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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