Monitoring and indicators for CRIs

This page provides guidance for Crown Research Institutes (CRIs) on monitoring and indicator requirements. It is section 3 of the CRI Toolkit.

Our SSI’s monitoring role

As 100% owner of CRIs, the Government is obliged to manage its investments in the best interests of New Zealanders. Our Institutional Performance team, assisted by The Treasury, monitors CRIs on behalf of shareholding ministers. Final decisions on all CRI issues remain with the shareholding ministers or Cabinet.

Our Science, Skills and Innovation Group (SSI) monitoring responsibilities are to:

  • provide independent analysis, commentary and advice to ministers
  • comment on draft SCIs, including any aspects that may be inconsistent with statutory requirements for CRIs
  • support CRIs’ medium- to long-term strategic direction
  • develop and communicate the Government’s ownership priorities and objectives for CRIs
  • monitor CRI performance and consult with boards as issues arise
  • provide a portfolio perspective to our monitoring to ensure the Crown’s balance sheet is optimally utilised
  • monitor international corporate governance changes and adjust procedures as appropriate.

Generic indicators

When producing the Statement of Corporate Intent, CRIs should develop a suite of indicators that describe their approach to improve performance over time.

The performance specification has some consistent measures across the CRIs as well as allowing the CRIs to select performance indicators that allow them to show their performance against their own strategy. The first set is generic performance indicators across all of the CRIs that were developed in consultation with CRIs. The second set is developed by the individual CRIs and applies to all or part of their organisation. This additional set should supplement the generic indicators and provide the CRI with scope to reflect the strategy and actions being taken by the CRI to deliver on its Statement of Core Purpose.

For both sets of indicators, the Statement of Corporate Intent should state the actual performance in the previous financial year and the target figure or range for the forthcoming financial year.

The generic performance indicators are:

Indicator Measure Reporting frequency
End-user collaboration Revenue per FTE from commercial sources Quarterly
Research collaboration Publications with collaborators Quarterly
Technology & knowledge transfer Commercial reports per scientist FTE Quarterly
Science quality Impact of scientific publications Annually
Financial indicator Revenue per FTE Quarterly

Our SSI will administer a rolling survey biennially, which will measure a number of these indicators. The survey will be funded by us and developed in partnership with the CRIs and interested government agencies.

Other indicators

CRIs are expected to be a ‘good employer’ The following indicators can be used by CRIs as a starting point to assess ‘good employer’ practice:

  • improvement in staff engagement survey results
  • reduction in percentage of unplanned staff turnover
  • reduction in average number of sick and domestic leave days taken
  • reduction in percentage of employees with annual leave balances greater than 20 days
  • reduction in workplace accidents
  • increase in percentage of IT system availability.

Financial requirements

CRIs are expected to remain financially viable and enhance shareholder value in their operation over the longer term. This expectation is set out in the CRI Act, with viability defined as:

  • generating an adequate rate of return on shareholder’s funds
  • continuing to operate as a going concern.

Each year in the SCI the board should set out using narrative and indicators how these requirements will be delivered. The setting of appropriate financial targets ensures that CRIs:

  • are focussed on achieving appropriate risk-adjusted rates of return over the financial year
  • replicate the disciplines exerted over private sector companies
  • operate in an environment that is competitively neutral with the private sector.

This does not mean that a Return on Equity (RoE) target in excess of the cost of capital needs to be achieved consistently every year, as long as an appropriate average return is achieved over time. A lower RoE requires ministerial approval.

Performance against targets

Our SSI has adopted a standardised set of financial performance measures to measure shareholder return, profitability and solvency for CRIs. These aim to promote transparency and consistency.

These measures, and related definitions, are set out in the following table:

Measure Description Calculation
Operating margin The profitability of the company per dollar of revenue. Earnings Before Interest, Tax, Depreciation, Amortisation and Fair-value (EBITDAF) / Revenue
Profit per FTE The ability of the company to generate a return from its staff. EBITDAF/ FTEs.
Quick ratio Adjusted ratio of current assets to current liabilities, adjusted for assets that cannot be liquidated quickly and liabilities that do not require cash to settle. Current assets less inventory less prepayments/ Current liabilities less revenue received in advance.
Interest coverage The number of times that the company can cover interest expense with profit. EBITDAF/ Interest paid.
Profit volatility The standard deviation of the past 5 year’s profit, scaled by average profit. Standard deviation of EBITDAF for past five years/ Average EBITDAF for the past 5 years.
Forecasting risk The average difference between forecast return on equity and actual return on equity for the past 5 years. 5-year average of return on equity less forecast return on equity.
Adjusted return on equity Return on equity after removing the impact of fair value movements. NPAT excluding fair value movements (net of tax)/ Average of share capital plus retained earnings.
Revenue growth Measure of whether the company is growing revenue. % change in revenue.
Capital renewal Measure of the level of capital investment being made by the company. Capital expenditure/ Depreciation expense plus amortisation expense.

