I hereby give notice that an ordinary meeting of the Council Controlled Organisations Governance and Monitoring Committee will be held on:

 

Date:                      

Time:

Meeting Room:

Venue:

 

Tuesday, 14 April 2015

1.00pm

Reception Lounge, Level 2
Auckland Town Hall
301-305 Queen Street
Auckland

 

Council Controlled Organisations Governance and Monitoring Committee

 

OPEN ADDENDUM AGENDA

 

 

MEMBERSHIP

 

Chairperson

Deputy Mayor Penny Hulse

 

Deputy Chairperson

Cr Calum Penrose

 

Members

Cr Anae Arthur Anae

 

 

Cr Cameron Brewer

 

 

Cr Dr Cathy Casey

 

 

Member Precious Clark

 

 

Cr Ross Clow

 

 

Cr Linda Cooper, JP

 

 

Cr Chris Darby

 

 

Cr Denise Krum

 

 

Cr Dick Quax

 

 

Cr Penny Webster

 

 

Member Glenn Wilcox

 

 

Cr George Wood, CNZM

 

Ex-officio

Mayor Len Brown, JP

 

 

(Quorum 7 members)

 

 

Jaimee Maha

Democracy Advisor

 

10 April 2015

 

Contact Telephone: (09) 890 8126

Email: jaimee.maha@aucklandcouncil.govt.nz

Website: www.aucklandcouncil.govt.nz

 

 

 


Council Controlled Organisations Governance and Monitoring Committee

14 April 2015

 

 

ITEM   TABLE OF CONTENTS                                                                                        PAGE

  

12        Ports of Auckland governance framework                                                                 5   

 

    


Council Controlled Organisations Governance and Monitoring Committee

14 April 2015

 

 

Ports of Auckland governance framework

 

File No.: CP2015/05833

 

  

Purpose

1.       To explain the statutory framework for governance of Ports of Auckland Limited (POAL), the powers council has in relation to Auckland Council Investments Limited (ACIL) (as shareholder of POAL), and what considerations apply to exercise of those powers. This report also explains the powers ACIL has in relation to POAL and the considerations applying to exercise of those powers.

Executive Summary

2.       POAL operates at arms-length from council and is subject to the Ports Companies Act 1988. By statutory imperative, POAL’s principal objective is to operate as a successful business. ACIL is the 100% shareholder of POAL. Auckland Council is the 100% shareholder of ACIL.

3.       ACIL is a council-controlled organisation (CCO), but port companies, including POAL, are expressly excluded from being CCOs under the Local Government Act 2002.

4.       This means there are two tiers of governance relationship:

·  council has a range of levers and powers relating to ACIL through the Local Government Act 2002, Local Government (Auckland Council) Act 2009 and Companies Act 1993. This is a “local government law” relationship.

·  ACIL has a range of levers and powers relating to POAL under the Companies Act and Port Companies Act. This is a “port companies law” relationship.

5.       The main levers in relation to each of ACIL, and in turn, POAL relate to:

·    board appointments

·    Statements of Intent (ACIL) / Statements of Corporate Intent (POAL)

·    management review / resolutions by shareholders.

6.       In exercising its powers, council needs to follow good decision-making processes for public entities required by general law (to act “fairly, reasonably and in accordance with the law”), and as required under the Local Government Act.  Broadly this means principled and reasoned decision-making for a proper purpose, with relevant information and genuine evaluation of relevant considerations (e.g. pros and cons of the impacts of the decision).

7.       There are also some specific statutory constraints on ACIL’s powers in relation to POAL:

·    POAL has the principal objective of operating as a “successful business”

·    operational management of POAL is vested in its board.

This prevents direct intervention by ACIL through shareholder resolution, and also affects how the SCI can be modified and the criteria for appointment of directors.

8.       POAL does have accountabilities under its SCI (which its board is required to comply with), and as with any wholly-owned corporate group, council / ACIL is entitled to expect:

·    good governance practice

·  robust and diligent commercial decision making (while still allowing business judgment and reasonable commercial risk)

·  good communication with the shareholder on material matters, and good stakeholder engagement as befits a major corporate with a significant regional role.

·  alignment to group objectives and priorities where possible.


