full opinion/analysis by Renai LeMay
19 July 2013
Image: NBN Co
opinion/analysis Under extreme provocation by a hostile Opposition, the National Broadband Network Company appears to have broken convention and possibly regulations regarding the behaviour of government business enterprises. The question now is: How will its shareholder ministers deal with its clearly aberrant behaviour?
The gradual emergence of NBN Co’s board from relative obscurity into the harsh and unforgiving gaze of the political and media spotlight has been a slow process which has taken place over the past 12 months.
Of course, NBN Co has always had a board; in fact, it has had several. The company’s first board, chaired at that stage by NBN Co founding executive chairman Mike Quigley, was set up as an independent entity in early August 2009, a few months after NBN Co was established with Quigley as its first employee. Like all boards, it was designed to be conservative and to reflect the concept of a ‘safe pair of hands’, featuring seasoned telecommunications executives such as Telstra’s Doug Campbell, as well as lawyers such as Freehill’s Peter Hay, financial experts such as Wesfarmers’ Gene Tilbrook, and technology and media domain specialists such as Illyria’s Siobhan McKenna and Westpac’s Diane Smith-Gander.
Later, the Government would add new directors to the group; culminating in the March 2010 appointment of experienced banker Harrison Young as its chair and Quigley’s subsequent move to step down to be merely NBN Co’s chief executive, if ‘merely’ is the right word. NBN Co also had a separate board for its short-lived Tasmanian subsidiary.
Although there have been minor changes to the directors sitting on it, and although it had responsibility for overseeing Australia’s largest ever infrastructure project, up until September last year, very few Australians paid any attention at all to the activities of NBN Co’s board. The entity held meetings, communicated with NBN Co’s shareholder ministers Stephen Conroy and Penny Wong, and generally went about its business quietly. For all political and media purposes, it might well not have existed. Everything was strictly a behind-the-scenes affair.
Then, suddenly, something changed; an event which caused ramifications which are still echoing through the current actions of NBN Co’s board. The company’s then-chairman Harrison Young, who had previously been virtually absent from the public spotlight, came out into the open to take a political position with respect to the NBN.
The occasion could hardly have been more public: A business lunch event held by the Committee for Economic Development of Australia. It is customary at such events, usually held in ritzy hotels in Sydney or Melbourne, for executives to take what they consider to be a thought leadership position on an issue in their industry. Leading companies and government organisations pay high prices for tables for high-ranking staff; pomp, ceremony and excellent beefsteak is served, and of course the media is given uncomfortable chairs at the back of the room (without drinks) so that the comments expressed may make it into print.
And on this occasion Young did not disappoint. Although the executive took pains to avoid the more controversial NBN topics and openly stated that he did not wish to take sides, he certainly threw his hat concretely in the ring as supporting the Government’s policy position on the NBN; taking positions agreeing with Government policy. And he even went so far as to criticise core elements of the Coalition’s emerging rival option.
It wasn’t the first time a senior NBN Co executive had made an intervention into the fraught political debate about the NBN. In the midst of the 2010 Federal Election, the company’s CEO Mike Quigley had similarly emerged — as he would again in February 2013 — to try to bring some technical clarity to the media sensationalism and political spin around the NBN.
But Young’s obvious partisanship in favour of Labor’s NBN policy did have one, perhaps unintended, effect: It drew the eagle eyes of Shadow Communications Minister Malcolm Turnbull to NBN Co’s board, and led the Member for Wentworth to suspect that the board was not the impartial entity that everyone had previously supposed it to be.
As you can read online, at the time Turnbull reacted with a furious statement pushing back on many elements of Young’s speech. It resulted in what many saw at the time as the appearance of an unseemly spectacle: The chair of a government business enterprise, debating the government of the day’s political opposition. Not nice; and not a position you want to be in, if you’re Harrison Young.