These measures should be included in each CRI’s SCI, where relevant.

If a CRI anticipates that it will not achieve its performance targets, the shareholding ministers expect early advice from the board, including details of the reason for the expected shortfall and the remedial actions put in place to remedy the situation. In general, this can be achieved through the quarterly reporting process. Where performance shortfalls are significant, the shareholding ministers expect more direct notification, and to be kept informed of progress.

In cases of serious underperformance or financial distress by a CRI, the shareholding ministers may:

  • increase reporting requirements
  • seek more detailed information from the CRI, including monthly accounts and cash flow forecasts
  • work with the board with a view to improving its performance
  • review the membership of the board
  • appoint a special advisor to the board
  • in extreme circumstance, liquidate or re-capitalise the CRI.

Boards should not, in the absence of an express agreement to this effect from the shareholding ministers, assume that additional financial support will be provided by the Crown to a CRI.

Rate of return

As set out in the CRI Taskforce recommendations, the adequate rate of return for each CRI will be tailored to the circumstances of that CRI. The board should formulate what they consider to be an adequate rate of return and this will be considered by ministers and officials during the business planning period. A board should have regard to:

  • its ability to deliver its SCP in the short and long term
  • its ability to grow New Zealand scientific capability through continued investment in new assets, capability and engagement with industry
  • the balance between reinvestment and dividends
  • how to deliver economic benefit to New Zealand in the most efficient manner (for example; using debt to facilitate greater investment and returns)
  • any factors that influence the ability to generate returns
  • the capital charge rate applied to Crown entities
  • Weighted Average Cost of Capital (WACC)
  • the necessity to maintain the ability to absorb risk and unexpected shocks.

Where the return is below the capital charge rate, or WACC, as part of the process of agreeing a tailored rate of return on equity, boards will quantify any trade-off between delivering a return on equity and increased sector impact for shareholder consideration. The plan should include:

  • a description of the services or initiatives lowering the return
  • reasons why the services cannot produce a return at the capital charge or WACC level
  • the relationship between the services or initiatives and the results the Institute is to achieve relative to its core purpose
  • the impact on the institute or sector if the services or initiatives were to cease
  • the impact on earnings before tax of funding the services or initiatives
  • alternative options for funding the services or initiatives.

Capital structure

There is no expectation of what the optimal capital structure is for a particular CRI. However, boards should assure themselves that they are using the balance sheet of the company in the most efficient manner. It is expected that whatever capital structure is chosen for the CRI is justified, taking into account:

  • what is appropriate to generate an adequate return
  • the most efficient manner to fund investment and deliver science outcomes
  • the balance between investment and dividends
  • the risk tolerance of the company.

In 2012, we commissioned the ‘Balance Sheet Review’, a review of CRI balance sheets and operating risks. Key findings from the report were accepted by shareholding ministers and monitoring agencies. Boards are not required to follow this guidance but it is expected that any deviation be justified.

The findings are:

  • CRIs do not carry structural debt.
  • CRIs borrow to fund specific capital investment rather than funding investment with accumulated cash reserves.
  • Surplus cash should be paid out as a dividend unless there is an appropriate alternative use for the cash and this is supported by a robust business case for reinvestment.

Capital asset management

CRIs should manage their infrastructure assets effectively over the assets’ expected lifespan, in recognition that making the most of existing assets is as important as investing in new assets.

Dividends

The level of dividend is driven by the CRIs desired capital structure, profitability and expected capital expenditure as outlined in the business plan and SCI. The proposed dividend pay-out ratio and estimated payment should be included in the business plan for each year.

Dividends are expected from CRIs unless the CRI has a greater need for reinvestment. The level of estimated dividends is set by the board in line with discussions with the shareholding ministers’ through the SCI and business plan consultation process.

