Vapid slogans and other top-level public sector vices

When I wrote last week about Gabs Makhlouf, outgoing Secretary to the Treasury (whose serious misjudgements around the “Budget leak” mean he really should already have gone), a former Treasury official got in touch to say that while what I said seemed reasonable, if anything I was probably a bit too generous to Makhlouf.  Perhaps, but it is probably better to err on that side.

Perhaps what my former colleague had in mind was something like the perspectives –  raw and brutal – in a truly remarkable column published at The Spinoff by Tony Burton, formerly (until just last month) the deputy chief economist at The Treasury.  The title tells you most of what you need to know: “How bosses’ obsession with vapid slogans borked the public sector”.  One can only assume Tony doesn’t intend to look for work in the New Zealand public sector ever again…or at least for not as long as Peter Hughes, and the CEs appointed in his image and likeness, are in place  (Tony’s background was as a UK academic, so I guess he can always head back there).    Anyone with the slightest interest in the degraded state of policy advice and the New Zealand public service should read it.

The first paragraph will give you a taster

Sometimes on a Tuesday morning you may hear a low, vaguely rhythmic rumble coming from a Treasury meeting room. A handful of its middle-aged Pakeha bureaucrats will have descended from the department’s working floors where budgets and economic predictions are done to assemble around the table. Stalin humiliated his politburo by forcing them to sing along to a recording of wolves howling. The Treasury leaders are probably attempting a waiata, but the sound they produce is a drone of submission eerily similar to its Soviet precursor. Welcome to the New Zealand public service in 2019.

and this, of The Treasury

The collapse in the organisation’s expertise has been so profound that Treasury even appointed an HR professional to the minister of finance’s office. Think about that for moment. The Treasury are government’s main economic and fiscal experts. An important way for Treasury to help the minister of finance is to provide some of those experts for his office. Yet Treasury appointed someone whose area of knowledge is running Treasury as an organisation. Imagine you went to see a GP and were told the office manager was the most qualified person in the practise to provide medical advice. That is the position Grant Robertson is in.

If anything, he seems to have it in for Peter Hughes even more than for Makhlouf (I guess the latter will be gone next week, while the former rules the roost of the New Zealand public service).  Of Hughes as head of MSD (Burton worked in MSD when he first came to New Zealand)

One of his first acts was to command all staff to heed ‘Peter’s Principles’, of which there were 10. (Yes, he really did issue 10 commandments from on high, though I understand it didn’t take 40 days.) The status given to expertise in the organisation’s culture is best exemplified by the last principle: “’Just do it!’ means … just do it”.


There are a few bits where I’d disagree with his emphasis or interpretation (about history before his time) but it is really important reading –  entertaining, passionate, disdainful even, but raising profoundly serious concerns.  He doesn’t really offer solutions, but the first step to a solution has to be a broader awareness and acceptance of the problem.   There is no sign yet of that, and thus it remains difficult to be optimistic that anything will be much better when Peter Hughes finally gets round to appointing a new Secretary to the Treasury.

Nor is it clear that even the government, let alone the Opposition, really cares.

But New Zealanders pay the price for this decline and fall.

UPDATE:     A reader with knowledge of the secondees to Robertson’s office got in touch and suggested that the claim (see above) that “an HR professional” was appointed as one of Treasury’s secondees did not seem right.  I have lodged an OIA request with The Treasury to confirm one way or the other (which they could answer quickly but probably won’t), but further inquiries resulted in an email suggesting that one of the current Treasury secondees may be the person Burton had in mind.   Here is his LinkedIn page.     The person concerned is a relatively recent Treasury recruit, having joined in 2016, with degrees in Architecture and Public Policy.  Of his time before his secondment last year to the Minister’s office he writes

Company Name:  The Treasury – New Zealand
Dates Employed:  Apr 2016 – Present
Employment Duration: 3 yrs 3 mos
Location: Wellington
I worked on fiscal and policy issues spanning state services to transport, and worked with Treasury leaders on its organisational strategy.

He appears to have worked on a range of policy issues, but also “worked with Treasury leaders on its organisational strategy”.  It has been suggested to me, from people who should know, that this role would have been based in Human Resources.

I would have to say that, if this is the person who was meant, the paragraph in the original article is at least slightly misleading (personally, I feel misled as a reader).   Again, if it is this person, they do not appear to be what most would think of as an “HR professional”.   One might debate what sort of people Treasury should hire as analysts – as Eric Crampton has done vocally – and even how experienced secondees to the Minister’s office should be (bearing in mind that the role is usually more about managing relationships and paper flow, founded on a knowledge of the organisation and its people and the potential significance of the issues, than on providing substantive personal analysis or policy advice to ministers), but this specific claim in Burton’s article does feel like something of an overreach.  Initially I had found it the most compelling single thing in the article –  it was something new to me and quite specific, coming from someone who  –  in my limited dealings with him over the years –  seemed pretty careful about detail.  I should have been more sceptical.


