Legislation and governance guidelines for CRIs
This page has legislation and governance guidelines for Crown Research Institutes (CRIs). It is section 1 of the CRI Toolkit.
The Crown Research Institutes Act 1992 (CRI Act 1992) states that CRIs must:
- carry out research for the benefit of New Zealand
- pursue excellence in all their activities
- comply with all applicable ethical standards
- promote the application of the results of research and technological developments
- be a good employer
- exhibit a sense of social responsibility
- maintain financial viability by operating in a financially responsible manner.
Key legislation affecting CRIs includes:
- the CRI Act 1992(external link)
- the Companies Act 1993(external link)
- the Crown Entities Act 2004(external link)
As the sole shareholder of CRIs, the Crown acts to protect its investment on behalf of New Zealand.
Each CRI has two shareholding ministers: the Minister of Science and Innovation and the Minister of Finance. Each Minister has a 50% shareholding, but the Minister of Science and Innovation is the responsible minister for CRIs.
The Ministry of Business, Innovation and Employment (MBIE) is the primary monitoring department for CRIs. This function sits within our Science, Skills and Innovation Group (SSI).
The secondary monitoring agency is The Treasury within its Commercial Operations group. The Treasury provides guidance primarily on the CRIs’ financial performance and has a lead role, alongside MBIE, in the CRI Board appointments advice process.
The governance structure for all CRIs is essentially the same: shareholding ministers appoint a board of directors to oversee the management of the CRI and to appoint a CRI’s chief executive in accordance with the Companies Act and the constitutions of each CRI. The Crown also appoints the Chair and Deputy Chair.
Role of the board
While a board may delegate a number of its powers to a CRI’s chief executive (CE), it is ultimately responsible for the management and governance of a CRI’s business operations.
The role of a CRI board differs from that of a privately owned company as follows:
- decisions relating to the operation of a CRI must be made by, or pursuant to, the authority of the board in accordance with its Statement of Corporate Intent (SCI)
- the shareholding ministers (rather than the board) appoint the Chair and Deputy Chair and set directors’ fees.
A CRI board’s responsibilities include:
- appointing a CE and managing and monitoring the CE’s performance
- providing leadership and vision to the company in a way that will enhance shareholder value
- developing and reviewing company strategy and evaluating performance against the strategy
- monitoring the performance of senior management
- reviewing and approving the company’s capital investments and distributions
- ensuring compliance with statutory requirements
- providing leadership in its relationships with key stakeholders including, where relevant, industry groups, Māori and staff
- preparing an annual SCI, approved by the shareholding ministers, to be tabled in the House of Representatives
- delivering an annual business plan to shareholding ministers at the same time as the SCI
- holding management responsible for meeting the performance measures/milestones in the SCI and business plan
- establishing appropriate governance structures to ensure the smooth, efficient and prudent management of the company; eg, board committees and clear lines of responsibility and accountability between the board and management
- reporting to shareholding ministers in accordance with legislative requirements and the expectations set out in the CRI Toolkit.
In addition, the Companies Act requires each board to:
- comply with the directors’ duties (see ‘Board of directors’ duties below)
- provide an annual report and annual financial statements to the shareholding ministers
- comply with the solvency requirements set out in the Companies Act
- hold annual general meetings
- present special resolutions to the shareholder when necessary (eg, resolutions for the approval of ‘major transactions’ as defined in section 129 of the Companies Act).
Role of the Chair
A CRI board Chair should:
- direct and lead the board and CRI in line with shareholding ministers’ expectations
- ensure effective accountability and governance as required by the relevant legislation
- maintain sound relationships with shareholding ministers, their advisors and other stakeholders
- ensure a process is in place to undertake an annual performance review of the board as a whole, and of the Chair and directors individually
- continually review the board’s membership to ensure the right balance of governance skills, and plan for the succession of the Chair and directors’ roles
- actively observe the ‘no surprises’ policy by informing shareholding ministers well in advance of any material event or circumstance that could affect shareholder value, cause embarrassment, or be of significant interest to the ministers
- review and update governance and risk management policies to reflect best practice standards
- guide and support directors, and new directors in particular, to ensure their effective contribution to the governance of the CRI
- guide and support the CEs and their senior management teams
- generally act in a manner consistent with the obligations of a director as required by the Companies Act and other legislation.
