In late August I wrote a piece looking forward to the Annual Report of the Reserve Bank of New Zealand’s Board. On 27 September, that report was published quietly – buried inside the Reserve Bank’s own Annual Report, and with no mention of it in the Governor’s press release. As far as I can see, the Board’s Annual Report got no media coverage at all.
That is both understandable and disappointing. Understandable, because it is much harder to report what isn’t there. And disappointing because Parliament set up the Reserve Bank Board as the principal body charged with holding to account the Governor of the Reserve Bank – who is probably the single most powerful unelected individual in New Zealand. The Board, with unparalleled access to inside information, was intended to be the agent for the Minister of Finance and for the general public in holding the Governor, and the Bank, to account.
When the Reserve Bank Act was introduced, the vision of accountability was a pretty simple one: if (core) inflation was away from target, the Governor was culpable. It was pretty quickly realised that things were more complex than that. In addition, the Reserve Bank (Governor) has been given, and has assumed, a lot more discretionary power in a much wider range of areas. Properly assessing the performance of the Governor in handling his statutory responsibilities/powers requires some pretty substantial analysis. And substantive accountability isn’t just about a group of the great and good declaring their satisfaction, but about laying out the arguments and evidence, including addressing and responding to the strongest arguments of the critics.
Over 25 years, the Reserve Bank’s Board has pretty consistently failed in that role, even since the requirement for a published Annual Report was introduced in 2003, and the Governor was removed as chair. From time to time they have asked awkward questions in private – no one has ever adequately been able to answer the questions Viv Hall used to pose around quite what clause 4(b) of the PTA really meant – and Boards have often had their own individual awkward and dissatisfied members. But the public face of the Board has been a consistently bland and affirming one. From the public’s perspective – and I suspect from that of members of Parliament – the Board adds next to no value.
That isn’t primarily a commentary on the individuals involved. I’ve had good relations with many of the able members over the years. The problem isn’t really with the individuals but with the institutional arrangements and incentives.
The Reserve Bank Board is set up to look like the Board of a corporate. Many of the people appointed to the Reserve Bank Board have served on corporate Boards. On a corporate Board the CEO runs the day-to-day business, but the Board is ultimately responsible for the strategy (and for the CEO). It can command resources. A very close relationship between CEO and Board is vital to the successful functioning of the organisation, and – at least in public – the Board needs to fully back the CEO, at least until the day they fire him or her.
By contrast, the Reserve Bank’s Board has no involvement in setting strategy, or deciding policy. It has formal input to a handful of not-overly-important decisions (eg the size of the dividend to recommend), and only two big roles – the responsibility to recommend the appointment of a person as Governor (and no person can be appointed who has not been recommended by the Board) and the ability to recommend dismissal (although it cannot actually dismiss the Governor, and contrary to what is stated in this year’s Annual Report the Minister of Finance can act to dismiss without a recommendation of the Board).
The Act is quite clear that the primary role of the Board is ex post review and accountability. And yet it goes through the routines that look like a normal corporate Board. There are monthly Board meetings, a Board audit committee, Board papers, the CEO sits as a member of the Board. A senior staff member serves as Secretary to the Board. The Board meets on Bank premises, and has no independent budget or staff resources of its own. But for an accountability board, the asymmetry is profound – the Governor has 300 staff who all work fulltime on Reserve Bank issues, while Board members – not typically experts in the field – devote a few hours a month to the issues.
The Board can ask for papers from management, but it can’t compel the production of such papers. It typically meets not just with the Governor (a fellow member of the Board), but with Deputy and Assistant Governors present throughout the meetings, and with other staff in attendance as required. And unlike the situation in most Crown agencies, even though the Minister of Finance appoints the members of the Board, he does not get to appoint the chair. Rather Board members get to select their own chair, increasing the likelihood that the role will be filled by someone who gets on easily with the Governor.
It would be recipe, perhaps, for effective collegial decision-making, if the Board were a decision-making Board. But the Board doesn’t have that role; it is supposed to be an arms-length review and accountability agency. And human nature is to avoid asking too many hard questions of those one works closely with, and to defer to expertise. That happens between the Board and the Governor, and within the Board. Thus, both of the independent chairs of the Board have been former senior executives of the Reserve Bank, and the current chair actually spent six months as acting Governor, aiming (unsuccessfully) to become Governor himself). Both are able people, and either might be well-qualified to sit in a decision-making Reserve Bank Board. But when the role of the Board is to ask hard questions and hold the Bank to account, being a former senior staffer isn’t necessarily the best qualification for a Board chair. Yes, former staff can ask awkward questions too, but in general – even if they have some technical insights other Board members won’t have – they will be too ready to see things through the eyes of the Governor and staff, to “have his back” as it were. But we – citizens – need a robust and independent eye. Awkward questions, not sympathy. Too often, the Reserve Bank’s Board seems to see a significant part of its role as being to help the Governor spread his story and to explain the choices the Governor is making.