If the policy is to not pay dividends, or the board decides to deviate from the policy in order to reinvest, the board should set out:

  • what the reinvestment is, and how it affects the ability to pay a dividend
  • the relationship between the services or initiatives and the results the institute is to achieve relative to its core purpose
  • the impact on the institute or sector if the services or initiatives were to cease
  • alternative options for funding the services or initiatives.

However, under section 15 of the Crown Research Institutes Act, the shareholding ministers have the power to determine the amount of dividends payable by any CRI in respect of any financial year or years.

Ordinary dividends, if any, may be paid out in 2 instalments: an interim dividend and a final dividend. Special dividends may be paid as seen fit by the board. Interim dividends are paid as soon as possible after the half-yearly report, and final dividends as soon as possible after the annual accounts are finalised.

CRI borrowing

CRIs are exempt from the restriction on borrowing outlined in the Crown Entities Act 2004 (section 162).

Explicit disclaimer of Crown guarantees and loan covenants

All contracts for loans to CRIs that are not provided by the Crown must include a disclaimer stating that the Crown does not guarantee or financially support CRI borrowings.

The disclaimer should clearly describe the nature of the relationship between the Crown and a CRI.

More information can be found on the Treasury's website(external link).

Ownership review clauses

Some loan documents link the loan terms to the shareholder’s identity, so that, if the control of the company changes, the lender reserves the right to call up the loan.

For CRIs, this would connect the loan terms with the Crown, and could give the incorrect impression of an implicit Crown guarantee.

Notwithstanding the Crown’s current ownership policy, the policy on such clauses is as follows:

  • it is acceptable to have loan provisions that require lenders to be informed whenever a CRI becomes aware that its ownership will change
  • shareholding ministers prefer CRIs not to enter loan agreements that provide for a review of the loan at the lender’s discretion in the event of an ownership change
  • it is not acceptable to have loan provisions that involve a technical default at the lender’s discretion in the event of an ownership change.

There are alternative mechanisms to assure lenders without the drawbacks typically inherent in ownership change clauses.

These range from covenants concerning the debt/equity ratio and interest coverage, to lenders taking security over specific company assets.

However, these mechanisms can place constraints on the company and must be designed to minimise the extent to which they constrain any future restructuring of a CRI. Boards should bear this in mind when considering such mechanisms.

Managing risks

Boards are responsible for managing risks, and should establish processes and practices within their CRI to manage all risks associated with their operations.

Boards should keep shareholding ministers informed of their risk management strategies through their business plans and other reports, as per the “no surprises” policy.

Tax planning

CRIs are expected to conduct their businesses on the same basis as comparable businesses not owned by the Crown, including normal and prudent planning of their tax affairs. CRIs are also expected to act as good corporate citizens by exhibiting a sense of social responsibility where able to do so.

These objectives should be met through tax planning that is within the intent and spirit of the law.

While shareholding ministers are comfortable with CRIs engaging in normal tax planning in accordance with tax law, they are not comfortable with CRIs leading the market in developing aggressive tax strategies.

The shareholding ministers recognise that what might be considered aggressive may change over time and that there will always be an element of judgement involved. This is a judgement for CRI boards, not the shareholding ministers, to make.

When assessing performance, the Government views dividend payments as if it were a domestic resident taxpayer. This means imputation credits are treated as if they have value in the hands of shareholding ministers, and should be reserved for attachment to dividends.

Significant transactions

CRIs are expected to obtain prior written consent from shareholding ministers for any transactions involving full or partial acquisition, disposal or modification of property (buildings, land and capital equipment) and other assets with a value equivalent to or greater than $10 million or 20% of the CRI’s total assets (before the transaction), whichever is the lesser.

Prior written consent of shareholding ministers is also required for any transactions with a value equivalent to or greater than $5 million or 30% of the company’s total assets (before the transaction) involving:

  • acquisition, disposal or modification of an interest in a joint venture, partnership, or similar association
  • acquisition or disposal, in full or in part, of shares or interests in a subsidiary, external company or business unit
  • transactions that affect the CRI’s ownership of a subsidiary or a subsidiary’s ownership of another entity
  • other transactions that fall outside the scope of the definition of the CRI’s core business or that may have a material effect on its science capabilities.