It was only six months later that Young retired from NBN Co’s board. But the damage had been done. The floodgates had opened. And NBN Co’s board, in the mind of the Opposition, was now a political player and thus, fair game.
The next salvo fired between the two sides (as appalling as the concept of two sides here is) came only a brief time after the appointment of Young’s replacement, long-time NBN board member Siobhan McKenna. McKenna, a former partner at notoriously tough consulting firm McKinsey, is accounted a very active and powerful player in Australia’s business scene, with her currently main gig being managing Lachlan Murdoch’s media investment vehicle Illyria. And that reputation quickly proved itself accurate. As The Australian reported in April, it took only six weeks for McKenna to make her presence felt at NBN Co:
“Ms McKenna said the NBN Co board was now taking a much tougher approach with management after last month being forced to slash its rollout targets, blaming problems with its contractors responsible for putting the fibre in the ground.”
The regular intervention of Communications Minister Stephen Conroy in NBN Co’s affairs was curtailed, Quigley was put on a much shorter leash, and McKenna turned the company’s focus squarely to its rollout targets.
This was all well and good and probably reflected better governance for NBN Co. In fact, even when it was reported that McKenna had sought opinions from NBN Co management about support for Quigley as chief executive, and that she might even be seeking to push him out of the role in favour of a new appointee, sites like Delimiter itself defended McKenna’s moves as the logical actions of a more strict board chairman. Young had taken a relaxed approach to NBN governance, it was whispered; McKenna was getting things back to normal. It’s not clear where the stories about McKenna’s difficult relationship with Quigley came from; or what motivations any of the parties concerned would have had for leaking them.
But the saga was far from over; in fact, McKenna’s actions had once again opened the door for the Coalition to directly attack NBN Co’s board, in what might well have been termed a case of ‘unintended consequences’. And this time it was to get nasty.
In early June, Turnbull went on the attack publicly against NBN Co’s board and McKenna personally. He told Federal Parliament at the time:
“We have had the unedifying spectacle of the new Chairman of NBN Co., Ms Siobhan McKenna, saying that she does not want the minister to speak to the Chief Executive Officer other than through her. We have had reports in the press saying that she wants the Chief Executive to be sacked—she wants to be the Executive Chairman. When this rather disturbing news was put to Mr Quigley in Senate estimates, the minister Senator Conroy intervened and would not allow him to answer the question and would not rebut the proposition himself. Can you imagine, Mr Deputy Speaker, a situation where you had a public-listed company and the chairman was reported as having no confidence in the chief executive and wanted to have him sacked, and that matter not being put to rest almost immediately? It would be a completely untenable situation. But this is the disaster that the government is presiding over.”
These comments were followed with more. Again and again, throughout June and July, Turnbull turned to talkback radio, television and newspapers to question the actions of McKenna and NBN Co’s board, the qualifications of its directors and, ultimately, its performance stewarding this most important of Australia’s infrastructure projects.
On June 18, Turnbull told Sky News that it was “remarkable” that McKenna wouldn’t issue a statement claiming full support for Quigley, despite NBN Co’s ongoing rollout problems. In Parliament that same day Turnbull went on a lengthy monologue about the situation, stating: “… what we have got at the moment with this company—the biggest infrastructure project in our history—is a situation where the management is tearing itself to pieces, the board is opposed to the Chief Executive.”
Quigley, of course, several weeks ago revealed his intention to retire; a decision which the board had been aware of for some time. In fact, it was very likely the reason why McKenna had been seeking a replacement for the chief executive in the first place; such a situation would have been completely normal. And yet again, Turnbull went on the attack, claiming on Twitter that Quigley was “fired” and then telling the ABC: “The Chairman of NBN Co Siobhan McKenna has been trying to get Michael Quigley sacked for several months and she’s finally succeeded – she’s had a head hunter out looking for his replacement.”
