Chief executives have been given virtual carte blanche to run their departments. New Zealand chief executives must do certain things that career managers in the Public Service generally have not been accustomed to doing. They must weed out weak managers, shed redundant workers, reexamine or sever long-standing relationships with suppliers, actively recruit from outside the Public Service, negotiate the wages of senior managers, revamp operations, abandon low-priority activities, manage their assets, commit in advance to output and cost levels, take responsibility for the volume and quality of services, negotiate employment, purchase and performance agreements, respond to numerous inquiries from Parliamentary committees and central agencies, represent the department to the media and public, be responsive to the Minister, and more. They must drive the department to be more efficient, productive, and responsive. They must act as if their own job is on the line and their own money is being spent. They must treat agreements on outputs and other aspects of performance as firm commitments, not just as plans. They must take personal - and organisational - responsibility for how well the department is doing. In sum, they must be accountable for what they have promised and for what they have done.
The State Sector Act establishes a trilateral process for appointing chief executives. It provides for the State Services Commissioner to "appoint chief executives of departments and to negotiate conditions of employment," and for the relevant "Minister to inform the Commission of any matters that the Minister wishes the Commission to take into account." The actual involvement of the Minister varies from case to case, but the principle is accepted that a candidate should not be appointed against the objection of the Minister and that a chief executive who has lost the confidence of the Minister should not remain in the post. The Minister cannot unilaterally decide to appoint or remove a chief executive, but the Governor-General in Council (in practice, the Cabinet) can unilaterally decide to appoint a chief executive. The Minister does negotiate an annual performance agreement that emphasises the key results the chief executive is accountable for. Performance under this agreement typically is reviewed in quarterly reports to, and meetings with, the Minister.
The appointment process and periodic assessments are the principal formal means by which the Minister obtains assurance concerning the chief executive's stewardship of the department. There may be informal means as well, for a chief executive is expected to be responsive to the Minister's demands for information and advice. In interviews, chief executives indicated satisfaction with these arrangements, but some are troubled by what they regard as SSC's intrusion into the relationship. Some see no need for SSC assessments when they already are subject to review by the Minister, and others wonder whether the employment contract should be negotiated with the Minister rather than with the State Services Commissioner. There may be some justification to these complaints, for the arrangement does make it possible for a chief executive to be pulled in one direction by the Minister and in another by SSC. But this trilateral relationship is preferable, in my judgment, to one in which SSC was excluded and the collective interest was thereby weakened. Responsibility to the Minister should not detract from the equally fundamental principle that the chief executive also is responsible for carrying out broad governmental policies and for coordinating the work of the department with related activities conducted by other entities. The trilateral relationship denotes that the performance of chief executives and departments is a legitimate interest of the government.
During the past eight years, New Zealand has had some outstanding chief executives and many very good ones. These have left a positive imprint on the departments they have led. It also has had a few weak leaders who have been reluctant to make the hard choices needed to whip their departments into shape. Chief executives have differed in their operating styles; some have aggressively challenged the status quo, others have preferred a more cautious approach. Some have had a high profile and have actively projected their department onto public attention, others have looked inward and have attracted little public notice for themselves or their department. Arguably, the departments showing the most dramatic improvement have been led by chief executives who have welcomed the opportunity to uproot established practices and habits. Rather than taking the organisational culture as fixed and unalterable, they have sought to recreate the department on an entirely new basis. It would be foolhardy to judge the effectiveness of chief executives in terms of their ability to stir things up or to draw attention to themselves. Unfortunately, in New Zealand's court of public opinion, this sometimes is the basis on which chief executives are sized up by their peers and others.
Fortunately, this is not the process used by the State Services Commissioner in carrying out that position's statutory responsibility to review the performance of chief executives. The process is demanding and time consuming; it takes place every year, not only when term appointments are about to expire. The recruitment process has more than forty steps; reappointment has almost as many. It is for good reason that a separate branch handles the Commission's many activities in this area.
The performance of chief executives is evaluated on the basis of three fundamental accountability principles: (1) the chief executive should be personally responsible for the department's performance; (2) performance expectations should be specified in advance; and (3) actual performance should be compared to the ex ante targets. These principles require that performance expectations be sufficiently defined to permit results to be measured against them. The ex ante specification is contained in the performance agreement between the Responsible Minister and the chief executive. This accountability regime does not preclude a broader review covering matters not specified in the agreement. In fact the chief executive must be accountable for all departmental operations, including those she/he are not directly involved in. But for the system to work as intended, the assessment must give weight to those elements of performance specified in advance.
The form and content of the performance agreements are now standard across departments. In the first years of the process, fewer than half of the chief executives had completed agreements. Pursuant to a 1992 Cabinet edict, all now have annual agreements. The current practice is to structure the agreements around the SRAs and KRAs. The standard agreement begins with a list of the relevant SRAs, after which it specifies the key results for which the chief executive will be responsible during the next year (in some cases, the following two years as well). The text makes clear that the chief executive accepts personal responsibility for each of the results set forth in the agreement. The chief executive also pledges to produce the outputs contracted for in the purchase agreement and to uphold collective ownership responsibilities.
