Appointing a central bank Governor

I commented yesterday on the unusually powerful role the Reserve Bank of New Zealand’s Board plays in determining who will be appointed as the Governor.  The Minister finally makes the appointment, but he can only appoint someone the Board recommends.   And the influence  of Board members is multiplied because the Governor of the Reserve Bank of New Zealand exercises an unusually large degree of power.

In New Zealand, the Governor is single (legal) decision-maker (and recently provided a written reaffirmation of that position as practice as well as law). And the Bank exercises power not just over monetary policy, but over a raft of regulatory policy matters (as well as the administration of supervision) in respect of banks, non-banks, and insurance companies, and a variety of other generally less contentious discretionary functions (notes and coins, foreign exchange intervention, payments system, and the operations of the key securities settlement system).  And in many areas the Reserve Bank’s legislation is quite permissive, leaving considerable policy discretion to the person who happens to be Governor (LVR limits –  whether or not to have them, and how they should be used –  is one recent example).  Even in respect of monetary policy, as have seen in the last few years, the Policy Targets Agreement (inevitably and probably sensibly) leaves plenty of room for interpretation.

So who gets appointed to the position matters a lot.  That person, while no doubt in receipt of lots of advice, will have considerable discretionary influence in many areas.   They aren’t just technocratic judgements either.  Reasonable people will have quite different views on appropriate policy in a lot of these areas, partly reflecting differences in what weights they put on different considerations and values (fluctuation in unemployment vs swings in house prices, say).     And they are typically areas in which there are either no rights of appeal, or where the courts have been very reluctant to second-guess decisions of executive officials.  Unlike, say, the Minister of Finance, the Governor does not typically require new legislation or parliamentary approvals (Budgets mean nothing without securing supply in Parliament, and public money can’t be spent without parliamentary appropriations), and doesn’t even have to front up to question time in Parliament each day.   In formal legal terms, the Governor is not even subject to parliamentary control on the level, let alone the composition, of the Bank’s expenditure.

So the ability to determine who gets this role is extraordinarily influential.    But this power rests not with the Prime Minister, not with the Minister of Finance, not with the Governor-General, but with half a dozen low profile individuals, themselves appointed by the Minister of Finance but for five year terms (in a system with three year parliamentary terms).  These people operate in secret –   past Annual Reports have been bland exercises in supporting whoever the incumbent Governor is –  and face no parliamentary scrutiny either when they are appointed or, generally, at any time during their term.

Who are these people?

The current non-executive directors (plus the Governor who is also a director) are:

Rod Carr

Bridget Coates

Neil Quigley

Jonathan Ross

Tania Simpson

Keith Taylor

Kerrin Vautier

Mostly company directors, a couple of former senior finance sector executives, a couple of (mostly micro) economists, a couple of university administrators, and a lawyer.  I’m sure they are all fairly able people in their own fields, but why would we delegate to those people in particular the ability to determine who will exercise that huge discretionary power the Governor has.  I’m not aware that any of them has ever stood for, or been elected to, public office, and we know little of their preferences or views on the sorts of issue whoever is Governor will get to decide.  But those preferences (explicit or not) will almost certainly influence the sort of person they put forward.  When I worked at Treasury I helped provide advice to the Minister on possible Board candidates –  including some of those now on the Board –  but we never looked into the questions of Board members’ policy preferences.  The focus was typically on a range of experiences and skills to help do the ongoing monitoring role.  But in fact the power to determine who (and what sort of person) is appointed Governor is probably where the Board members have most influence, and the least scrutiny.

I’m not suggesting that they exercise that power carelessly.  Or that they are necessarily blind to the political environment.  Since the current Act was put in place, the Board has chosen two Governors (Don Brash was already in place when the Act was passed, and reappointments are a somewhat different matter).