On the ANZ affair

I’m no great fan of David Hisco, perhaps even less of John Key, and hold no particular brief for the ANZ either. I don’t now, and never have, worked for commercial banks.   I’m an ANZ customer, although largely by inertia rather than enthusiastic loyalty –  I was a happy National Bank customer, uneasy about the ANZ takeover, but actually I’ve not had any bad experiences so never went to the effort of changing banks.   But even with all that, and a couple of days on from my initial one-paragraph comment, I’m still at a loss to understand (substantively) why the Hisco expenses issue is exciting so many people and generating so much coverage from so many (ok, yes I’m now adding to it).

As a reminder, the ANZ New Zealand operation is a subsidiary (there is a branch as well, but ignore that) of a large Australian bank that has been operating in New Zealand since 1840.   There aren’t many post-settlement entities that have been operating here continuously for longer than that (Anglican, Catholic, and Methodist churches, and ……?). In that time, ANZ hasn’t failed, hasn’t been bailed out by the Crown, and has provided bank services to New Zealand well enough to, these day, be the largest player in the New Zealand banking market.

As customers, I’d have thought the main two things we’d want from our banks were that (a) they didn’t lose our money (or through some TBTF mechanism get the government to bail them out, and (b) that they provided the transactions and recordkeeping services tolerably well enough.  People can moan about banks all they like, and it can be a hassle to change banks in the shorter-term, but here we are talking about a bank operating in New Zealand for 179 years and counting.   Plenty of banks and quasi-banks have come and gone from the market in that time, as customers (new generations thereof) have preferred one institution over another.    Even the fact that today’s ANZ has grown partly by takeovers (Rural Bank, Postbank, Countrywide, National Bank) doesn’t change that story very much –  the most recent of those takeovers was 15 years ago, and ANZ must have offered the best deal to the vendors (presumably believing they could add most value through the purchases).   People can badly misjudge takeovers but, decades on, ANZ is still here, strongly capitalised and profitable (it isn’t, for example, akin to RBS taking over ABN-AMRO at the end of a frenzied boom).

What else might bother people?  Well, there is always the issue as to whether banks are “excessively” profitable.  I suppose my instinctive bias here is that of an old-fashioned central banker, preferring a profitable bank to the alternative.  But even setting that to one side, I’ve always been rather sceptical of the “excessively profitable” story, partly because the balance sheets of the New Zealand subsidiaries don’t tell the full story: the profits are not just a return on balance sheet equity, but also on the implied support of the parent banks in Australia.  I’ve also tended to emphasise the relatively open regulatory regime we have here, allowing new entrants to set up and take advantage of any (allegedly) excess returns.  But even if there is less to those stories than I have allowed, the merits of such arguments –  which might argue for a more active Commerce Commission involvement –  really shouldn’t be materially affected by the question of a (now-departed) CEO’s expenses, legitimate or otherwise, properly documented and reported internally or not.

I also get that some people are bothered by the level of senior executive salaries.  To be honest, at times I’m inclined to share those concerns (at least a little), perhaps especially around people who are really only second-tier employees in big Australian banking groups.  But what of it?  It is a private business, in a market where customers have alternatives.  If I really don’t like the fact that ANZ remunerates its top managers so well, I could shift my banking to, say, TSB.  They won’t be paying their CEO and top management anything like as much as ANZ is.

And then, of course, there is a scale of this particular issue.  We are told that the amounts involved are mid tens of thousands of dollars, spread over 10 years, so perhaps $5000 a year.   In respect of a person whose total remuneration over that ten years probably averaged $2million a year.  It seems quite appropriate for the ANZ’s group chief executive to want to tidy things up, and to be uneasy about how these expenses may hav been reported internally (details of which the public haven’t been told), but why is it a matter of any public – or legitimate political –  concern.  It is a private company.   Perhaps some people might be puzzled as to quite why ANZ pushed Hisco out over what looks like quite a small matter –  the question has been asked, is there something more to it –  but again, it is a private company, and Hisco is well-equipped to look out for his own interests, including ensuring that he has had good legal advice etc.    Perhaps one might expect the Reserve Bank, as prudential regulator (and that is all), to ask the ANZ a few questions, to ensure that the expenses issue isn’t a cover for more serious problems on Hisco’s watch but assuming it isn’t –  an ANZ would be in serious trouble, including with the ASX, if they were misrepresenting that  – that is about all the legitimate regulatory/political interest I can see.

The story has been used by people on the left, including trade unions, to run a “a bank teller would never get away with it” sort of line. But even if that has some rhetorical force, it shouldn’t.  For better or worse, a bank teller –  one of thousands doing similar jobs, on standard contracts –  would simply not have found themselves in the sort of situation where there was ambiguity about what was acceptable, or what had been subject to an oral agreement.  And had they somehow done so, and been fired, they’d have had recourse to their union and to the protections of employment law.