 

9.       Regarding council’s relationship with ACIL, the substantive CCO structure established for Auckland Council relies on good decision making at CCO board level by appropriately qualified and experienced directors, and of CCO decision making being informed by SOI requirements and any other council policies a CCO is required to comply with. The skills, experience and outlook of CCO directors is intended to be different from that of elected members. Council appoints the CCO directors on its own criteria, and gives strategic direction, but does not make operational decisions for CCOs in the general course of its business.

 

Recommendation/s

That the Council Controlled Organisations Governance and Monitoring Committee:

a)      receive the Ports of Auckland governance framework report.

 

 

Comments

10.     This report responds to councillors’ questions concerning POAL’s governance structure.

·  The first part sets out the general statutory framework governing council’s ownership and control of ACIL, and ACIL’s ownership and control of POAL, and the types of considerations relevant to each of council and ACIL, respectively, when deciding how to use the powers they have.

·  The second part addresses specific issues and considerations for each of the available governance tools, especially between ACIL and POAL.

Ownership structure and status

11.     POAL is 100% owned by ACIL, and council is the 100% shareholder of ACIL. This means that shareholder rights over POAL fall to ACIL to exercise. Council’s “shareholder” control of POAL is indirect.

12.     ACIL is a substantive CCO, and therefore falls under both the Local Government Act and Local Government (Auckland Council) Act 2009. Port companies are expressly exempted from being CCOs under the Local Government Act. This means that none of the “local government” levers apply to port companies (even if POAL was directly owned by council).

13.     POAL is incorporated under the Companies Act 1993, but as a “port company” it is subject to the Port Companies Act 1988. This Act transferred port businesses from the then Harbour Boards into standalone port companies, the ownership of which was later transferred to the applicable local authorities. The Port Companies Act is fundamental in relation to the operation and governance of port companies.

14.     The preamble to the Port Companies Act explains its purpose as:

        “to promote and improve efficiency, economy, and performance in the management and operation of the commercial aspects of ports and, to this end,… to establish requirements concerning the accountability and ownership of [port] companies and the responsibilities of [shareholders].”

15.     In light of that purpose, the Port Companies Act then expressly provides that:

        “The principal objective of every port company shall be to operate as a successful business.” (Section 5).

        “All decisions relating to the operation of the port company shall be made by or pursuant to the authority of the directorate of the company in accordance with the statement of corporate intent (if any).” (Section 6(3)).

16.     These provisions directly impact on the three types of lever that ACIL has in relation to POAL:

·  board appointments: directors of POAL must be persons “who, in the opinion of those appointing them, will assist the port company to achieve its principal objective”, namely to operate as a successful business. (Port Companies Act, section 6(2)). ACIL, as shareholder, appoints the directors of POAL. Pursuant to its SOI, ACIL must keep council fully informed and consulted in advance of proposed appointments, but the appointment decision remains in the control of the ACIL board.

·  Statement of Corporate Intent:  the shareholder (ACIL) can require amendments to the Statement of Corporate Intent, but must consult the POAL board as to the proposed amendments and have regard to the requirements of section 5 of the Port Companies Act (the “successful business” mandate). The Port Companies Act requires the SCI to cover “objectives” of POAL and the “nature and scope of activities undertaken”, along with other financial and business matters. A copy of POAL’s current SCI is provided as attachment A.

·  management review / shareholder resolutions:  under the Companies Act, shareholders can initiate management reviews and pass resolutions relating to the management of a company, and these resolutions can be binding on the board if the constitution permits:

ACIL’s constitution permits council to make binding shareholder resolutions (ACIL’s constitution is provided as attachment B – refer clause 24.2), but POAL’s constitution expressly negates ACIL’s ability to give binding directions to POAL (POAL’s constitution is provided as attachment C – refer clauses 25.2 and 25.3).

Note: POAL’s constitution can only be changed with the consent of the Minister of Transport. There is still a potential obstacle in section 6(3) of the Port Companies Act (requiring operational decision-making to be made by the board), and there are also some technicalities around whether a written resolution can be used, or an actual shareholders meeting has to be convened.

directors, once appointed, must act in the best interests of the company, except to the extent the constitution permits them to act in the interests of a sole shareholder. ACIL’s constitution permits it to act in council’s interest, but POAL’s constitution does not permit it to act in ACIL’s interest (as opposed to POAL’s interest).