Additionally, the shareholding ministers expect CRIs to consult with them should any proposed activity fall outside the nature and scope of their activities as defined in their SCP.

Intellectual property transactions should be noted in the quarterly reports to shareholding ministers, in advance if possible.

The shareholding ministers expect CRI boards to inform them, in advance, of any transaction that does not meet the thresholds outlined above, but which falls within the scope of the “no surprises” policy.

Process for approval of significant transactions

The approval process is expected to be conducted in good faith and to include the following steps:

  • the board advises shareholding ministers of a relevant pending decision and provides information on the rationale of the proposal,
  • reasonable time is given for ministers’ consideration,
  • the board considers ministers’ comments with an open mind
  • the board proceeds to take the final decision for which it is responsible.

Shareholding ministers will assess investment proposals against the following investment principles:

  • the business case for the proposal, including expected financial returns and risks, and the sensitivity and volatility of returns to various alternative scenarios
  • the size of the proposal and fit with the CRI’s sector and SCP
  • the size and fit of the proposal within the wider CRI portfolio and Crown balance sheet
  • the CRI’s track record of success in similar expansions
  • an analysis of by what means the proposal will be funded and impact on the CRI’s financial position.

It is expected that CRI’s will engage with us to clarify expectations on the content of any business case.

4-year rolling reviews

As part of the implementation of the CRI Taskforce reforms, the Government will evaluate the performance of each CRI against its Statement of Core Purpose (SCP) every 4 years.

The purpose of the review is to provide shareholding ministers with an independent evaluation of each CRI’s effectiveness in delivering the outcomes set out in its SCP. The ministers will also be able to judge the long-term performance potential of the CRIs against the strategic role outlined in their SCP and evaluate the durability of their outcome statements.

The reviews are designed to be an inclusive process, with opportunities for input and feedback from all parties, including the CRIs, ministers and key stakeholders. The 4-year rolling reviews were evaluated and tested through the process of running 3 reviews with an independent panel during 2013 and 2014. The terms of reference will be reviewed after the first 3 4-year rolling reviews have been completed.

The independent panel of reviewers will draw on the aggregation of performance-related information that is already routinely generated as part of the matrix of monitoring and evaluation processes established around the CRIs. Our SSI will provide support to the review panel to ensure stakeholder engagement is effective, targeted and efficient, and that ‘engagement fatigue’ is minimised.

It is expected that CRI boards will use the information and recommendations from the reviews to inform their strategic planning and governance decisions to support continuous business improvement. The CRI board will develop a 12-month action plan in response to the review and progress will be monitored by our Institutional Performance team through the quarterly reports.

The reviews and recommendations will be released into the public domain when the first 3 reviews are completed.

CRI performance management framework: incentives and sanctions

Our SSI use relationship-based monitoring, based on trust, with open communications channels and a no-surprises approach.

The trigger for performance management is when a CRI fails to meet its deliverables:

  • outcomes as defined in the SCP, on a 10-15 year horizon
  • impacts as identified in the SCI, on 3-5 year horizon
  • outputs and activities as identified in the SCI, monitored and evaluated annually in terms of quantity, quality, cost, targeting, coverage and timeliness, as appropriate
  • financial viability.

If a CRI fails to deliver, the level of monitoring may increase. An explanation of the levels of monitoring and transition between them is listed in the table below.

Role of the shareholding ministers

Legislation enables shareholding ministers to do the following (this is not an exhaustive list):

At any time:

  • ask for a briefing from us or The Treasury seeking more information
  • call a meeting with the CRI Chair or board and us
  • seek information from the CRI (under s20 of the CRI Act 1992).

When a CRI is moved onto intensive monitoring shareholding ministers can request an action plan from the board describing its corrective actions.

Shareholding and Vote ministers also have powers to implement sanctions. These are presented at the end of the table.

Monitoring levels, associated actions and performance triggers

Monitoring levels and examples of performance triggers Actions

Standard monitoring

The CRI has high quality accountability documents/arrangements in place in a timely manner

The CRI is meeting its obligations as set out in the governance and ownership resources

The CRI is complying with timely and accurate provision of information for formal reporting requirements

The CRI can evidence a strong logic between what they are doing and the contribution to SCP and outcomes, and acting in accordance with the operating principles in the SCP

CRIs report as per the requirements detailed in the governance and ownership resources and relevant legislation.

