MINISTERS, STATUTORY AUTHORITIES AND GOVERNMENT CORPORATIONS: THE AGENCY PROBLEM IN PUBLIC SECTOR GOVERNANCE.

• Date: 01 April 2022
• Author: Saunders, Benjamin B.

CONTENTS I Introduction II The Private Sector Model of Corporate Governance and the Agency Problem III The Hybrid Nature of Statutory Authorities and Government Corporations A Government Corporations B Statutory Authorities C The Public Governance Framework D The Agency Problem and Public Sector Entities IV Agency Problems in Statutory Authorities and Government Corporations A Ministers as Principals, Ministers as Agents B Ministers as Shareholders, Ministers as Directors C The Responsible Government Problem V Conclusion I INTRODUCTION

Statutory authorities (1) and government corporations (2) are important features of modern government in all Australian jurisdictions, carrying out functions ranging from regulation, to disability support, to broadcasting, to water supply. (3) The use of non-departmental entities has a long history in Australia. (4) At the Commonwealth level alone there are 169 statutory authorities and 18 government corporations, in addition to 14 departments. (5) The structure of non-departmental entities around Australia differs depending on the type of entity and the provisions of the governing legislation; but all, to a greater or lesser extent, adopt concepts and structures derived from private sector notions of corporate governance. (6) Government corporations are closely modelled on the private corporation, adopting typical private sector structures such as shareholders and boards of directors. Statutory authorities are usually less closely modelled on the corporation, but also adopt aspects of private sector governance.

Non-departmental public sector entities are also subject to important elements of public law regulation, including the constitutional overlay of responsible government, which provides a framework for political accountability centred on the Minister, (7) administrative law remedies such as judicial and merits review, and codes of conduct applicable to public sector employees and officials, supervised by public service commissions. In every Australian jurisdiction, governance duties, modelled on the duties applicable to company directors, apply to officials of public sector entities. (8) Government corporations and statutory authorities are therefore hybrid entities, exhibiting aspects of both public and private law. Some consider this to be a singular advantage, in that they are, in President Franklin D Roosevelt's words, 'clothed with the power of government but possessed of the flexibility and initiative of a private enterprise'. (9)

Given the importance of the functions performed by statutory authorities and government corporations, it is highly desirable to ensure that they are subject to an effective governance framework. This article analyses the governance framework applicable to statutory authorities and government corporations through the lens of the 'agency problem'. In the corporate sector, company directors are subject to governance duties designed to reduce the risk that directors will engage in shirking or prefer their own interests, by aligning the incentives of directors with their company. This is achieved by imposing liability where directors and senior officers fail to act with care and diligence, or fail to perform their functions in the best interests of the company. (10) Similarly worded duties have been imposed on officers of non-departmental entities, which suggests that these duties are intended to address a similar agency problem in the public sector context.

This article argues that the governance framework applicable to both statutory authorities and government corporations creates an intractable agency problem, which centres on the position of the Minister. This arises as a result of the accountability and oversight structures which exist in relation to both government corporations and statutory authorities, and the tensions created by the constitutional overlay of responsible government. In relation to both statutory authorities and government corporations, Ministers exercise crucial accountability functions. Under the conventions of responsible government, statutory authorities and government corporations are accountable to a Minister for the performance of their functions, and the Minister is accountable to Parliament. Ministers are also the shareholders in government corporations (note that sometimes the Minister who holds the shares in the corporation is not the responsible Minister) and so exercise a dual supervisory role as responsible Minister and shareholder.

There are three ways in which an agency conflict arises. The first conflict arises from the potential for conflict between the interests of the Minister and those of the public. When exercising his or her function of supervising the activities and performance of a statutory authority or government corporation, there is a possibility that the Minister may be acting for personal or political reasons rather than in the public interest. Placing Ministers in this position solves one set of agency problems by creating another.

Secondly, Ministers are vested with considerable power in relation to both statutory authorities and government corporations, such as the power to determine strategy, issue directions and make board appointments. (11) These powers are analogous to the functions performed by boards of directors and shareholders in relation to private sector companies. The conventions of responsible government also mandate a particular relationship of control and oversight by the Minister, and Ministers wield considerable informal power under the Westminster system. (12) That power has the potential to, and sometimes does, constrain the ability of boards or executives to govern their entities. In addition, under the conventions of ministerial responsibility, a key function of Ministers is to hold non-departmental entities to account. As a result of these overlapping private and public functions, the Minister effectively holds a role analogous to that of a director, shareholder, and, in some cases, regulator. However, if the Minister exercises key strategic powers in relation to a non-departmental entity, then the Minister's own actions may have contributed to its performance. It is unlikely that the Minister will be able to judge his or her own performance dispassionately, and so the Minister's director-like and shareholder-like functions are inherently in tension with the Minister's role in holding the entity to account.

Thirdly, the constitutional conventions of responsible government make portfolio Ministers accountable for the performance of statutory authorities and government corporations. Although there is debate as to the extent to which Ministers are responsible for the actions of non-departmental entities within their portfolio, legislation confers many powers on Ministers in relation to such entities, and Ministers will be responsible for the exercise of these powers. More generally, the government is responsible for the executive as a whole. Therefore, where a statutory authority or government corporation underperforms, or engages in some form of mismanagement, the relevant Minister will likely bear some responsibility for those failures. The net result is that Ministers are expected to scrutinise entities for whom they bear some level of political responsibility.

The major implication of this argument is that the hybrid public-private nature of public governance which applies to non-departmental entities cannot meaningfully solve the agency problem. Ministers are likely to be unable to perform the function of holding statutory authorities and government corporations to account effectively. The argument in this article is both explanatory and predictive. The evidence that exists suggests that there are inherent problems with public sector governance, relating in particular to a persistent lack of clarity as to the respective roles of key parties such as the Minister, the board, and the department, including the powers exercisable by Ministers in relation to public sector entities. (13)

While previous studies have recognised the problems of public sector governance, this article offers a unique explanation which centres on the hybrid public-private nature of non-departmental entities and the constitutional and statutory role played by the Minister under the principles of responsible government. This article argues that the reasons for this stem from the structure of ministerial oversight (in relation to both government corporations and statutory authorities) and ministerial shareholding (in relation to government corporations). This article also provides a testable hypothesis which serves as a basis for further empirical research in relation to the governance of public sector entities.

Australian law maintains a fundamental distinction between public and private, and, as the former Auditor-General noted in 2002, private sector concepts of governance cannot simply be applied to the public sector without understanding the distinctive context of public sector regulation. (14) Undiscriminating attempts to replicate the structures of private sector models in the public sector without clearly understanding the distinctive constitutional framework within which the public sector operates have led to the failure of those models to achieve their intended goals, particularly in relation to hybrid public sector entities which share many of the characteristics of private sector companies. One implication of this article is that reforms are necessary to achieve meaningful enforcement of public sector governance duties and that such reforms will need to ensure that the enforcement mechanisms avoid the agency problems discussed in this article.

II THE PRIVATE SECTOR MODEL OF CORPORATE GOVERNANCE AND THE AGENCY PROBLEM

Statutory authorities and government-owned corporations are modelled to a greater or lesser extent on private sector companies, applying corporate law...