17.     Section 14(1) of the Port Companies Act permits the Minister of Transport to waive the “successful business” requirement (and certain other provisions) if the port company is 50% or more privatised. In other words, operating as a successful business is a precondition of a port company remaining in majority public ownership. Private shareholders would presumably seek successful business outcomes without need for a statutory requirement.

18.     The effect of these provisions is to create a degree of separation between port companies and the local authorities that ultimately own them, by emphasising the commercial considerations relevant to running a port company (as if it were privately owned). ACIL’s ability to exercise its powers in relation to POAL is subject to the “successful business” mandate.


 

19.     While a commercial focus does not preclude a company board from taking non-financial considerations into account (as with any privately owned business), the Port Companies Act does not expressly include non-commercial objectives for port companies in the way that the Local Government Act does for CCOs and the State Owned Enterprises Act 1986 does for SOEs. Both CCOs and SOEs have a “good employer” objective, and also to:

        “exhibit a sense of social [and environmental] responsibility by having regard to the interests of the community in which it operates and by endeavouring to accommodate or encourage these when able to do so.” [Note: “environmental” is only included in the Local Government Act]

20.     So on a continuum including Crown entities, CCOs and SOEs, the port companies stand furthest removed from their ultimate public entity shareholders. Operationally, port companies have a high degree of independence.

Local government decision making

21.     In addition to the requirements of the Port Companies Act relevant to ACIL’s exercise of powers, council (as a local authority) is bound by:

·    the decision-making criteria in the Local Government Act (section 14, and subpart 1 of Part 6 etc.)

·  the general legal requirement for public entities to act “fairly, reasonably, and in accordance with the law”.

22.     Broadly, this means reasoned and principled decision-making for a proper purpose. Council must focus on relevant considerations to the decision, and not irrelevant considerations. For example, council’s regulatory role in planning and consenting is distinct from its investment and ownership activities, and different considerations may apply when discharging different roles. In the context of the Port Companies Act, exercise of the levers by ACIL (and council’s relationship with ACIL in that regard) will focus on commercial considerations, which could include:

·  financial – council’s interest in the scale / scope of the port, any risks and impacts on revenue

·  strategic – regional economic development.

23.     Specific issues for each of these levers are set out below.

Board appointments

24.     If governance or company performance is not satisfactory, then board appointments are an important accountability tool. The Companies Act does not constrain a shareholder’s discretion in voting to appoint or remove a director of a company, but the Port Companies Act does require the shareholder (i.e. ACIL) to be of the opinion that the directors appointed will assist the company to achieve its principal objective of being a successful business.

25.     In making any board appointments (or removals), ACIL would be expected to follow the applicable part of council’s own Board Appointments Policy which is competency and merit based, and make principled and reasoned decisions. As a company, ACIL has some latitude in making commercial decisions, including calculated risks in its business judgment.

26.     While alignment of board members to shareholder objectives is important, it is not generally regarded as good governance practice to use board appointments as an attempt to secure particular decision-making outcomes at board level. All directors are under a duty to act in the best interests of the company, in their own judgment (using required care, skill, diligence etc.).


 

27.     Irrespective of the statutory requirements, shareholders can reasonably expect a high degree of engagement and cooperation from directors of wholly-owned companies, including aligning to group priorities and timeframes where possible. Shareholder communication, stakeholder engagement and maintaining good public relations with communities are part and parcel of good governance and business practice. These considerations and behaviours are relevant when deciding on board appointments.

Statement of Corporate Intent

28.     A statement of corporate intent (SCI) is a more commercial version of a statement of intent (SOI). SCIs are also used for SOEs, whereas SOIs are used for Crown entities and CCOs.

29.     The SCI content for port companies includes “objectives” of the company and the “nature and scope of the activities to be undertaken”, along with other financial and reporting matters, and any other matters the POAL board and shareholder (ACIL) agree to include.

30.     For example, Port Otago (which is publicly owned) has included social and environmental responsibility objectives in its SCI, as indeed has POAL itself to some extent. Provided this is not phrased inconsistently with the principal objective, there is no prohibition against such inclusions if they reasonably fit under the “objectives” heading or if the port company and shareholder otherwise agree to include them.

31.     In modifying the SCI, the shareholder (ACIL) is required to have regard to the “successful business” objective and consult with the POAL board, so the bar is fairly high to using the SCI for specific interventions on matters that the POAL board otherwise considers are necessary or desirable for pursuing the successful business objective.