But Turnbull also went further. For perhaps the first time, and with Quigley exiting the arena, McKenna’s own credentials came under fire. Turnbull said:
“… we know that Siobhan McKenna, the chairman, who by the way has no experience in the telecoms sector, she’s never built a network or run a network, she’s a management consultant. So there’s real questions about her capacity to chair this business.”
Now, there is no doubt that Turnbull’s attacks on NBN Co board, at this stage, had reached an incredibly unprofessional level for a politician of his standing.
One of the core principles of a Westminster system of parliament and government such as Australia uses is the separation of public servants and politicians for accountability purposes. It is unwritten in law, but is very strong convention, that public servants working in government departments are not attacked by politicians, even when they make major mistakes. Instead, Oppositions almost always seek to hold the political players of the day accountable. The secretary of Australia’s Department of Immigration and Citizenship is never held accountable for the increased numbers of asylum seekers attempting to land on Australian shores; that is the responsibility of the Immigration Minister.
Ministers and Governments set policy and are accountable when it fails; bureaucrats implement policy and are not.
The situation is a little different when it comes to government business enterprises such as Australia Post and NBN Co. These organisations are not departments; they are formally companies staffed by executives, and there is a whole set of government regulation and legislation devoted to them. They are nominally independent and have their own boards.
However, the core principle still applies; as their strategies are broadly set or at least explicitly supported by their ‘shareholder’ ministers — ministers such as the Communications and Finance Ministers for NBN Co which represent the Government’s stake in these businesses. NBN Co does not set government policy, it enacts it. And so, while its executives are a little more publicly accountable than departmental secretaries, if the NBN fails, it would be the Minister who would ultimately be held accountable.
Turnbull’s attacks on NBN Co’s board abjectly breach this convention, and many within Australia’s political sphere would rightly count them appalling. By attacking NBN Co’s board, Turnbull has poisoned a well from which he may well have to drink in only several months’ time, if the Coalition wins the next election and the Member for Wentworth becomes Communications Minister.
It does not do to defecate in your own backyard; but that is precisely what Turnbull has done by politicising the relationship with NBN Co’s board. There is no doubt that Australia’s political debate right now is quite poisoned; but Turnbull’s attacks on NBN Co’s board have been some of the most debased your writer has recently seen. You can see in his appearance on the ABC’s Lateline program last night — in which Turnbull was very careful not to target McKenna or other NBN Co board directors personally, and in which he was extremely circumspect and precise with his language — that Turnbull realises now he probably went too far on this issue. Of course, it’s too late to go back.
Still, this does not justify the next steps NBN Co took.
As has been chronicled in correspondence released yesterday morning by Turnbull, McKenna in June took the extraordinary step of retaining law firm Herbert Smith Freehills to advise the board directly on “external threats”, which in turn retained political lobbying firm Bespoke to set up meetings with Coalition MPs; including, presumably, Turnbull himself. In her letter to Turnbull, McKenna argued:
“Non-executive Directors have been told directly and indirectly by members of the opposition that they can expect a Judicial Enquiry investigating their governance post-election.
The Non-executive Directors naturally sought to engage independent legal counsel on this matter, which they have a right to do, and appointed Herbert Smith Freehills. It is not unusual for company directors faced with threats to exercise their right to appoint external advisers. Indeed in the circumstances it would be most unusual for the directors not to seek to do so. Given the governmental nature of the matter, Herbert Smith Freehills have engaged Bespoke Approach.”
The problem with this approach is that it is at best a major breach of the Federal Government’s conventions for government organisations dealing with the Opposition; including, very likely, of the Caretaker Conventions used during elections and wider conventions for departments and government business enterprises. It may also flirt with the boundaries of being a breach of corporate law.
To understand why, it’s important to go back to the then-Gillard Government’s instructions to NBN Co, upon taking power after the 2010 Federal Election.