Board of directors’ duties
Under the Companies Act, CRI boards are strictly obliged to:
- act in good faith in the best interests of the company (section 131)
- exercise powers only for a proper purpose (section 133)
- comply with the Companies Act and the company’s constitution (section 134)
- not agree to the company engaging in reckless trading (section 135)
- not agree to the company incurring an obligation that it cannot perform (section 136)
- exercise the care, diligence and skill of a reasonable director (section 137)
- comply with rules concerning transactions in which directors have a ‘self-interest’ (sections 139-144)
- comply with rules relating to the use and disclosure of company information (section 145).
Liability and insolvency
CRI directors are liable should they fail to meet their duties under the Companies Act.
The Crown’s liability for CRIs is limited: there is no guarantee, implied or otherwise, that the Crown will meet the liabilities of an insolvent CRI.
If shareholding ministers decide not to invest further in an insolvent CRI, a receiver or liquidator will be appointed pursuant to the Companies Act.
In the event of liquidation, the liquidator will endeavour to make recoveries for the benefit of the CRI’s creditors. This could include claims against directors for reckless or insolvent trading, or any other breaches of duty.
A board may establish committees or sub-committees to increase their effectiveness and efficiency.
Committees have no legal standing and all board members remain accountable for committee decisions. A committee’s terms of reference and its powers, duties, reporting procedures, membership and duration of office should be clearly recorded at the time it is established.
Board committees can be standing or ad hoc in nature, and might typically address areas such as remuneration and audit (finance and risk).
An audit committee is highly recommended. An audit committee:
- leads compliancy and risk management
- focuses on the CRI’s financial management, reporting and internal controls
- should not be chaired by the board Chair but should include directors who are financially literate
- should meet at least 3 times a year and record a statement from these meetings in the annual report.
Apart from the recommendation of an audit committee, there is no prescribed or optimum number or type of committees. Boards should only establish new committees after serious consideration of the need for them and of the potential benefits to the governance of the CRI.
Shareholding ministers expect that a board is informed by independent strategic advisory panels as recommended by the CRI Taskforce (Recommendation 19). Detailed information on using these panels is contained in Relationships and protocols.
Fees and expenses
Fees are set by the shareholding ministers under The Treasury’s framework approved by the Cabinet.
The amount approved by the shareholding ministers in any 1 year for board fees is a global amount that the board can allocate as it considers appropriate.
Therefore a board can ascribe specific fees to committee membership if the correct process is in place and the total amount paid in fees does not exceed that specified by the minister.
Detailed information about the directors’ fees and expenses is available on The Treasury’s website(external link).
Directors are also encouraged to refer to the Office of the Auditor-General’s guidelines(external link) on controlling sensitive expenditure.
Director: appointment process, terms of appointment and succession planning
Directors are generally appointed to CRI boards for a term of 3 years, and may be reappointed at the expiry of that term, subject to their contribution having been satisfactory and their skills continuing to be relevant to the board.
In some circumstances directors may serve more than 2 terms, where a critical business need has been clearly demonstrated to shareholding ministers. Given the long-term nature of science, government may also consider reappointing well-performing directors beyond 2 terms. Each case is considered on its own merits.
Directors need to be aware that the same process that was followed for their original appointment will be applied again if they are eligible and available for reappointment at the expiry of their term.
Shareholding ministers are accountable to Parliament for the appointment of directors to the CRI boards. Appointments of CRI boards are made by the Minister of Science and Innovation.
Directors of CRIs hold office at the pleasure of shareholding ministers and, accordingly, under the constitutions of the companies, may be removed at any time by notice in writing to the board of the company.
Shareholding ministers and board Chairs are continually reviewing board composition and skills requirements as well as term expiry dates and succession. In the case of each expiry of a director’s term, or vacancy arising for other reasons, this process will result in the development of a skills profile for every board. Following agreement by the responsible minister, a specification will be prepared for each individual vacancy. The specification of the vacancy will be used to guide the search for suitable candidates. Once the suitable candidates have been identified, the responsible minister will consider them for short-listing and appointment.