Institutional Performance team: standard monitoring and relationship management

TRANSITION PHASE

Early warning signals from the sector (eg, loss of a major client), end-users dissatisfaction, or the CRI itself (eg, eduction in forecasted cashflow) indicate there may be performance issues for the CRI. 

Institutional Performance team works with CRI to explore, understand, invalidate, or evidence early warning signals.

Institutional Performance team briefs GM Institutions and System Performance and DCE Science, Skills and Innovation with recommendation to either: take no action; have a discussion with the CRI Chair; or elevate to performance watch.

Performance watch – ‘On-watch’

Financial issues identified

Non-compliance with standard monitoring requirements

An emerging deterioration in the CRI’s performance against its SCI

SCI has substantial risks that are not yet fully managed

The CRI is failing to deliver on the outcomes or operate within the principles set out in its SCP

CRI: reporting requirements may increase to monthly reporting on the specific performance issues identified (eg, relationship with a key sector, projected cashflow)

Institutional Performance Team assists CRIs in addressing the identified issues, through increased relationship management activity and monitors progress.

Performance watch is noted in the summary of quarterly reports to shareholding ministers. Ministers may request a briefing.

TRANSITION PHASE

Increased monitoring attention fails to bring about compliance from the CRI in terms of reporting or accountability requirements

The financial position deteriorates further

Aligned sectors continue to negatively impact on the CRI  or governance and management issues remain unresolved.

Institutional Performance briefs DCE Science, Skills and Innovation with recommendation to either: return to standard monitoring; leave on performance watch; or escalate to intensive monitoring.

DCE Science, Skills and Innovation contacts the Chair and briefs shareholding ministers.

Intensive monitoring

“Bring in shareholders and The Treasury”

A CRI is unable to achieve minister’s support for its SCI within agreed timeframes

Continued reporting non-compliance

Continued financial poor performance

Deterioration in either standard monitoring requirements or performance watch requirements

A single event that seriously affects planned performance or creates material risk

Non-disclosure of a significant transaction

DCE Science, Skills and Innovation: formally notifies shareholding ministers

The Treasury will become involved if the performance issues are financial.

Shareholding ministers request an action plan from the board describing their corrective actions, and meet with the Chair or board and DCE Science, Skills and Innovation.

The Institutional Performance Team and The Treasury agree and monitor the action plan on behalf of shareholding ministers.

TRANSITION PHASE

Non-compliance continues; financial performance deteriorates further; governance and management issues remain unresolved; or risks remain unaddressed.

GM Institutions and System Performance briefs DCE Science, Skills and Innovation with recommendation to either:maintain on intensive monitoring; or escalate to implement sanctions.

DCE Science, Skills and Innovation contacts Chair indicating that sanctions are imminent.

DCE Science, Skills and Innovation briefs shareholding ministers on the appropriate sanctions to implement.

Implement sanctions

Failure to deliver on the action plan required in the intensive monitoring phase.

Sanctions may be implemented by the shareholding or Vote minister as described below. Shareholding ministers can:

i. initiate an independent review of the CRI or Board (s132 of the Crown Entities Act 2004)

ii. require more frequent monitoring to be accompanied by a letter from the Chair

iii. appoint or remove CRI Chair or board members (CRI Act 1992)

iv. appoint a representative to the board. The Vote minister can:

v. withhold a portion of core funding (Public Finance Act 1989) until agreed actions to address performance issues are implemented.

vi. reduce or terminate core funding in the subsequent appropriation round

vii. alter the payment schedule to monthly in arrears (financial sanctions v-vii are not suitable where financial under-performance is the trigger)

Incentives

Good practice management and monitoring will reflect an ‘earned autonomy’ approach, where consistently high performers require less time and attention. Under-performance will attract greater monitoring scrutiny and increasing compliance requirements. Over time, we may seek opportunities to decrease the reporting and performance framework for consistently high-performing CRIs.

To remain at the standard level of monitoring, the board and management team in each CRI will need to encourage an organisational culture that ensures that high performance and effective risk management are core activities. Organisational structure, risk management frameworks, capability building, and internal review systems should maintain performance and facilitate the achievement of the Government’s goals and objectives.

In the current fiscal environment, financial reward for excellent performance is unlikely. In future, it might be possible to create structures whereby high performers could apply for additional core funding as part of the annual appropriation round, if initiatives were aligned with government priorities.