At the time, NBN shareholder ministers Conroy and Wong issued a comprehensive ‘statement of expectations’ document to NBN Co’s board (PDF), giving instructions for what the Government expected from NBN Co in meeting its policy goals. Among many other stipulations, the document very clearly states:
“The Government expects that the NBN Co Board will clarify with shareholder Ministers should it be advised by shareholder Departments of a policy obligation which the Board is uncertain should apply to NBN Co; and in the interim not act inconsistently with that policy. During election campaigns, the Government expects NBN Co to abide by the Caretaker Conventions as advised by a relevant Departmental Secretary. In summary, as a major GBE, the Government expects the Company to model a high standard of corporate citizenship.”
What this makes very clear is that NBN Co, like government departments, is expected to follow strict guidelines on dealing with the Opposition of the day, especially during an election period.
Now, it is true that Australia is not yet in a Federal Election period; that won’t happen until Prime Minister Kevin Rudd formally declares one; although he is likely to do so at any time. However, a little known fact is that the Caretaker Conventions (available online in PDF format) also discuss interaction with the Opposition outside that period.
In a section entitled ‘Pre-election Consultation with the Opposition’, the conventions state that at the initiative of Opposition MPs, including the Shadow Minister, for example, departments (and remember, this includes NBN Co) may give special briefings with the Opposition, aimed at providing information around “the administrative and technical practicalities and procedures involved in implementation of policies proposed by the non-Government parties”.
These discussions may take place within a three month period before an election, or up to three months before the expiry of the House of Representatives — the three month period begins around the 27th of July this year. However, such discussions will involve the explicit notification of the organisation’s portfolio Minister, and may not see political matters discussed — the departments would seek to notify the relevant Minister if that occurred.
The fact that these conventions exist implies that government departments should explicitly avoid discussion with the Opposition of the day outside election periods — and that these conventions are only in existence to promote a smooth transition of power in the event of a change in government. The default rule under normal circumstances is clear: Departments and GBEs do not hold meetings with Opposition MPs, unless it’s explicitly under the auspices of the sitting Minister. And even then, the discussions will necessarily be extremely limited.
The problem for NBN Co’s board is that it has indeed been having discussions with Coalition MPs, arranged via Bespoke Approach, completely outside of this process outlined in the conventions; and even if you could consider that the pre-election time period already exists, it really does not appear as if NBN Co’s board has discussed its talks with the Coalition with its shareholder ministers. And yet, according to Turnbull and reports in the Financial Review, the discussions are being held with the explicit intention of talking up the performance of NBN Co’s board, with a view to its future under a Coalition Government.
It should be obvious that NBN Co’s should not be having private discussions with the Opposition about its future under a Coalition Government. The stipulations in the Caretaker Conventions merely illustrate how far outside its customary remit NBN Co’s board is operating.
Incredibly, in an interview in the Financial Review yesterday, McKenna acknowledged this fact. “All communication between the board of NBN Co and any member of the opposition needs to be directed through the shareholder minister’s office,” the executive said. “It is the same for all government business enterprises.” And yet, NBN Co’s board, through its law firm and its political lobbying representation, appears to be breaching this very concept.
There are also other reasons to be concerned about the behaviour of McKenna and the rest of the board, from a legal perspective.
One governance expert your writer spoke with this week highlighted sections of the Corporations Act dealing with the behaviour of board directors, and questioned whether NBN Co’s board was acting within those very strict guidelines. The relevant sections of the Corporations Act (starting from section 180) state that:
“A director or other officer of a corporation must exercise their powers and discharge their duties: In good faith in the best interests of the corporation; and for a proper purpose.”
Now, government business enterprises are not strictly regulated precisely the same as corporations; in fact they come under the Commonwealth Authorities and Companies Act. However, like the Corporations Act, that legislation contains very similar stipulations to ensure that officers of a GBE act in good faith in the best interests of the company, and that they don’t take advantage of their position for their own gain.
The expert your writer spoke to pointed out that NBN Co’s board discussing matters with the Coalition before an election would be akin to the board of a public corporation discussing the future with a company attempting a hostile takeover. Given that it is incumbent upon the board to firstly serve the needs of the current shareholder (the Government of the day), this would represent something of a conflict, and a potential breach of the idea that directors should firstly serve the best interests of their own corporation (ultimately, owned by shareholders).
