A boardroom coup?

The Reserve Bank’s Annual Report should be due out later this week.  With it, no doubt, will be the separate report by the Bank’s Board of Directors.  The Board has few/no executive responsibilities, and its prime responsibility is to (a) recommend the appointment of a Governor, and (b) to monitor the performance of the Governor.

The Bank’s own Annual Report is usually an anodyne affair, as no doubt it should be.  The Governor has plenty of other vehicles to comment on policy etc.  But the Board’s Annual Report should be different.  After all, it is the one time in the year when the Board makes a public statement.   But the operative word is “should”.  I wrote about last year’s Board report here –  that report said almost nothing, and seemed consistent with a Board view of itself primarily focused on “having the Governor’s back”, at least in public.  We’ll see soon if this year’s report is any better.

But then this morning, in a statement no doubt timed deliberately in advance of the Board Annual Report, came news that the Board had acted to replace both its chair, Rod Carr, and its Deputy Chair Keith Taylor.    In one of the odd and unsatisfactory features of the Reserve Bank Act, the Minister of Finance appoints Board members, but the Board members themselves appoint the chair and deputy chair from among their number.

And one of the practical problems of how the Act has worked since the new structure was put in place in late 2003 is that Board members have repeatedly (each year, since chair is an annual appointment) chosen former Reserve Bank staff as chair.  First Arthur Grimes (who had previously been Chief Economist and Head of Financial Markets) and since 2013 Rod Carr, former Deputy Governor (and Acting Governor for a time after Don Brash resigned).  I presume the Board liked the idea that the chair had some subject-specific expertise and experience, but the downside was that those chairs were all too ready to bring a management perspective to the Board.  When they ask questions, they might be the geeky questions that get asked on the internal Bank committees, it is too easy to get too close to management,  and externally they seem to have wanted to make sure they “have the Governor’s back”.   We saw a particularly egregious example of those sorts of faults in the way Rod Carr was egging on Graeme Wheeler, and backing him up, over Wheeler’s misjudgements in the OCR leak debacle.

But now Carr is gone, and with him his deputy Keith Taylor, replaced by the two economists on the Board: Neil Quigley (Vice-Chancellor of Waikato University) takes on the role of chair, and Kerrin Vautier becomes Deputy Chair.

In my experience, Quigley was always willing to ask hard questions, and look for alternative perspectives, even if that meant upsetting first Alan Bollard and then Graeme Wheeler.  Combined with a background that doesn’t include a stint in RB management, it looks like a step forward.

But it also looks as though the Board itself really wanted some things to be different. We are told:

Dr Carr said that he had advised the Board some months ago that he would not be seeking a further term as a Director of the Reserve Bank when his present term ends in July 2017. In light of that decision he had decided to step down as Chair.

But one might reasonably wonder if perhaps the causation was not the other way round?  Carr was in his first term as Board member, and could surely have expected reappointment to the Board by the current government.  Sure, he has a busy day job, but not necessarily any busier than it was when he first became Chair three years ago.   There might be a sense in which Board members had become discontented with Carr’s chairmanship, quietly foreshadowed the prospect of a “coup” at the next annual election, allowing Carr to go quietly, suggesting it was all his own decision.

The timing is also interesting given that Graeme Wheeler’s term expires a year (almost to the day) from now.  An experienced chair, in whom the Board had confidence, would have been a natural to oversee the process of identifying the person to serve as the next Governor.  That would have been so even if Carr had genuinely not wanted another term –  oversee the selection process, which would be over before Carr’s term expired, and then leave it to another chair to work with whoever is the new Governor.  By contrast, while Quigley has been on the Board for several years, he only becomes chair now, and has (as far as I’m aware) no experience in the leading a process to fill such a powerful role.  In itself, that shouldn’t be disqualifying –  and as I noted earlier, I think his appointment is a modest step forward –  but it does suggest something more in the nature of a board room coup has gone on.

If anything, Graeme Wheeler’s press release could be seen in the same light. I’m sure there was a nice laudatory press release from the then Governor when, in 2003, Rod Carr left the Bank staff.  And yet we get this today

When Dr Carr’s term ends as a Director, this will end a 10-year relationship with the Bank. Between July 1998 and July 2003, he was Deputy Governor and then Acting Governor of the Bank. In these positions he also served as a Director of the Bank until September 2002, since when Deputy Governors have no longer been Directors of the Bank. Dr Carr was appointed to the Board in 2012, and was first appointed Chair in September 2013.

Governor Graeme Wheeler paid tribute to Dr Carr’s contribution. “Rod has provided over a decade of invaluable service to the Bank, spanning key management and governance roles. He has been an outstanding Chairman and the Bank has benefited greatly from his intellectual rigour and sound advice and judgment.”

