2009 Outline of Shareholder Expectations for Crown Research Institutes (CRIs)

Introduction

This Outline of Shareholder Expectations is a useful guide for boards.  It supplements the operating principles outlined in the Crown Research Institutes Act 1992 and the broader expectations in the Owner’s Expectations Manual with regard to governance, reporting requirements, and the role and responsibilities of CRI directors in general.

New and existing CRI directors are encouraged to be well aware of the content of these documents.  Shareholding Ministers will assess the performance of each CRI board against the expectations in these various documents.

Context

This National-led Government places a high priority on the contribution that research, science and technology can make to New Zealand’s economic growth. The maintenance of science capability and the efficient continuity in public good science are other key priorities.  As such, shareholding Ministers expect that the CRIs will pay heed to government policy in general and seek to align their areas of focus with existing and emerging national priorities. 

The CRIs are also encouraged to lead and inform debate on relevant scientific issues and to offer input into policy refinement in areas where they have expertise, including input into defining areas of national focus.

This Outline of Shareholding Expectations sets out requirements that are common to all CRIs. It covers three main issues:

·                    performance

·                    business expectations

·                    the Government’s agenda for 2009

1.         Performance

9% return expectation

Whilst recognising that the strategic value of CRIs is in their underpinning of the broader economic environment, the fact remains that sustained financial viability is an underlying pre-requisite for CRI performance. 

The expectation is a rate of return of 9%. This is intended to ensure that CRIs are financially viable and are able to withstand financial shocks without recourse to shareholders. In past years the rate of return has not necessarily been extracted by way of dividend.  CRIs should make no such assumption in the future.  Where CRIs have sound investment opportunities or where important capabilities might need to be retained shareholding Ministers will make informed decisions about whether these are worth a reduced rate of return. Where CRIs have no sound investment opportunities, they are expected to return surplus cash to the shareholder in the form of a dividend. 

Many CRIs have engaged in high levels of reinvestment.  With some exceptions, this reinvestment has produced few tangible returns to date.  Although reinvestment may of necessity be of a medium- to long-term nature, boards will be expected to demonstrate their return expectation on such reinvestment.

Target capital structure

Consistent with this Government’s focus on driving better value for money, shareholding Ministers wish to see all parts of the public sector playing their part to ensure more rigorous use of capital.  Thus, CRIs are expected to manage their balance sheets effectively. 

Each CRI is also expected to manage to an agreed capital structure target based on its risk/return characteristics.  Each CRI should update its target regularly as the company’s profile materially changes.  Where a CRI has not carried out its own capital structure review, a benchmark target of 30% net gearing and three times interest cover will prevail. 

Investment in capital assets

Boards are expected to manage their business in a way that they can meet their short-, medium-, and long-term needs.  This involves making sufficient financial provision to replace assets. CRIs should develop plans that address future infrastructure requirements in the most cost-effective manner over the planned life of facilities. 

Capability retention

CRIs need to think strategically about retaining capabilities that are not fully funded against the expectation that future income may be attainable. Unfunded or underfunded capabilities that do not achieve clear science goals and that jeopardise a CRI’s on-going financial viability should not be countenanced.  However, cases where income is insufficient to maintain what may be considered ‘nationally important’ capabilities must be brought to shareholding Ministers’ attention.  

Interaction with key client groups

Without successful interaction with their key client groups, CRIs cannot deliver relevant research. The research application indicators will continue to be used to obtain relevant information in this regard.

2.         Business expectations

Communication

The CRIs are encouraged to maintain the key role they play in communicating the value of science.  As part of this, CRI public accountability documents (in particular annual reports) should communicate more clearly to the New Zealand public each CRI’s range of activities and contribution to New Zealand’s well being.

IP management

The CRI’s IP portfolio is an important asset and should be continually identified and managed for national benefit.  For the avoidance of doubt, Ministers are comfortable with an IP policy that allows an individual or group of employees to materially benefit from their intellectual contribution. 

Technology transfer

Technology transfer is a key expectation on all CRIs and can take many forms.  However, there are cases where CRIs have invested often significant amounts in bringing products and services to a market-ready state.  This has often involved the CRI alone incurring considerable risk and significant investment. 

As research organisations first and foremost, CRIs are expected to remain focused on their core research activities, including the transfer of knowledge and technologies to end users.  Boards should not spend excessive time on commercial ventures to the detriment of a CRI’s core focus.  Commercial ventures must be underpinned by a realistic business and investment plan with measurable interim and ultimate objectives.  CRIs are not expected to be long-term holders of commercial ventures except under exceptional circumstances.  Conversely, CRIs are not expected to transfer their IP to the private sector at devalued rates.  They are expected to derive an adequate return on their investment.

It is acceptable for CRIs to enter into technology transfer arrangements with overseas parties.  In doing so, however, CRIs will be expected to consider benefit to New Zealand, and provide evidence in advance of relinquishing IP.

Linkages and collaboration

Linkages between CRIs, firms, and tertiary education institutes are extremely important and the CRIs are encouraged to maintain and grow such linkages.

Whilst strong international collaboration at the investigator level within CRIs is the norm, institutional and governmental collaboration are sometimes less advanced.  CRIs are encouraged to continue to seek opportunities for international collaboration.  Teams across CRIs are already generally collaborating well.  There may be potential, however, for enhanced collaboration through forms of closer collaboration.  The recent merger between Crop & Food Research and HortResearch, initiated by the boards of the two companies, demonstrates this potential.

Structural change

Shareholding Ministers are open to the possibility of further change within the CRI portfolio.  The onus in the first place, however, is on boards to present initial proposals to shareholding Ministers.  Note that there is a clear expectation that such proposals will be presented jointly by all boards involved in such proposals.  In the absence of proposals initiated from boards, shareholding Ministers may initiate change as part of wider reform.

Good employer obligations

Finally, CRIs have obligations toward their staff members to act as good employers and to engage openly and constructively with their staff members and/or workplace representatives. Where CRIs face the prospect of having to review their staff numbers, CRIs are encouraged to take into account future requirements and explore all viable options.  The personal impact on affected staff members should be borne in mind.

3.         The Government agenda for 2009

The Government recognises that there are a number of initiatives that are needed to provide a more transparent and efficient environment for the science sector.  Priorities for 2009 include:

·        less bureaucracy and reduced compliance costs

·        clearer expectations for what CRIs deliver from negotiated funding

·        development of a formal Statement of Science Priorities

·        appointment of the Prime Minister’s Science Advisor.

This work is already under way, and CRIs will have the opportunity for ongoing input.

Shareholding Ministers will also have closer contact with Ministers in other relevant portfolios to ensure cross-government awareness of CRI issues and alignment with wider government initiatives.

There is no doubt that New Zealand faces a challenging year ahead. There are bound to be changes that will impact on the role and work of CRIs.  In the meantime, the expectations outlined in this 2009 Outline of Shareholder Expectations will apply.

 

Hon Bill English

Minister of Finance                                 

 

Hon Wayne Mapp

Minister of Research, Science and Technology

 

May 2009