There was quite a strong sense of political involvement in the process after Don Brash left in 2002. The then Prime Minister was furious with the Board for having allowed the Governor to be employed on conditions that allowed him to go straight from running the central bank one day to active party politics the next.  And word was also understood to have come down that the government would not be receptive to the nomination of a “Brash clone”, widely regarded as anyone who had been in senior management under Don Brash.   But my sense (I was second tier manager at the time) was that the Board played the process fairly straight.  They employed an executive search firm –  but I’m not sure how much effort the recruiters would have put into understanding the policy preferences and inclinations of candidates.  I understand that at the final interview stage it was a choice between Rod Carr (Deputy  –  and then acting –  Governor), Murray Sherwin, Deputy Governor until quite recently, and Alan Bollard.  People can debate whether Alan was really the best pick but all three were serious credible candidates.

In 2012, again an executive search firm was used.  I understand that the choice quickly resolved to one between the longstanding incumbent Deputy Governor, Grant Spencer, and Graeme Wheeler, with the suggestion that Board members were quickly wowed by Wheeler’s experience in international bureaucracies, and the big name referees he cited.  Again, on paper both candidates looked quite impressive, but I wonder how much effort the Board put into understanding and assessing the candidates’ policy preferences and inclinations.  And, of course, even if they had made time to, what qualified the Board members to assess those –  innately “political” – preferences and determine which set was, in some sense, “best”?  That, surely, is what we have politicians to do.

If the Board doesn’t do it, and the Minister can at no point impose his own candidate, then what we end up with is either a candidate who accords with the implicit (often unstated and perhaps unrecognized) biases, preferences, and interests of Board members, or something more random.  A person might be chosen because they are thought to be, say, a good manager, and/or, have some familiarity with macroeconomics and finances.  But what they might do with the considerable powers they are to be given is simply unknown –  even to the Board.  That simply isn’t good public policy governance.

I’m also not suggesting that if in 2002 and 2012 the appointment of the Governor had been solely in the hands of the Minister of Finance we would necessarily have had different people appointed.  Bollard and Wheeler both looked like establishment candidates when they were appointed,  As I noted, the Labour government in 2002 was pretty clear it didn’t want Brash people, and Alan Bollard’s give-growth-a-chance mentality (in contrast to perceptions of “crush growth Brash”), if it had ever been enunciated, would probably have resonated with Michael Cullen and Helen Clark.  And Bill English was known to have been keen to find a place back in New Zealand for Graeme Wheeler.  But those decisions really should have been in the hands of somone the voters could toss out, not a bunch of fairly anonymous Board appointees, who often enough will have been appointed by the previous government.

I can think of no other powerful independent office holders which are appointed, in effect, by unelected unscrutinised people.  The State Services Commissioner appoints head of core government departments, but those department heads typically have little or no policy flexibility –  policy is set by ministers, and departments advise and administer.  The State Services Commissioner himself is, in effect, appointed by the Prime Minister, as is the Police Commissioner. Judges are appointed by the Governor General, on  the recommendation of the Attorney General. The Chief Electoral Officer is appointed by the Governor General on the recommendation of Parliament, as is the Ombudsman. The Governor General is appointed on the advice of the Prime Minister.   And all boards of decision-making Crown entities (eg FMA, NZQA, TEC, EQC) are appointed by ministers (those Boards in turn employ chief executives, but the power rests with the Board, not with the CE.)

There is simply nothing comparable in New Zealand to the situation of the Reserve Bank in  (a) the extent of policy discretion held by an unelected official, and (b) the extent to which other unelected officials control the appointment of the person (the Governor) exercising that discretion.   It is a reach too far –  too much distance between those we elect, and the person exercising the (considerable) discretionary powers.  Perhaps it might matter a little less if these were decision-making committees being appointed (as is typical with central bank), but in this case it is one man –  and any one person while have his or her own biases, preferences, idiosyncrasies and flaw.

What happens abroad?  Well, typically the head of the central bank is appointed directly by politicians, most commonly the Minister of Finance or President. With a bit of help, I found a handful of countries where the appointment is subject to parliamentary ratification (the US is the most obvious example, but it is also the case in Japan, and in several emerging economies).  The Reserve Bank had an article not long ago on some of these issues, including a useful table on appointment arrangements etc ( I had editorial responsibility for the article, but have just noticed an error, in that the Japanese requirement for parliamentary ratification was somehow overlooked).

But what about cases at the other end of the spectrum?

