions, two examples being Barry Carbon, recruited as Secretary of Environment and David Butler, now Inland Revenue Commissioner. I suspect that there are talent shortages worldwide for these types of demanding jobs.

Building capability is also about strengthening regulatory structures and processes in response to some glaring failures over the past decade.

Among the most notable of these is what New Zealanders came to know as the leaky buildings crisis—an epidemic of rotting timber frame houses and apartment buildings that has been traced back to industry deregulation in the early 1990s, to the rising popularity of new building materials and techniques, and to ineffectual oversight by slimmed-down state agencies.

In early 2002, we saw the news media zero in on a rising incidence of leaks and rot in new buildings. Six months and much political embarrassment later, an officially-commissioned inquiry criticised the Building Industry Authority for failure to be more active on the problem and for not providing a more comprehensive service to the public.

The BIA was the Crown entity responsible for oversight of building standards. The initial Government response was to fund a mediation service for home-owners to thrash out their grievances with builders.

The national repair bill will run into 100s of millions of dollars - just as it did in British Columbia where a similar crisis occurred in the 1990s, apparently without being noticed New Zealand officials.

Leaky buildings has been a wake-up call on the extent to which deregulation and a narrowing of focus within state agencies can work against the public interest, with drastic consequences for unsuspecting individual citizens. The Government has since committed to tighten industry regulation and building codes. And recently, a new Department of Housing and Building has opened its doors. This agency has assumed the policy advice and state house accommodation operations of a former ministry, while also acquiring new powers for building industry regulation. The troubled Building Industry Authority is being dissolved into the new department.

I might add that the crisis has also been linked to skill shortages in the building industry after the dismantling of traditional apprentice schemes and reforms in the New Zealand industry training sector during the 1990s. Those shortages have become acute in the context of a current boom in residential and commercial construction.

The Government has had to address skills issues in the context of reviewing building industry regulation. One prominent member of the industry has even been calling for government incentives to entice qualified and experienced Kiwi builders back from Australia where pay rates have traditionally been higher!

The new Department of Housing and Building, like all other organisations in the state sector, will work within a Statement of Intent which links its outputs to explicitly-stated policy goals of the Government. Statements of Intent are a cornerstone of the "managing for outcomes" framework introduced over the past two years.

Each agency must explain how it is using public resources towards attaining desired policy outcomes and report on associated risks. The system obviously requires stretch in management thinking and brings with it, a significant additional level of accountability.

At the same time, we are seeing a renewed focus on values and standards of behaviour across the state sector. Needless-to-say, the public service values of a Westminster democracy-political neutrality, responsiveness and accountability—are fundamental in New Zealand. This is a country with one of the least corrupt governments on the planet. The latest annual Corruption Perception Index by Transparency International ranks New Zealand third (with a score of 9.5 out of 10). Australia is ranked back at eighth.

The reform agenda includes building on this reputation to ensure that core public service values feed through to more capability in state agencies and reinforce "whole of government" solutions to big issues. Where people are motivated by the positive values, they are more likely to cooperate across organisational boundaries and to pursue innovation. I note a similar push in Australia to create values-based organisations in the Commonwealth and States.

No-one would argue that values are more easily articulated than they are applied in the real world. And it is timely to observe how New Zealand has been struggling in recent months to define the boundaries of political neutrality among public servants and Crown entity managers in the context of national debate over Māori rights under the Treaty of Waitangi.

As some of you may be aware, the debate is currently focused on the rights of Māori iwi and hapu to use, and even own, areas of foreshore and seabed adjacent to ancestral lands. For a sizeable minority of the New Zealand population, the issues involved raise issues of national, group and personal identity. The politics run deep and can be very divisive in any number of settings.

Of course, political neutrality is a fundamental concept in the New Zealand Public Service Code as it has long existed for government department employees. Moreover, over the past year the State Services Commission in Wellington has given special guidance on how not to compromise the confidence that politicians must retain in the neutrality of individuals and public agencies.

But still the question arose recently: How far can a public servant go when engaging in political and Parliamentary processes on issues as basic as Māori rights? In one much publicised case, a departmental manager, a Māori woman, quit the job when her after-hours political activities began a subject for debate in Parliament last month.