It is all a bit strange really.  Being a Board member is (supposed to be) quite different from being a senior manager, especially in the Bank legislative model.  And isn’t it a bit icky to have the person whose performance the Board, and Chair, are primarily responsible for monitoring lauding the excellence of the outgoing chair just a few days before the Annual Report –  the performance assessment on the Governor – is due?  I suspect Wheeler probably was rather keen on Carr’s unquestioning defence of the Governor.  But that might have been part of the problem –  just helping to reinforce that bunker mentality which characterizes the late-Wheeler Reserve Bank.

Today’s news really does start the process leading to the appointment of the new Governor.  I remain convinced that the Board –  all members unaccountable and barely known –  has far too much power in that process.  But better at least to start the current unsatisfactory model with something of a clean slate at Board chair level, and a perspective that isn’t shaped by a term as Reserve Bank senior manager.

PS: The Bank should probably be aware of the factual error in the press release.  Contrary to the statement in the blocked text above, Carr had served as a Board member throughout his term as Deputy (and Acting Governor).  He didn’t leave until the second half of 1993, and the provisions removing Deputy Governors from the Board weren’t in effect until after his departure.    It is all there on page 6 of the 2003 Annual Report.



2 thoughts on “A boardroom coup?

  1. It is about time we had a Board that can ask some serious questions and to ensure that any decision by the RB is properly backed by analysis and discussion. It is horrendous when ever interest rate rises it is in such desperate quick succession. We saw that with all RB governors, Don Brash, Allan Bollard and recently with Graeme Wheeler. There is a complete disregard for businesses to be able to respond to rapid interest rate rises. No business can respond fast enough to rising costs especially the building and construction sector that relies entirely on debt funded development.The construction industry has very small margins contrary to popular belief. Developers rely mostly on the market moving upwards to recoup a healthy margin without which due to enormous regulation and delays any development project is underwater on day 1.


    • A small minority of us have been trying to draw attention to the following phenomenon. Slowly, government advisorial staff are starting to take notice, beginning with the Treasury.

      A shift to explicit rationing of urban land supply, as with “compact city” policies and growth boundaries and even strictly sequential “infrastructure plans”, creates “monopolistic competition” and “extractive economic rent” in urban land, in place of a prior norm of “differential rent”. Differential rent merely involved “the lowest-cost land able to be utilised by the urban economy” as a superabundant resource – i.e. rural land; plus “differential” or “option” value uplift according to transport cost savings relative to the base; plus local amenity and/or clustering effects (the latter usually in tandem with higher incomes at those locations).

      When the urban land market changes like this, it is like an exponential chain reaction. Everything now capitalises into land values: income growth; lower interest rates; first home buyer subsidies; accommodation supplement; middle class welfare; increases in allowed density of development; public investments in infrastructure and amenities; population growth; negative gearing; etc etc. Many of these factors in the former, anchored, differentially-derived urban land market, were beneficial, and unfortunately the beneficial nature of them has become taken for granted in spite of the fact that they have ceased to be so to anyone but the land rentier class. On top of this, speculative effects kick in, and even “the maximum that people can stand to pay to be housed”, is regularly exceeded at points in the property cycle. In fact there is a down-shift on the part of every income-level cohort, in the standard of housing achievable, with the bottom cohort missing out altogether.

      Arthur Grimes and Andrew Aitken published a paper in 2010 with momentous consequences for the standard practice of modelling of urban housing markets by economists and planners. It has baffled the “experts” in the UK for decades, why “housing supply” theoretically enabled under a given Plan, by way of upzoning, never materialises. In fact even as a chronic housing shortage worsens and worsens, cycle after cycle, the supply response falls further and further short, with construction firms going bankrupt and employment in the sector falling, along with “productive capital” investment in the sector.

      Grimes and Aitken in their conclusion, stated: “all the profit potential from redevelopment is being impounded in rising site values”. First, this becomes an incentive to site owners to “hold” in anticipation of further inflation-proofed capital gains, and neither sell nor redevelop, but rather to attempt to acquire still more property with no intention of development. Second, developers are forced to carry exponentially higher costs of acquisition and financing of sites, which in combination with the constrained ability of end consumers to pay the extractive prices of “housing” – actually land rent plus the essential out-bidding of speculators – squeezes developer margins and increases risk to knife-edge levels.

      So finally I come to your point about the effect of the slightest interest rate increase….

      If you get it, please join the forces of enlightenment. There are a few good “bush economists” emerging out there – look at the comments on this thread:


      The Professor who is the author of the article, sees “evidence of problems” in the construction sector somewhat similarly to what you do. However, he needs schooling re the land market distortions that are the underlying reason.


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