Turnbull has pointed out that the board does not appear to be acting in NBN Co’s interests in retaining counsel and lobbyists in this matter. “Are you not concerned that you may be confusing your own interests and advantage with your fiduciary duty to the NBN Co?” he asked McKenna in his letter to the NBN Co chair.
And the Shadow Communications Minister also, ominously for NBN Co, explicitly referred to a landmark legal case in his letter — Advance Bank v FAI Insurances (1987). Turnbull’s reference of this case is ominious, as broadly (bearing in mind that I am not a lawyer), the judge in the case found that a company itself could not hold a power to support or oppose any person standing for election to a company’s board — implying that company money should not be spent on backing particular candidates.
“Do you think it is appropriate that the Board of a government business enterprise employ a lobbyist to impress on the Opposition that its board is able? You will understand that it is very difficult not to see this exercise as part of an effort to secure re-appointment in the event of a change of government,” Turnbull questioned McKenna. “That being the case, should not the cost of this engagement be borne by the directors, rather than by the NBN Co?”
Now, there are a few things to be said here.
The first is that it’s very difficult to say, legally, whether the position of NBN Co’s board is tenable or not. We’re looking at a very complex situation here with respect to the existing judgements in this area, and from analysis I’ve seen, not all of the case law agrees; in fact, the case cited by Turnbull is only one of several in the area.
However, what is clear is that NBN Co’s board, in retaining a political lobbying firm and communicating directly with the Opposition of the day, has definitely at least breached government conventions in this area. I strongly suspect that this practice will not be allowed to continue; it is a situation which many stakeholders in government will be concerned about and which will come up again and again in public debate until NBN Co’s board returns to commonly accepted government norms in this area. It’s hard not to agree with Business Review Weekly columnist Leo D’Angelo Fisher on the issue:
“Turnbull is right to be angry. McKenna’s approach to chairing a government-owned enterprise raises questions about the governance responsibilities of a chairman and the nature of the relationship between the chairman and political process.”
In a wider sense, the actions of NBN Co’s board also fail a very basic public test, in that it’s hard to see the Australian public approving of it spending money, even the money of its individual directors, wooing Coalition MPs with political lobbyists. That doesn’t feel like an action the board of a government business enterprise should take.
Despite this, Turnbull doesn’t escape blame in this case; it’s also clear that Turnbull has acted very inappropriately. While NBN Co has broken government conventions, Turnbull has broken wider conventions about the Westminster parliamentary system which are just as powerful. As a politician, Turnbull can get away with a lot more; nevertheless, this conduct is unbecoming, and we strongly suspect Turnbull is personally aware of this fact. You simply cannot, as a Shadow Minister, go to war with an organisation you may shortly be administering in Government. It is unseemly and unproductive; and especially disappointing given Turnbull’s senior political rank and profile.
Furthermore, if it wasn’t for Turnbull’s attacks on NBN Co’s board, the board would not have felt it necessary to escalate the situation to the degree it has. Turnbull must share responsibility for this debacle.
In a wider sense, the actions of both sides are really quite embarassing. We are speaking here about Australia’s largest ever infrastructure project; a massive undertaking which will progress for the next decade. The fact that its board and the Opposition portfolio shadow minister who may be taking it over shortly are engaging in open warfare, with vitriolic statements being published through the media on a daily basis, is simply incredible.
NBN Co chair Siobhan McKenna yesterday morning urged Australian politicians not to politicise the NBN. The truth is that it’s too late to try and stop it — the project has already been politicised to hell and back. But what may still be possible — unlikely, but possible — is for all of the stakeholders involved, no matter who they represent, to start acting like grown-ups again. In the context of Australia’s largest ever infrastructure project … that would be very nice indeed.