In various articles in the last few days, I’ve seen references to the idea that the banks somehow owe New Zealand for its support (as if to justify public involvement in the Hisco-Key affair).  There have been silly references –  no doubt channelling flawed lines from our bombastic populist Governor –  that somehow the banks were bailed out by the governmment in 2008/09.  They simply weren’t.  There was no risk of any significant bank failing in New Zealand at that time, whether from the funding/liquidity side or from credit losses and insufficient capital.  It is certainly true that there were various Reserve Bank and government direct interventions during that period, but those interventions were not about “saving the banks”, as about limiting the potential damage to the economy that might have arisen otherwise (extremely risk-averse banks – in the middle of a global crisis – would have pulled in lending more aggressively etc).  And cutting the OCR was no “favour” – in downturns, market interest rates tend to fall, and the Reserve Bank’s hand on the OCR is really just meant to mimic that.   I don’t want to take this line too far –  there is some interdependence, and banks operate in a system governed by parameters the political system has set up (eg having our own currency etc) –  but the robustness of the banks in 2008/09 was a credit primarily to them, their owners/managers etc, not to the New Zealand authorities.

We’ve also heard people talking about about the case for a Royal Commission into something around banking, the call we heard last year in the context of the Australian Royal Commission.    And here there is the suggestion –  I saw it in the Herald this morning –  that somehow again the banks owe the Reserve Bank and the authorities, because the latter “went out on a limb”, or “stuck their necks out” to protect the banks.  That is simply rubbish.  Rather, the Governor of the Reserve Bank (and to a lesser extent the FMA) were playing a populist political card when they launched their inquiry last year  – in an area where, as even they acknowledged, they had no statutory powers.  After all the hullabaloo, they found basically nothing (not that surprising, given that different context in which banks operate here and in Australia, especially as regards superannuation), but it hasn’t stopped them using the issue to claim some sort of moral authority over these private banks, operating in markets where customers have choice.

But even if there had been something to the conduct/culture issues, surely those were supposed to be about public facing issues, things directly affecting customers.  Whether some small portion of David Hisco’s large expenses bill was questionable, seems –  to say it again –  like a matter for the Board and management of the ANZ, perhaps even for the staff (confidence in the integrity of your leader) but simply not a matter for government agencies at all.

I guess that among the sound and fury on this issue, there will be a range of interests and motivations.  Some will even be quite genuine and public spirited.  But it is hard not to read the coverage of the last few days and think that at least some people are playing distraction.  Banks are never likely to be that popular, perhaps especially not Australian ones (despite the fact that New Zealand benefits from having its bank part of bigger offsore groups) and they make a convenient scapegoat. Perhaps that is especially so when the old enemy of the left –  John Key –  is chair of the bank’s local board (as I’ve written here before, I happen to think it is unfortunate –  at best –  to have former politicians so quickly on such boards).    It shouldn’t have been a great week for the government –  what with the GJ Thompson affair, meningitis injections, and so on –  and it hasn’t been a great time for the Reserve Bank (all that pushback against their unsupported radical bank capital proposals) , and one is left   –  perhaps unduly cynically – thinking that in some quarters there will have been quite an interest in playing distraction by feeding a beat-up on the ANZ, for what really looks to be a rather small, albeit untidy, mostly internal affair.  For me, if they keep my money safe, do my transactions competently, and don’t rort others on any sort of systematic basis, I’ll be pretty content.

Throughout this note, I have stressed that bank customers have choices and alternatives.  Faced with overly powerful, weakly accountable, government agencies, citizens really don’t.     When Peter Hughes gives gushy speeches about Gabs Makhlouf –  the man he is supposedly investigating –  we are stuck with the clubby system.  When a Supreme Court judge thinks it is just fine to go on holiday with a senior lawyer in a case before the Supreme Court, we have few effective protections.  And when the Governor of the (monopoly) Reserve Bank never gives substantive speeches about things he is actually responsible for, plays fast and loose with the Official Information Act, claims he has no resources to properly oversee the bank capital system (internal models and all) that the Bank itself put in place, all while spending a million dollars on a Maori strategy (for a body with little or no public-facing role), devoting his time and professional energies to personal passions, be it climate change, infrastructure, or whatever, there is also nothing we can do about it.  The amounts involved –  money diverted from core functions (under budgetary pressure) to finance the Goveror’s personal causes and whims –  is probably already at least as much as the Hisco case over 10 years.  But we can’t change central banks, can’t dump our shares in the Reserve Bank.  Perhaps these issues (for some reason) excite fewer people, but when the abuses and slippages are by high government officials, they need to be taken much more seriously, precisely because exit isn’t (for us, citizens) an options.  The small(ish) stuff needs to be sweated.

On which note, I saw a piece on the ANZ affair by Auckland lawyer Catriona MacLennan, I very rarely agree with anything she writes, but her final paragraph did strike a nerve.

I have been on the board of a non-governmental organisation for three years. We are not paid a cent for our work, but I and the other board members would consider we had completely failed in our responsibilities if we let unauthorised expenditure go unchecked for nine years.

The Governor, the Bank’s Head of Financial Stability, and the (outgoing) chair of the Bank’s Board Audit Committee, might like to reflect on questions around unauthorised (operational) expenditure over at least as long a time.