Chapter 3 - The provisions of the bill
3.1
Both the explanatory memorandum and the minister in his
second reading speech note that the changes introduced in the bill form part of
the implementation of the government's response to the Review of Corporate Governance of Statutory Authorities Administration
Office Holders conducted by Mr John
Uhrig.[23]
3.2
As part of its broad objective to establish effective
governance arrangements for statutory authorities, the government assessed
EFIC's existing governance structure against the recommendations and principles
of the Uhrig Report.[24] It concluded
that the board template was suitable for EFIC on the basis that the corporation
'operates primarily as a commercial organisation and (except in relation to
national interest transactions) its board has a high degree of power to act'.[25]
3.3
The main changes are concerned with the membership of
the EFIC Board which, according to the government, are of 'an operational and
enabling nature'. It maintains that the amendments 'do not impact EFIC's
functions, nor EFIC's delivery of export facilitation services to Australia
business'.[26] EFIC would continue to focus
on assisting Australian businesses to enter and develop export markets.
The Explanatory Memorandum
3.4
Before examining the proposed amendments, the committee
comments on the explanatory memorandum and its value in informing the
Parliament on the significance of the proposed amendments.
3.5
An explanatory memorandum is usually provided for every
bill introduced in Parliament except for the annual appropriations bills.[27] As a companion document to a bill,
the explanatory memorandum is intended to assist members of Parliament,
officials and the public to understand the objectives and detailed operation of
the provisions of the bill.[28] The
Legislation Handbook is unequivocal when stating that support material 'should
ensure that notes on clauses clearly and adequately explain their operation and
purpose'.[29]
3.6
The Handbook drew attention to criticism of explanatory
memoranda in the June 1995 report of the House of Representatives Standing Committee
on Procedure. This report expressed disappointment at the general standard of
explanatory memoranda. It said:
An explanatory memorandum must be
written in plain English and should focus on explaining the effect and intent
of the bill, or the amendments, rather than repeating the provisions.
Information contained in the explanatory memorandum must be accurate and not
misleading, and must reflect the final form of the bill to be introduced or the
amendments to be moved.[30]
3.7
It stated further that notes on clauses should not
simply repeat the words of the bill or restate them in simpler language. It
directs that:
The notes should explain the
purpose of the clause and relate it to other provisions in the bill,
particularly where related clauses do not appear consecutively in a bill.
Examples of the intended effect of the clause, or the problem it is intended to
overcome, may assist in its explanation.[31]
3.8
In the committee's view, the explanatory memorandum
accompanying the Export Finance and Insurance Corporation Amendment Bill falls
short in providing the level of detail necessary to assist legislators in their
understanding of the proposed amendments. It provides little insight into the
operation of the provisions of the bill and how the
proposed amendments are in keeping with Mr
Uhrig's recommendations. It did not follow
the advice contained in the Legislation Handbook that the explanation 'should
focus on explaining the effect and intent of the bill'. There is no attempt,
other than general references, to tie the amendments directly to the findings
and recommendation of the Uhrig Report. Indeed, there is no summary of any kind
providing a basic understanding of the Uhrig Report, nor any commentary on
deficiencies or problems in the current legislation that the bill is intended
to address.
3.9
Parliament is left in the dark as to the significance
of removing the CEO of the Australian Trade Commission from EFIC's board. There
is no explanation as to why that position was originally appointed to the Board
and in light of the Uhrig Report why it is now deemed appropriate to remove
that position.
3.10
The committee accepts that the amendment to remove from
the Minister the power to appoint the General Manager and Deputy Manager of
EFIC and confer this authority on the board is self-explanatory. Even so, the
explanatory memorandum again should have endeavoured, at the very least, to explain
the significance of this change in light of Mr
Uhrig's recommendation.
3.11
The previous chapter contained a brief outline of Mr
Uhrig's findings and recommendations and provides
the information and context needed to make the direct and relevant connection of
the provisions of the bill to the Uhrig Report.
Recommendation 1
3.12
The committee recommends that the government take steps
to ensure that explanatory memoranda provide members of parliament with the
information necessary to be able to make informed decisions about the
legislation before them. For instance, it suggests that the Legislation
Handbook be worded more forcefully to alert those preparing the documentation
to the importance and function of an explanatory memorandum. It also suggests
that the Department of Prime Minister and Cabinet monitor and report on the standard
of memoranda.
Provisions of the bill
3.13
As mentioned in chapter 1, EFIC, as Australia's export
credit agency, facilitates and encourages Australian export trade by providing
insurance and financial services and products to persons involved in export
trade.
