Posted 03/12/2018 by Philip Hamilton
Established on 30 June 2018 by the National Housing Finance and Investment Corporation Act 2018 (NHFIC Act), the NHFIC is a statutory authority that: makes loans, investments and grants for enabling infrastructure that supports new housing, particularly affordable housing; and provides cheaper and longer-term financing to registered community housing providers through Australia's first national Affordable Housing Bond Aggregator (AHBA). The NHFIC is not a completely new type of body; it resembles the existing Export Finance and Insurance Corporation (EFIC) and the Northern Australia Infrastructure Facility (NAIF) to the extent that they were created to be providers of financial assistance, and are governed by boards.
The NHFIC differs from EFIC and NAIF, however, in that the NHFIC Act includes a statutory provision for a Commonwealth officer to be appointed as an Observer to attend Board meetings. The Observer cannot vote, but ‘is entitled to relevant information for the purposes of taking part in Board meetings or to report to the minister’. The Parliamentary Library’s Bills Digest concluded that although there are sound reasons for an Observer, ‘the appointment of an Observer by the Minister may operate to undermine the [NHFIC] Board’s independence’.
The Uhrig Review and government representatives on boards
Conceptually, an observer for a board occupies the space between a full member with voting rights, and a guest invited to attend specific agenda items to provide information or clarification. In 2003, the review of corporate governance by John Uhrig cautioned that:
care should be exercised when appointing public servants to boards. In circumstances where a departmental staff member is appointed on the basis of representing the government’s interests or having a ‘quasi’ supervision approach, conflicts of interest may arise and poor governance is likely.
To align with Uhrig’s preferred models, Acts were amended in 2007 and 2008 to remove provisions under which government officials were appointed as board members to a number of statutory entities, including Tourism Australia, the Australian Fisheries Management Authority, the Australian Wine and Brandy Corporation, and eight rural Research and Development Corporations.
Precedents for non-members attending board meetings
Uhrig noted that his reservations about appointing public servants to boards:
do not mean that departmental representatives should not attend board meetings as agreed by the chairman. No objections are raised to either staff of the entity or other public servants attending specific parts of a meeting to discuss or clarify issues with the board.
The Bills Digest noted that the practice of having an observer attend board meetings is probably not without precedent, as observer arrangements between portfolio departments and corporate Commonwealth entities are likely to have been in place informally in a number of portfolios. In South Australia, an observer role was provided for in regulations in the 1990s, but the NHFIC is likely to be the first time an observer role has been formalised in Commonwealth legislation. The Observer role did not attract any stakeholder comment during the Senate Economics Committee’s consideration of the NHFIC Bill.
The role of the Observer on the NHFIC board
Under the NHFIC Act the NHFIC Observer is appointed by the Minister, holds office for a specified period not exceeding six months, and may be reappointed. The Explanatory Memorandum (EM) for the NHFIC Bill stated that ‘a Commonwealth official may be appointed [as Observer] by exception’. Specifically noting Uhrig’s concern that ‘departmental appointments to Boards … may create conflicts of interests and compromise governance arrangements’, the EM argued that ‘the capacity to appoint an observer strikes a balance to support appropriate Government oversight of [the] NHFIC at critical times, while maintaining Board independence’:
[P]roviding oversight of the Commonwealth’s financial exposure [the] position is intended to support Government visibility of decision making, particularly in exceptional circumstances such as the establishment phase of the NHFIC and/or during periods of financial market uncertainty. … The Observer may also report to the Minister on matters relating to the operations of the NHFIC or the Board; and is entitled to relevant information for the purposes of taking part in Board meetings or to report to the minister.
The Minister (likely to be the Treasurer as the NHFIC is within the Treasury portfolio) gives the Board an Investment Mandate that provides directions about the performance of the NHFIC’s functions. The Parliamentary Library’s Bills Digest noted:
The Observer will interact with the Board to ensure that there is compliance with the Investment Mandate. The Observer will also act as a conduit between the Board and the Minister should it emerge that the Investment Mandate needs fine tuning or if there are concerns that the Board is exercising its powers and undertaking its functions inadequately or inappropriately.
The Bills Digest concluded that the EM had given ‘sound reasons for the appointment of an observer, especially given the reserve for the AHBA is up to $150 million’. (A subsequent amendment bill, the non-controversial National Housing Finance and Investment Corporation Amendment Bill 2018, passed on 15 November 2018 and included a provision to establish a $1 billion special account for the AHBA, including the existing $150 million).
Conclusion
The EM for the NHFIC Bill stated that, despite the presence of the Observer, ‘the Board would … remain the decision maker in all circumstances relating to the performance of the NHFIC’s functions’. However, the Bills Digest also noted the potential for an observer to exert influence:
[A]s the observer can take part in all aspects of the Board meeting except voting—without actually being a Board member—it is foreseeable that he, or she, could exert influence over the Board to vote favourably (or unfavourably as the case may be) on individual proposals, thereby diminishing the perception that the Minister is arms-length from deliberations.
Uhrig drew a distinction between departmental appointments to Boards and public servants attending specific parts of a meeting to discuss or clarify issues with the board. With the NHFIC Act providing that the Observer ‘may attend any meeting of the Board and take part in proceedings, not including voting, as the observer thinks fit’, the NHFIC Observer’s role would appear to be closer to that of a member than that of an invited guest.
Whether a legislated Observer role is a one-off occurrence specific to the NHFIC, or a governance model that is adopted more widely, may depend in part on whether the NHFIC Observer is perceived to strike the appropriate balance between government oversight and Board independence. There will be an opportunity to review the role of the Observer—in accordance with the recent NHFIC Amendment Bill, the Minister must cause a review of the operation of the NHFIC Act to be undertaken as soon as possible after 30 June 2020.