In another instance, the Commissioner for Māori Language—a role constituted as one of the Crown entities—made a Parliamentary Select Committee submission against Government legislation. In the submission, he warned of civil war on the Māori rights-foreshore issue.

The Commissioner, Haami Piripi, said he was speaking in his personal capacity as a leader of Far North Māori and even then, not as a radical voice of opposition. Ministers of the Crown were not inclined to see it that way and Prime Minister Clark issued her own warning when she said: "People have to decide whether they are public servants or political activists". There has been heated debate over whether Mr Piripi crossed the line as a public servant, where exactly that line is and if he did, who should deal with him and how.

Technically the Commissioner is not part of the public service and has some statutory independence from the Government. But the episode has added impetus to a move for greater consistency in the application of public service values not just in core departments but across the range of Crown entities. The focus on state sector wide values has been a consistent plank of the current reform agenda.

I started this speech with reference to the Public Finance (State Sector Management) Bill, now before the Parliament. Part of this legislation will give the State Services Commissioner, the country's chief public servant, an extended mandate to set down a code of conduct for use within Crown entities—a code comparable to the existing Public Service Code. The move is indicative of the Government's intention to ensure Crown entities are part of a "whole of government" approach. I will now turn more directly to the Bill and in particular to its focus on corporate governance.

The legislation has various objectives, including the simplification and merger of two key acts from the earlier revolutionary era of reform: the Public Finance Act 1989 and the Fiscal Responsibility Act 1994.

This will serve to provide the executive with more flexibility in managing public finances while also strengthening accountability mechanisms. The Bill also introduces a new Crown Entities Act - and this is the principal vehicle for objectives in respect of Crown entity reform.

The forthcoming new Act will set out consistent corporate governance and accountability requirements for Crown entities. It will clarify relationships between their boards, Ministers and Parliament, in part by establishing clear procedures for appointment and removal of board members. It will also clearly articulate their roles and duties, and set guidelines for remuneration.

Most Crown entities operate under their own empowering acts which pay little attention to matters of governance. State Services Minister Trevor Mallard has likened the forthcoming Crown Entities Act to New Zealand's 1993 Companies Act which is the foundation law for private sector business - and, I should add, also for state-owned enterprises. The new legislation will be the foundation for Crown entities.

From now on, they will be classified in terms of their relationship to a portfolio Minister. At one end of independence continuum is a class of Crown agents, required to give effect to government policy. In these Crown entities, board members will serve at the Minister's pleasure and may be removed accordingly, without compensation.

At the other end of the continuum is a class of Independent Crown Entities which have an explicit arms length relationship to the Minister who cannot remove board members during the term of their appointment.

The classifications reflect differences in the purpose of entities and their statutory powers. The Securities Commission is an Independent Crown Entity, or ICE. This is obviously consistent with our need to operate, and be seen to operate, independently as a regulator of activities in markets where the Government itself and other state agencies are participants. There is another category of Crown entities which are constituted as companies to reflect their quasi-commercial purpose - Crown-owned research institutes are good examples.

The new corporate governance framework should resolve many of the tensions existing in part of the state sector which is beyond the core public service but not subject to the strict commercial disciplines that face state-owned enterprises. Those tensions have burst onto the public stage many times in the past decade, most graphically around the performance of the New Zealand Tourism Board and its portfolio Minister in 1998-1999. It is worthwhile recapping on this debate over the role of a Crown entity—a debate that developed into something of a saga.

The Tourism Board is a vehicle for public funding of international promotion of New Zealand as a tourist destination. Its membership comprises mainly experienced businesspeople from the tourism industry.

In 1998, the then Minister of Tourism became highly frustrated with the board's promotion strategy and sought to give more direction on big expenditure decisions. Tensions culminated in resignations by the chairman and several board members, and their accusations of inappropriate political interference.

The board argued that it was independent of the Government and answerable to Parliament. The Minister argued just as strenuously that as he was ultimately accountable for the board's use of public money, he was entitled to give direction. He was subsequently forced out of the portfolio when an investigation by the Auditor-General found that the board had made unlawful severance payments to its outgoing members with authorisation by the Minister. The latter justified the payments as the only way to get rid of people he wanted out of the board.

The current Bill reflects the Government's determination to clarify the critical board-minister relationships which are at the heart of Crown entity governance. I might add that the Tourism Board now becomes a Crown agent, required to give effect to Government policy and with its members serving at the Minister's pleasure.