If a director is to retire, he or she will receive a letter from the responsible minister confirming that fact well in advance of the expiry of the term. If a director is being considered for reappointment, he or she will receive a notification letter from the responsible minister. The notification letter will be sent out at the same time as those sent out to new appointees to boards during the appointment round.
It is intended that all board appointees are notified at least 1 month in advance of the start of the new term of office. All new directors will receive a letter of appointment and terms of reference and MBIE’s Institutional Performance team will conduct an annual induction workshop for new directors.
For further details, please refer to the State Services Commission document Review of Board Appointment and Induction Processes(external link).
Conflicts of interest
Directors must disclose any relationships and/or matters that give rise to an actual or potential conflict of interest.
Directors should refer to sections 139 to 149 of the Companies Act for further guidance on what may need to be disclosed. The board must have in place a process for disclosing and dealing with conflicts of interest, including the maintenance of an interest register, and should ensure that all board members are aware of the existence and nature of any disclosure of interests made.
Crown company constitutions usually provide that a director who is interested in a transaction may not vote on a matter relating to the transaction but may:
- vote on any matter which relates to the company indemnifying, or effecting insurance for, directors and employees of the company
- attend a meeting at which a matter relating to the transaction arises and be included among the directors for the purposes of determining the presence of a quorum
- sign a document relating to the transaction on behalf of the company
- do anything else as a director in relation to the transaction as if the director were not interested in the transaction.
Only shareholding ministers can relax the rule prohibiting directors from voting on a matter in which they have an interest.
In addition, shareholding ministers generally expect that directors who are interested in a transaction will absent themselves from deliberation on the matter, unless the board or committee resolves that this is not required.
Further information, including examples of conflict of interest and guidance on how to manage them, can be found in the Office of the Auditor-General’s publication entitled Managing Conflicts of Interest: Guidance for public entities(external link).
Other issues to raise with shareholding ministers
It is also possible that a director may be placed in a situation where, as a result of circumstances that are not related to a directorship of a particular company, continuing to act as a director of that company might nevertheless place the company or the shareholding ministers in a position of embarrassment.
A director in such a situation must take the initiative and raise the matter with shareholding ministers, via the board Chair. While there are no set criteria for such situations, examples of the types of issues the shareholding ministers would expect to be advised on include:
- where legal proceedings have been, or are likely to be, brought against the director
- where the director has been, or is likely to be, subject to negative media or public scrutiny
- where the director is placed in a situation of actual or perceived conflict of interest
- any issue affecting the director’s ability to contribute to the board, eg, as a result of other time pressures, extended overseas travel (ie, more than 2 months), illness etc
- where the director is appointed to any position as an employee of the Crown, or intends to undertake significant contract work for any Crown agency
- any other similar circumstance which may place the company or the shareholding ministers in a position of embarrassment.
If any of the above circumstances arise, the director concerned should, in the first instance, discuss the matter with the board Chair, who will then advise shareholding ministers if appropriate.
The Board charter or code of practice
A Board is expected to have a charter/code of practice to provide guidance to directors to help them to carry out their duties and responsibilities effectively, and in accordance with the highest professional standards.
A board charter should not be an exhaustive statement of obligations. If read in conjunction with the law applying to company directors and the constitution of the company, it should present a complete picture of the legal and ethical responsibilities imposed on directors, including any specific requirements arising from the business of the company and the wider sector in which it operates.
In 2004, the Securities Commission developed a set of Principles of Corporate Governance. They were written after consultation with a range of sectors and acknowledge that different types of entities can take different approaches to achieving consistently high standards of governance.
While the principles do not in themselves impose any legal obligations, they are supported by shareholding ministers. It is expected that a company’s board charter will at least cover the Securities Commission’s principles, adapted as necessary to fit the Crown environment and the particular company’s circumstances.
It is also expected that annual reports will report fully on the company’s corporate governance practices. The manner and style of such reporting is up to the CRI itself but it should at least provide a report that incorporates a reference to each of the Securities Commission's principles set out below and how the board has achieved those principles.