3.14
EFIC is a body corporate created under the Export Finance and Insurance Corporation Act
1991 (the Act). It has been in
operation in one form or another for half a century. In 1991, the government
decided to establish EFIC as a statutory corporation structured along government
business enterprise lines. It was intended to equip EFIC to operate in a more
commercial and accountable way in an increasingly competitive export climate.[32] It was to fill a gap left by the
private sector where this sector lacked the capacity or willingness to provide
such services.[33]
EFIC—a statutory corporation
3.15
EFIC as a statutory corporation is a separate entity legally
independent of the parliament and of the executive. EFIC may:
- enter into contracts; and
- appoint agents and attorneys, and act as agent
for other persons; and
- engage persons to perform services for EFIC; and
- enter into:
- arrangements known as swaps, foreign exchange agreements,
forward rate agreements, options or hedge agreements; or
- arrangements having a similar purpose or effect;
and accept gifts, grants, bequests and devises made to it, and act as trustee
of money or other property vested in it on trust; and do anything incidental to
any of its powers or the exercise of any of those powers.
3.16
In establishing EFIC as a statutory corporation, the
government indicated its intention to establish some degree of independence
from ministerial and departmental control. Indeed, the governing board of EFIC
provides the mechanism that enables the government, as the shareholder, to
delegate its management authority and the responsibility for EFIC's performance
to the directors. The joint submission noted that EFIC's status as a commercial
organisation with a board having a high degree of power to act aligns closely
with the board template outlined in the Uhrig Report. It explained:
As a self-sustaining, primarily commercial organisation it is
appropriate for EFIC to retain its status as a Commonwealth authority under the
Commonwealth Authorities and Companies Act 1997. The effect of the Bill
will be to change EFIC’s governance arrangements resulting in EFIC’s board
management structure reflecting more closely the board governance model set out
in the Uhrig Review.[34]
The Board and the executive management
team—level of ministerial control
3.17
The Act establishes an Export Finance and Insurance
Corporation Board which consists of the following members:
- the Chairperson;
- the Deputy Chairperson;
- the Managing Director;
- the Chief Executive Officer of the Australian
Trade Commission;
- the government member;
- as many other members, not fewer than 4 nor more
than 6, as the Minister determines in writing to be appropriate.
3.18
It is the function of the board to manage the affairs
of EFIC which includes the determination of the policy to be followed in the
conduct of the affairs of EFIC.
Appointment of CEO
3.19
According to the Uhrig Report, the board 'is
responsible for ensuring the success of the statutory authority through its
executive management team and within the broad strategic directions set through
its governance framework, including by the Minister'.[35]
3.20
It states clearly that the board should be responsible
for supervising the CEO and have the power of appointment and termination. It
advised:
Generally, it will be better practice for the chairman and the
Minister to consult prior to the final decision on issues involving the
employment of the CEO. Where the board does not have the power to appoint and
terminate the CEO it cannot be effective, and the alternative template should
be used [that is the executive management model].[36]
3.21
Similarly the Australian Government's Governance Arrangements for Australian
Government Bodies, advises that a governing board should have full power to
act in the interests of the relevant authority which generally included the
ability to appoint and remove the Chief Executive Officer'.[37]
3.22
In keeping with this advice, the bill changes the
method of appointment of the Managing Director and the Deputy Managing
Director. Section 71 of the bill proposes that:
- after
consulting with the Minister, the Managing Director is to be appointed by the
Board—currently the Minister appoints the Managing Director on the
recommendation from the Board; and
- after consulting with the Minister, the Board may appoint a Deputy
Managing Director—currently the Minister may appoint the Deputy Managing
Director on the recommendation from the Board.
Committee
view
3.23
The committee understands that the proposed changes to
confer on the Board the authority to appoint the Managing Director and Deputy
Managing Director is consistent with the principles established in the Uhrig
Report. The committee accepts that it is appropriate for the Board of EFIC to
have this power.
Composition of Board
3.24
The Uhrig Report examined the responsibilities of board
members and the appropriateness of certain appointments to the board. It argued
that in order to achieve a high standard of governance, 'it is essential for
board members to be focused on ensuring the success of the statutory authority
and for governance arrangements to support their roles and promote their
ability to perform to their highest potential'.[38]
3.25
The Uhrig Report did not support 'representational
appointments' to governing boards. It argued that such appointments 'fail to
produce independent and objective views'. In its view, there is the potential
for these appointments to be primarily concerned with the interests of those
they represent, rather than the success of the entity they are responsible for
governing.
3.26
For similar reasons, it advised that care should be
taken when appointing public servants to boards. It found:
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. Through participation in decision–making, either directly or implied,
the departmental representative may become an advocate for the organisation
rather than contributing critical comment. This also has the potential to
create an incentive for the other members of the board to meet to discuss and
agree on important issues separately from formal meetings, without involving
the departmental representative, thereby removing the formal board meeting as
the main decision–making forum of governance. Membership of the board by the
related departmental secretary is unwise unless there are specific
circumstances which require it.[39]
3.27
The Australian government's Governance Arrangements for Australian Government Bodies, also
advised against appointing APS personnel to corporate governance boards:
Appointees to governing boards should not be there in a
representational capacity. Avoid placing an APS employee on a governing board,
in particular the Secretary of a department.[40]
3.28
In 1991, when re–establishing EFIC as a statutory corporation,
the government wanted to ensure that linkages between EFIC and Austrade were
maintained and provided for cross membership of boards by the managing
directors of the respective organisations.