The new corporate governance framework is an attempt to secure the advantages of injecting fresh and independent perspectives into parts of the state sector via Crown entity boards and office holders—at the same time maintaining appropriate linkages to the policy preferences of the government of the day.

It is a balancing act that is very topical in Australia also. Many of the same issues have been examined closely by John Uhrig in this report to the Commonwealth on the corporate governance of statutory authorities and office holders, released recently. Mr Uhrig says many of those entities need greater clarity around their purpose, direction and objectives—and his solution is to make far more explicit the expectations that Ministers and other public agencies have of statutory authorities.

Australia has benefited from some very clear thinking on performance and accountability issues in the context of different types of agency and board. Work in these areas has been summed up in a "Public Sector Governance" manual recently published by CCH—this is surely a must read for all Board appointees and public sector agency executives and their advisers.

In New Zealand, we have less legal complexity around the working of boards in every context, public and private sector. There is traditionally a stronger reliance on the probity and sound judgement of individual directors and managers, rather than rules, codes or even clearly documented enunciation of good practices. This is changing and the Securities Commission has taken a lead over the past 18 months in promoting high standards of conduct wherever corporate governance is, or should be, an issue.

Earlier this year, we published a set of nine broadly framed principles for application in all kinds of entity, from the large publicly listed company to producer cooperatives to Crown entities. Our focus was on any organisation that operates under the leadership and oversight of a board, and has some economic impact in New Zealand. This explicitly excluded the core public service but definitely included state-owned enterprises and Crown entities - I have already noted their key importance to the national economy. In addition, we wanted principles that would apply to local government-owned entities as well.

The New Zealand corporate governance principles had to be broad enough to apply to some extent at least, to all types of governed entity. Reflecting the consensus gathered through extensive consultation, the Commission takes the view that boards should be left to decide exactly how they apply the principles.

So, for example, we set down as a matter of principle that boards should have a balance of independence, skills, knowledge, experience and perspectives among their directors. The onus is on each board to deliver on this in its particular setting and to report accordingly to its stakeholders, whether those stakeholders be a dispersed group of public company shareholders, a locally-elected council or a Minister of the Crown.

There is a good fit between the New Zealand principles and the forthcoming Crown Entities Act. Indeed, I predict the principles will help drive current reform in relevant parts of the state sector, entity by entity. Needless-to-say, the principles are also driving reform in the private sector where there have been many well-documented lapses in corporate governance over the past decade, to the detriment of investors, employees and others. The proponents of excellence in corporate governance worldwide see it as a precondition of enhanced organisational performance regardless of ownership, structure or purpose - I agree.

I should add that our principles were formed also after close examination of current thinking and practice in Australia and around the world. As some of you may be aware, the Australian Stock Exchange's Corporate Governance Council produced a set of 10 fundamental principles in 2003 covering the same territory as we have. We saw those principles as an important input to the process of reform in corporate governance practices in New Zealand.
On that note, I turn to the third strand of state sector reform activity - a strand that is integral to the broad ranging range of growth in the trans-Tasman relationship.

Everyone will be aware of the success of Closer Economic Relations since the initial agreement was signed between Australia and New Zealand in 1983. Integration of the two economies continues with various initiatives to harmonise, coordinate or mutually recognise laws, regulatory processes and organisational structures. These initiatives have, obviously enough, become important reform drivers within the public sectors of both countries. We even see new trans-Tasman bureaucracies, most notably the Australia-New Zealand Food Authority which was formed in 2003 to harmonise and enforce food safety and labelling regulations in both countries.

The processes of harmonisation, coordination or mutual recognition are, in many instances, borne of necessity given the unrelenting growth that is occurring in trans-Tasman business ties between us, and in the exchange of goods, people and capital. Governments and their agencies must keep up. The trans-Tasman ministerial talks of last January added coordination of competition regulation, banking supervision and financial accounting standards to work streams already underway

It is safe to say that few if any areas of the state sector in New Zealand do not have a constructive relationship with their counterpart organisations at Commonwealth level in Australia. In my own area, trans-Tasman coordination has definitely become a driver in New Zealand's process of reform in securities market law and regulation. Under our Securities Markets Act 2002, for instance, the criteria for setting continuous disclosure rules on securities exchanges include an explicit requirement to coordinate these rules with Australia equivalents.