Management review / shareholder resolutions

32.     The Companies Act permits shareholders to give binding directions to company boards if the constitution allows it (section 109(3)). ACIL’s constitution allows council to give binding directions to ACIL, but POAL’s does not allow ACIL to give binding directions to POAL. Non-binding directions can still be given by ACIL, as part of management review by the shareholder, and the POAL board is required to consider and respond to these (using its judgment). Management review can be preparatory to changes in board composition.

33.     Again, the usual criteria apply to whether this sort of power should be exercised. If ACIL is aligned to council’s objectives regarding POAL it would seem unnecessary to give ACIL any binding directions, especially if that puts ACIL in the difficult position of not being able to compel action from POAL.

34.     Apart from certain veto rights under the Companies Act (e.g. major financial transactions), the governance and management of a company is the responsibility of the board rather than the shareholders. Although technically permitted under the Companies Act in some circumstances, it is not generally regarded as good governance practice to use binding directions to overrule board decision-making. By giving a binding direction, the shareholder steps out from the protection of the shareholder’s limited liability and takes an active role in the business decisions of the company.

35.     There are several potential issues with using binding shareholder directions on a CCO, which should be considered in each case.

·  It might be seen as a vote of no-confidence in the CCO board (which would be better addressed through management review or appointments / removals).

·  It could affect council’s ability to secure the services of persons of mana on CCO boards.

·  It could expose council’s decisions to challenge (e.g. if such directions were inconsistent with previous policy decisions or with the structural framework of council).

·  It could deem council (or elected members) to be directors of the company, with potential liability exposure.

·  It could be seen to have the effect of circumventing the express restriction in the Local Government (Auckland Council) Act 2009 on elected members being directors of substantive CCOs.

36.     The substantive CCO structure established for Auckland Council relies on good decision making at CCO board level by appropriately qualified and experienced directors, and of CCO decision making being informed by SOI requirements and any other council policies a CCO is required to comply with under the Local Government (Auckland Council) Act. The skills, experience and outlook of CCO directors is intended to be different from that of elected members. Council appoints the CCO directors on its own criteria, and gives strategic direction, but does not make operational decisions for CCOs in the general course of their business.

Restructure

37.     Council could potentially decide to take direct ownership of POAL and/or its other investment shareholdings, through a corporate restructure (whether or not it disestablished ACIL). By taking direct ownership, council could also avail itself of the right to appoint up to two non-independent directors to the POAL board (e.g. council employees or even councillors), as permitted under the Port Companies Act.

38.     Restructure would possibly be a significant decision requiring a special consultative procedure by council (and separate advice would be required on that, including any specific statutory constraints or issues). Also, council is currently consulting on the LTP on the basis of the POAL shareholding being held by ACIL under its investment management mandate.

39.     Council would be entitled to consider restructuring, or use of other governance tools, for proper reasons and purposes but that would require appropriate analysis, public consultation, and consideration of relevant issues.

40.     Note: section 106 of the Local Government (Auckland Council) Act 2009 provides that, for purposes of the director appointment provisions in section 6(1)(b) of the Port Companies Act, ACIL is to be regarded as being a “regional authority”. This apparently means that, while ACIL is POAL shareholder, ACIL can appoint up to two of its own employees or directors as POAL directors. Councillors could only be appointed as non-independent directors if council itself was the direct POAL shareholder.

Consideration

Local Board views and implications

41.     Governance of CCOs and their subsidiaries is the responsibility of the governing body. Local board views would be sought if any significant changes to POAL governance were proposed.

Māori impact statement

42.     Because this is only an explanatory and noting report, there are no specific implications for Māori wellbeing as a result of this report.

Implementation

43.     There are no implementation implications associated with this report.

 

Attachments

No.

Title

Page

aView

POAL's 2014 - 2017 Statement of Corporate Intent

11

bView

ACIL's constitution

19

cView

POAL's constitution

37

      

Signatories

Author

Alastair Cameron - Principal Advisor CCO Governance and External Partnerships

Authorisers

John Bishop - Treasurer  and Manager CCO Governance & External Partnerships

Roger Blakeley - Chief Planning Officer

 


Council Controlled Organisations Governance and Monitoring Committee

14 April 2015

 

 









Council Controlled Organisations Governance and Monitoring Committee

14 April 2015

 

 


















Council Controlled Organisations Governance and Monitoring Committee

14 April 2015