Most chief executives welcome the KRAs as a positive development because they now have a much clearer picture of what is expected of them. Not only are the KRAs highlighted in the performance agreements, they also are prominent in assessing the performance of chief executives. In fact, many chief executives prepare quarterly and annual checklists of progress in implementing the KRAs and producing the agreed outputs. These checklists are a convenient means of indicating that some progress has been made or that the objective has been met.
This pattern of behaviour may be a mixed blessing. On the positive side, it indicates that chief executives take their performance agreements seriously; they do not regard the agreements as scraps of paper that can be ignored without penalty. Many chief executives use the performance agreements as road maps for plotting the departments' work and measuring progress. On the negative side, however, the road may be a bit narrow, for chief executives now have a strong incentive to go by the book and ignore promising detours. This checklist behaviour affects the entire range of accountability requirements, and is the subject of further discussion in chapter 7.
The State Sector Act conceives of chief executives as strong managers who have full responsibility for departmental operations. The performance agreements impel them to narrow their perspective to those activities that give evidence of achieving the KRAs and outputs. Broader aspects of management - leadership, strategic perspective, interpersonal skills, organisation-building, investments that have long-term payoffs, innovation and risk taking - are ownership qualities that may be undervalued by the performance agreements and the assessments made pursuant to them.
The temptation to "manage by the agreement" is reinforced by the demanding assessment process. The annual review takes up to six months, meaning that one year's assessment follows on the heels of the last. Current procedure assigns the burden of proof on chief executives to document (or certify) that they have met the requirements of the purchase and performance agreements. Chief executives also have to compose a self-assessment, which is supplemented by assessments from relevant Ministers, the central agencies, and outside referees. The Prime Minister also may offer an assessment. The cost of operating this process is substantial not only in financial terms, but also in terms of the attention given it by the State Services Commissioner and the chief executives. Not the least of the benefits of a reduction in the number of departments would be lower transaction and human costs.
I regard both types of evaluation as necessary, but both need not be conducted every year. A strong case can be made for an annual review of performance in terms of KRAs and outputs - after all, these are commitments agreed by the chief executive. But it would be impractical to comprehensively evaluate leadership and other vital elements of managerial performance each year. It may be more sensible to have a basic accountability review (focusing on KRAs and outputs) after each of the first two years (assuming an initial five-year term) and an in-depth evaluation after the third year, and possibly after the fifth year as well. The full assessment would go beyond the measurable targets and milestones to consideration of the chief executive's performance in leading the department in light of the government's ownership interest. SSC would need flexibility to adjust this schedule to different situations. The in-depth review might be accelerated if the Commission were concerned about subpar performance, or it might be waived if the chief executive gave notice of early retirement. Many permutations are possible; it should not be difficult to devise flexible rules.
Some observers have suggested that progress in reforming New Zealand government has been uneven, because SSC has not been sufficiently demanding in reviewing the performance of chief executives and has been reluctant to dismiss weak performers or to use pay differentials to reward strong managers and penalise weak ones. The problem, however, may not lie with the Commission but with the system for appointing and remunerating chief executives. In private firms, the chief executive typically has an indefinite term and continues in the post until she/he retires, voluntarily leaves, or loses the confidence of the board. In New Zealand government, by contrast, the chief executive has a fixed term, and a decision must be taken near the end of the term to continue or replace the incumbent. This arrangement places a great deal of pressure on the State Services Commissioner, especially in the case of middling performers who may have done well enough for a full term but do not merit reappointment. In these circumstances, formal evaluation may be a rigid tool that forces the Commissioner to point the finger of blame at executives who, while competent, may not have done all they could to reshape the department. Perhaps a less formal process, in which the Commissioner quietly encourages such persons to depart without putting them through the wringer of public review, would yield better results. It would be easier for the Commissioner to act in this manner if chief executive terms were indefinite, but I see no prospect of shifting to such an arrangement, for it would be seen as a return to the discredited system of permanent heads. Nevertheless, SSC should consider the feasibility of more flexible terms than the current system allows.
It is unrealistic to expect SSC to approve large pay differentials in response to differences in chief executive performance. The Commission is likely to be constrained for the foreseeable future by both government policy and public opinion in its ability to award superior performers with substantial pay increments, though bonuses may be more acceptable. In practice, pay differentials tend to correlate more with departmental size than with performance.
Because of the high turnover in chief executive posts and the complex appointment and evaluation procedures, the "chief executive system" is rigid and costly. It is highly desirable that the Commission explore means of making the process more flexible so that the New Zealand government can continue to recruit, motivate, and retain a corps of talented chief executives.