In Sweden, the Governor (and other monetary policy decision-makers) are appointed by the General Council.  That might sound a bit like our Board, but it isn’t.  It is a parliamentary committee, appointed by MPs from their number, after each election, in proportion to the various parties’ representation in Parliament.  The Minister of Finance doesn’t get to appoint the decision-makers, but elected politicians certainly do.   (Note in Sweden the central bank has much less discretionary power than our Reserve Bank has, as it is ot responsible for banking regulation and supervision).

The closest parallel to the New Zealand arrangement is Canada.  The Bank of Canada also has, in law, a single decision-maker, the only other advanced country central bank to have such a model.  The Governor is appointed by the Board, with the consent of the Minister (in substance the same approach as in New Zealand). One difference from the New Zealand system is that members of the Board in Canada are appointed for three year terms (rather than five years in New Zealand) in a parliamentary system in which elections typically occur every four years (rather than three years in New Zealand).  It is also worth noting that in Canada the Secretary to the Treasury sits as a non-voting member of the Board, and that the Bank of Canada also has little or no responsibility for supervisory/regulatory matters.

My point is not that there are no parallels with the New Zealand model –  Canada, with quite old legislation and a much narrower range of responsibilities, is strikingly similar,  But our model remains quite unusual, and seems to leave a rather large democratic legitimacy gap: there is much more effective discretion for central bankers than was realized when the law was passed in 1989, few other central bank decisionmakers are appointed this way, and there is nothing remotely comparable in how we appoint key decisionmakers is other areas of the New Zealand government and public sector.

I suggested yesterday that at very least the Reserve Bank Act should be amended to provide simply for the Governor to be appointed by the Minister, taking advice and nominations from anyone the Minister chooses.  I also suggested the idea of parliamentary select committees hearing before any new Governor takes office, along the lines of the model now quite successfully used in the United Kingdom.  We don’t have a constitutional system of parliamentary ratification of appointments, or indeed for Parliament to be directly involved in making appointments (with the except of the important deliberately non-partisan positions such as the Ombudsman or the Chief Electoral Officer).  Perhaps one could argue that the Governor has so much power an exception should be made for his position, but I wouldn’t go that far.

As I noted yesterday, our FEC is less likely to do the scrutiny job well than, say, the House of Commons Treasury select committee does.  Able government members very quickly become ministers, and the ones who aren’t yet want to be soon.  Rocking the boat by openly asking hard questions of a ministerial appointee-designate probably isn’t particularly rewarded.  And, unlike the UK, we don’t have much a hinterland of able former ministers from the governing party who stay on in Parliament, and are often willing  –  and better positioned – to pose those sorts of questions.   Our select committees also simply aren’t well-resourced.  But FEC hearings would be better than the situation we have at present, and not being tied to actual MPS or FSR announcements (which are what Governors mostly front up to FEC for), the process might encourage more serious questioning.

(A reader got in touch to suggest something beyond FEC hearings: perhaps a debate in Parliament itself on the appointment, with the whips off.  That just seems too out of step with our system of government for me.  Apart from anything else, the policy inclinations and character of a person appointed to have big discretionary influence over monetary and financial policy doesn’t seem like the sort of area one would want to remove party discipline for. A Minister of Finance might reasonably tolerate his MPs grilling a Governor-designate in a select committee, but should be able to expect his party to ultimately support his appointee to such an important position. )

The Governor of the central bank is a position unlike the Ombudsman, the Chief Electoral Officer, or the Auditor General.  Those positions really need to be non-partisan in nature, since they are focused on the process of our democracy.   The Governor, by contrast, exercises considerably discretionary power, and it is the nature of things that there will be differences, often along partisan lines, in how the Governor should exercise that power.  There is a case for some specific policy decisions of the Governor to be at arms-length from the government of the day, but there is strong public interest in understanding the inclinations and preferences of the person appointed to the role.  Hard questioning of anyone appointed to a position wielding considerable discretionary power is likely to make for a better functioning system of government.  And sheeting home responsibility for those appointments to politicians whom we can turf out, rather than to little known appointees who owe citizens little and over whom we have little leverage, is perhaps even more fundamental.

The system of appointing the Governor really needs to change.