Don’t take my word for it: this year’s Board report states explicitly
With most Board meetings…the Board hosts a larger evening function to engage with representatives of many local businesses and organisations, and to enhance our understanding of local economic developments and issues……. This outreach is a longstanding practice of the Board to ensure visibility of its role among the wider community, and to facilitate directors’ understanding of local economic developments, and the wider public’s understanding of the Bank’s policies.
Worthy activities for management, but that isn’t the role Parliament envisaged for the Board – whose purpose is to hold management to account, not help management explain their choices to (select elements of) the public.
All that is by way of getting to this year’s Board Annual Report (from p3). It was better than last year’s in one respect. This year’s report stretched out to a little over three pages (last year’s was less than two pages). But most of it is still descriptive (and even that contains an error). I counted 41 paragraphs in the report. Of them, at most 10 could be considered having anything other than purely descriptive material (“these are the activities we undertake/documents we receive/meetings we attended”).
In my earlier post, I identified some issues this year’s report might cover, if it were to do well the sort of scrutiny and accountability job Parliament appears to have intended.
This year’s Annual Report might perhaps cover, in some depth, issues such as:
• The way that core inflation has now been well below the middle of the target range for some years
• The significant policy mistake that was made last year in raising the OCR repeatedly and only very belatedly beginning to slowly cut it again.
• The poor quality of Bank’s research, analysis, and argumentation around the housing market, and around the new investor finance restrictions in particular.
• The obstructive and non-transparent approach the Bank has taken, including with respect to compliance with the Official Information Act.
What is about the Governor’s performance, and stewardship of resources, that has led to these outcomes? And what steps are being taken to avoid a repetition? Many outsiders might have a view, but the Board has unique access to the inner workings of the Bank, and the ability to grill management.
In fact, probably to no one’s surprise, there is no substantive analysis in the report of any of these issues, or any others. The report has a single sentence stating its comfort with the new LVR restrictions. In discussing monetary policy, the substantial policy reversal (in which the OCR was raised aggressively last year and then cut this year) was not even mentioned. The Board appears to have had no concerns about the conduct of monetary policy at any point in the year, and simply offers the anodyne observation that they consider that “the Governor made appropriate monetary policy decisions”, while providing no analysis to defend that conclusion (although I don’t take from that text that they gave the Governor an enthusiastic A+). In neither monetary policy nor financial stability is there any sense of the events and policy responses being part of a chain of events stretching back over several years.
I’m not suggesting that the Board should have concluded that the Governor made mistakes. Reasonable people might differ on that, but we should expect to see signs that the Board has thought hard about the issues, engaged with alternative perspectives, rather than just looked to gloss over any potential areas of awkwardness. There is no sign of that this year, or in previous years.
In essence what we seem to have is a model in which the Board majority has mostly been interested in being something of a cheer leader for the Governor, helping get the Governor’s message across and not making trouble. But they don’t seem to realise that they work not for the Governor but for the public – who need robust scrutiny of powerful public agencies.
The Board’s Annual Report contains a mildly interesting list of some of the papers management provided to the Board during the year (I might OIA a couple of them). But it must surely be a list than contains a major omission. Readers may recall that I lodged an OIA request for copies of any work the Bank had been doing on reforming the governance of the Bank. The Bank refused to release anything, in the process confirming the scale of the work programme they had underway (which appears to have included professional legal advice and discussions with the Minister of Finance). Given the sensitivities the Board has historically displayed around anything to do with governance – including Bulletin articles on related issues – it is simply inconceivable that there were no discussions at the Board, or papers to the Board, on the issue during the 2014/15 year. The Board might reflect that there would be at least as great a public interest in knowing that the Board has received, and discussed, a paper on that issue as on, say, “differences in methodologies in calculating and assessing the output gap”.
The Reserve Bank’s Board simply does not do its job well. It may be useful in some other roles – perhaps an occasional sounding board for the Governor – but the Board that is supposed to be focused on arms-length accountability and review, as agent for the Minister and the public. And yet it has never once published a critical comment about the Bank (in subject matter which is riddled with uncertainty and where mistakes and revisions to judgements are inevitable) It does not publish its minutes, its papers, its agenda (even with a lag) and is just as obstructive of OIA requests as Bank management. It is simply not worth the money we spend on it.
Readers might wonder why I harp on the issue. After all, the Board doesn’t cost that much. But recall just how much power the Governor, personally, exercises. The Board was supposed to provide the check on gubernatorial mistakes or misjudgements – counterweight to the unusual amount of power vested in a single unelected official. It has not done so, does not do so, and probably – as currently constituted – cannot really be expected to do so. We need serious structural reform of the Reserve Bank: decision-making by committees appointed by the Minister of Finance, and ex post review and analysis (of all limbs of macro policy) by a body that is better resourced and operates at much greater distance from the Governor and his senior staff.
 Although the Governor himself has an input. On one occasion, a former Governor adamantly insisted to the Minister that a certain former respected market economist not be appointed (he and the Governor had recently disagreed on the OCR). The Minister gave way (appointing instead someone who had recently been the political adviser in the office of one of his colleagues).