Securities Commission principles of corporate governance
Shareholding ministers expect the boards of Crown companies to comply with the Securities Commission's Principles of Corporate Governance, including those set out as follows:
- directors should observe and foster high ethical standards
- there should be a balance of independence, skills, knowledge, experience, and perspectives among directors so that the board works effectively
- the board should use committees where this would enhance its effectiveness in key areas while retaining board responsibility
- the board should demand integrity both in financial reporting and in the timeliness and balance of disclosures on entity affairs
- the remuneration of directors and executives should be transparent, fair and reasonable
- the board should regularly verify that the entity has appropriate processes that identify and manage potential and relevant risks
- the board should ensure the quality and independence of the external audit process
- the board should foster constructive relationships with shareholding ministers that encourage them to engage with the entity
- the board should respect the interests of stakeholders within the context of the entity's ownership type and its fundamental purpose.
Refer to the Corporate Governance in New Zealand Principles and Guidelines(external link) for further detail.
Directors as consultants
Shareholding ministers expect board directors to refrain from any consultancy work for the CRI that falls outside of normal duties, and that would normally be contracted to a third party.
A Chair should seek shareholding ministers’ approval in advance for any consultancy work to be carried out by a board director if an exception to this rule appears appropriate.
Consulting work undertaken by directors for other CRIs is however encouraged, unless there is a conflict of interest, as an opportunity to share experience and knowledge and to promote a more collaborative stance between CRIs.
Gifts, koha, facilitation practices and bribes
Directors are solely remunerated for their contribution to the board through the fees they are paid. They should not seek to benefit financially from their position as a director in other ways.
Directors and their immediate family should not accept gifts, koha, entertainment, discounts, loans, commissions or other favours from individuals or organisations, if they could influence, or be perceived as influencing, a business decision, or be considered to be extravagant or unduly frequent.
This is especially important if the individual or organisation is soliciting business or information from the CRI concerned.
For further information, please refer to the Guidelines from the Auditor General(external link).
Although all directors carry equal responsibilities, the board’s membership and the appointment process are structured to ensure that the necessary balance of competencies and skills are present to conduct the board’s business. It is expected that boards will agree on a schedule of meeting dates at the beginning of the year, allowing directors to manage their commitments to ensure attendance.
Where justified, a director may be granted leave for 1 meeting per annum. However, it is generally accepted that 2 or more meetings missed in a year should raise questions about a director’s place on the board.
Partial attendance of meetings—if frequent—is more problematic. Partial attendance of meetings both in-person, and through tele- or video-conferencing, is disruptive to board discussions and denies the board the benefit of a director’s particular expertise. It may also result in a loss of continuity in board outcomes.
Boards are encouraged to raise any issues of director absenteeism to shareholding ministers if a solution cannot be found. A director who misses 3 meetings in a year would result in concerns raised to MBIE’s Institutional Performance team and The Treasury, and in turn to the minister(s). The minister(s) will address the director directly and may seek the director’s resignation.
Directors standing for Parliament
Directors should immediately advise the Chair if selected as a parliamentary election candidate, or if placed on any political party’s list.
Board Chairs should subsequently advise shareholding ministers through MBIE as soon as any director on their board has been identified as a candidate.
Any director who is formally selected to stand as a candidate for election to Parliament, or placed on any party’s list, is expected to stand down from the board, with effect from nomination day at the latest, to protect CRI governance and prevent conflicts of interest.
Political neutrality protocol
Political neutrality is expected of directors at all times when acting in their capacity as a board member. Political neutrality is particularly important at election times, when CRI board directors, as employees of publicly owned entities, face greater scrutiny. Chairs and boards should ensure ‘no surprises’ throughout this time.
Confidentiality and security of information
Directors must ensure the security of board papers and other information relating to CRIs while in their possession. Board papers remain the property of the company and should be returned to the CRI following the retirement of the director.
Guidelines for securing electronic documents:
- access to documents filed on a director’s personal computer should be limited to authorised users (directors are advised to seek technical advice if necessary)
- documents filed on a workplace, or other organisation’s IT system and server, should be secured, and access limited to authorised users
- following a director’s resignation, electronic versions of board documents must be deleted to the same extent as if physically destroyed and confirmation sent to the board.