More broadly, we securities regulators are working towards a cross border recognition scheme for securities offerings. It is a matter both of acknowledging the realities of the trans-Tasman capital flows and of proactive facilitation of growth in investment in the economies of both countries.

Dialogue between the New Zealand Securities Commission and the Australian Securities and Investments Commission took a step forward last month with the first meeting of both full bodies, in Melbourne. This is not a forerunner to a merger of commissions. But our meeting will help pave the way for still closer coordination on securities law and regulation. We will have a follow up meeting this December. In the particular area of company takeovers regulation, there is a successful exchange of permanent members between the Takeovers Panels of Australia and New Zealand.

Clearly, trans-Tasman linkages of many kinds will continue to guide reform in laws, process and in structures in New Zealand in ways that are both practical and in alignment with broad economic and political developments.

I should add that in securities regulation, the growth of trans-Tasman linkages does not detract at all from our other drive to keep abreast of international best practice in securities regulation and corporate governance. It is also important to recognise that in talking about mutually-inspired public sector reform, there are no predictions about political integration between New Zealand and Australia. That is a completely separate issue.

Between institutions of the two countries, there are definitely more similarities than differences. But significant differences do exist in how we have gone about state sector reform and in our current priorities.

I offer the following observations about trans Tasman differences, first in regard to the building of state sector capability and second, in regard to corporate governance.

The Australian Commonwealth reform process has been relatively steady and incremental over the past 20 years. New Zealand, on the other hand, went through a revolution during the first half of the same period. As I noted before, the 1996 review by Allen Schick applauded the boldness and completeness of a reform programme carried out without pilot testing or cautious implementation.

New Zealand had no equivalent of the Management Advisory Board - the Australian statutory body that has been advising on governmental reform and evaluating the results through much of the reform process. Perhaps as a consequence, New Zealand's current reform agenda has a definite bias towards resolving issues that were created, or exacerbated, by the pace and manner of the country's early adoption of the NPM model.

Even back in 1996, Schick suggested that New Zealand would have to "debug" elements of a reform programme he likened to the adoption of "leading edge technology". Three years ago, his view was echoed in the Government's Review of the Centre report which highlighted issues of state sector fragmentation, leadership and training, and also shortcomings in public services delivery. I have mentioned the current efforts in these areas.

It would seem that Australia's more incremental approach to reform has enabled substantial "whole of government" and service delivery developments that, as yet, have no New Zealand parallels. Centrelink is an obvious example - the agency established in 1997 for one-stop-shop delivery to citizens of services from 25 other federal and state agencies.

In Wellington, e-government is coming and some departments have taken large strides in online service delivery but there is nothing as comprehensive as Centrelink. Departments and Crown entities also retain a monopoly on service delivery in most areas of government - and there has emerged as another key difference from Australia where contracting to private sector providers has become far more of a feature.

Likewise, the "public-private partnership" is a concept yet to progress in New Zealand. In Australia PPPs have, of course, been used on diverse projects from the Sydney Airport rail link, to the delivery of social services like the Job Network for assisting the unemployed.

New Zealand's first foray into PPPs foundered amid political controversy and public scepticism in 2002. That was a proposal, backed in part by the Sydney-based Pacific Road Group, to build much-needed highways in Auckland. The new roads are to be built but with a major funding commitment from central government rather than public-private infrastructure investment.

Clearly, there are country-specific drivers that lead to different outcomes in Australia and New Zealand, even as they both move broadly in the same direction. For starters, we should not underrate the significance of trans-Tasman differences in size and in the availability of resources.

In the New Zealand context, there has been some academic debate over whether the current state sector reform agenda amounts to a winding back of the 1980s revolution. However, this type of "revisionist" argument does not seem to be carrying the day.

There is broad acceptance of the very cogent view that emerged from the 2001 Review of the Centre. Page one of that report declares that, "the public management system as it stands today provides a reasonable platform to work from". The report's recommendations—most now being actioned—call for a shift of emphasis within existing structures and policy directions.

In building state sector capability, New Zealand places special emphasis on making departments and Crown entities more innovative. There is some interesting analysis on the managerial and cultural factors that help drive innovation within and between agencies. In this context, innovation is said to be any new system, process or practice within the workings of government that creates value and improves a particular agency's performance. There are some great case studies.