3.29
Under the current legislation, the Chief Executive Officer
of the Australian Trade Commission is an ex–officio member of EFIC's board. Section
34 of the bill would remove the CEO from this board. The amendment is
consistent with the findings of the Uhrig Report.
3.30
The committee notes, however, that Mr
Michael L'Estrange,
Secretary of DFAT is the government member on the board and Mr
Mark Paterson,
Secretary of the Department of Industry, Tourism and Resources, is a member of
the board. They are not ex officio positions and have been appointed to the board
by the Minister. Their appointment seems to be inconsistent with both the recommendations
of the Uhrig Report and the government's guidelines on corporate arrangements.
3.31
It should be noted that the joint submission from EFIC
and the Department of Foreign Affairs and Trade informed the committee that it
is intended to discontinue the practice of appointing the Secretary of the
Department of Industry, Tourism and Resources to the EFIC Board.
3.32
This is not the case with the Secretary of the
Department of Foreign Affairs and Trade. The joint submission explained:
The Uhrig Review allowed for retention of the Secretary of the
related department on boards where “there are special circumstances which
require it”. In view of the special circumstances pertaining to EFIC's role in
the management of the National Interest Account the Government has decided to
retain the Secretary of the Department of Foreign Affairs and Trade as the
Government member of the Board. The retention also recognises the contribution
of the Government member to country risk assessments which form an important
part of Board deliberations, is the most efficient means of ensuring EFIC’s
compliance with its market gap mandate, and ensures that Board decisions are
taken within the framework of a deeper understanding of the Government’s
foreign and trade policy objectives.[41]
Committee view
3.33
The committee accepts that the removal of the Chief
Executive Officer of Austrade is in keeping with the Uhrig Report's
recommendations. It also notes that the Minister no longer intends to appoint
the Secretary of the Department of Industry, Tourism and Resources to the board.
This move is also consistent with the principles established in the Uhrig
Report. The decision by the Minister to retain the Secretary of Foreign Affairs
and Trade as a member of the board is supported by the view that special
circumstances exist that warrant his presence on the board. Even so, the
committee believes that it is important to be aware of the concerns raised by Mr
Uhrig about the appointment of departmental
secretaries to boards 'unless there are specific circumstances that require
it'.
Size of Board
3.34
The Uhrig Report commented on the factors that should
be considered when determining the size of a Board. They included factors such
as the entity's size, complexity, risk of operations and the needs of the
board. It stated:
Based on current thinking on best practice in the private sector
a board of between six and nine members (including a managing director if there
is one) represents a reasonable size. Boards with members within this range
seem to be more easily able to create an environment for the active
participation in meetings by all directors.[42]
3.35
The report observed further that:
Boards with less than six members
may have difficulty in meeting their statutory responsibilities due to workload
pressures and the potential lack of breadth of views. This situation will be
exacerbated in periods where vacancies exist. There is also the risk that
smaller boards may find it easier to become involved in practices which are not
conducive to governance, such as becoming involved in management decisions
rather than overseeing them.[43]
3.36
Consistent with the Uhrig Report, section 34(f) reduces
the number of members of the Board from not fewer than 4 nor more than 6 to not
fewer than 2 nor more than five. Taken as a whole, including the Chairperson,
the Deputy Chairperson, the Managing Director, the government member, and other
members, the board may consist of between 6 and 9 members. To accommodate the reduction
in board membership, the quorum at a meeting of the Board is to consist of 3
members not the current requirement of 5 members.
Committee view
3.37
The committee notes that the reduction in the size of
the membership of EFIC's board is consistent with the findings of the Uhrig
Report.
Tenure of board members
3.38
The Uhrig Report considered finite board terms to be
important. It suggested that finite terms:
...provide an indication to directors
that they should have no expectation of appointments continuing beyond one
term. Appointment terms of three years are generally favoured with an
expectation that the contribution of a director will increase with knowledge
and experience of the entity.[44]
3.39
Section 35(1) of the bill proposes that an appointed
member, other than the government member, must be appointed for a term of 3
years instead of the current arrangement of not exceeding 5 years. The member
is eligible for re–appointment but must not hold office as a member of the
Board for a total of more than 2 terms. Under the current legislation, Board
members may serve a maximum term of five years with no limit to the number of
terms for directors.
3.40
The joint submission stated that the term limits 'are
intended to improve performance by introducing "greater experience and/or
fresh thinking" '.[45] It
also noted that allowing a director serving as chairperson an additional three-year
term is to provide continuity of direction for the entity.[46]
Committee view
3.41
The committee is of the view the tenure fixed for board
members is appropriate.
Conclusion
3.42
The committee has considered the bill and is of the
view that its provisions are consistent with the recommendations of the Uhrig
Report. As a commercial organisation, it is appropriate that EFIC aligns more
closely with the board template as intended by the bill.
Recommendation 2
3.43
The Committee recommends that the bill be passed.
Senator David Johnston
Chair
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