Did you know the New Zealand Department of Conservation is the acknowledged world leader in pest eradication on islands after years of experimentation and experience? It has cleared rats from dozens of ecologically sensitive islands around New Zealand, while also exporting pest eradication techniques to Australia and elsewhere.

The Department's biggest triumph so far has been Campbell Island, which experts say had the highest concentration of rats of any place on earth - the last one was bagged in an efficient, cost effective programme taking just one month in 2001. If only we securities regulators could have the same success with a different type of rat so often encountered in investment markets.

One New Zealand research house (NZIER 1) has tentatively concluded that innovative thinking and practice have become more deeply embedded in New Zealand's state sector than its counterparts in Australia and North America. If so, it is a by-product of the length of time that public servants have lived with the managerial focus on outputs and accountability, combined with a high public acceptance of discretionary decision making within state agencies and a general Kiwi "can do" attitude to most things.

I do not want to open any debate over who are the best innovators and why. However the quest for agency level innovation is certainly a strong theme in New Zealand. Indeed, efforts to build state sector capability mentioned earlier are an explicit attempt to create the leadership, knowledge base and systems on which this form of practical innovation can flourish.

Turning back to corporate governance, I think there are key differences in emphasis and approach between New Zealand and Australia.

Across the Tasman, we have a focus mainly on the principal-agency relationship between Ministers and appointed boards in Crown entities. The current legislation will strengthen the hand of Ministers in some cases while in other cases, it will clarify the degree to which boards have independence from Ministers and flexibility in their public policy and/or commercial decision making.

More generally, the New Zealand approach to corporate governance places a particularly strong emphasis on adherence to sound fundamental principles - and at the same time, to preserving the flexibility of boards and their stakeholders to decide what structures and processes are most appropriate for their organisation.

The New Zealand approach is essentially no different between private sector and state sector boards. In each case, the critical test of good corporate governance is whether board members, appointed or elected, step up to the mark on soundly-based decision making, risk assessment, performance reporting and so on.

We rely heavily on owners - and Ministers are the relevant party for Crown entities and state-owned enterprises — to hold boards to account as they see fit. New Zealand has shied away from detailed prescription for boards and managers on most governance issues and the forthcoming Crown Entities Act remains consistent with that approach.

In the Australian Commonwealth, there is greater prescription around corporate governance practice arising from the landmark legislation of the late 1990s and now also the report from John Uhrig. The report calls for Ministers to set down Statements of Expectations for the guidance and direction of statutory authorities and office holders - and for there to be reciprocal Statements of Intent. This new system for regulating the principal-agent relationship has been endorsed by the Federal Government, although I note that it has not picked up Mr Uhrig's other recommendation in favour of establishing a new agency to regulate the relationship.

I would conclude by reiterating my opening remark about state sector reform - it is ongoing in New Zealand despite some commentary about the "end of the New Zealand experiment".

The themes of reform are very much the same as those in Australia, although there are differences in approach and emphasis due largely to differences in the experience of reform over the past 20 years. I have suggested three strands of ongoing reform activity in New Zealand. In regard to the first two - the building up of state sector capability and the strengthening of corporate governance - there is clearly an element of New Zealand having to address issues created, or exacerbated, by the pace and manner of revolutionary changes in the 1980s and 90s.

The Securities Commission's principles can successfully be used to assist in corporate governance reform across both private and public sectors — and in relation to New Zealand's plethora of Crown entities. These fundamental principles on governance will reinforce current legislative reforms.

There are some key trans-Tasman differences in approach but I believe we will see very similar governance structures and practices develop in public agencies, and in other organisations, in New Zealand and Australia.

The third strand of reform is based on extension of the New Zealand-Australia relationship itself, and the growth of cooperation between public agencies on both sides of the Tasman.

New Zealand places particular importance on the relationship and I have no doubt that it will continue being a key driver for reform in structures and practices within the New Zealand state sector.

I would encourage you to support processes of cooperation wherever there are underway - and to recognise the value in continuing to exchange ideas, experiences and people as reform proceeds at a more evolutionary pace in the 21st century.

Thank you.

Footnote:

1

This is a reference to the New Zealand Institute of Economic Research Report to Treasury, "New Zealand Public Sector Innovation: Practical prospects based on experience", July 2002.