In a piece on the Future Fund on Wednesday I was prematurely positive about Peter Costello not entering into the public arena with complaints about the board selection process.

He let fly on the ABC’s 7.30 last night. He called the process that has led to the appointment of David Gonski as chair of the Future Fund board of guardians “a shemozzle” and that it was not good corporate practice.

Whether or not it was good practice is a matter for judgment.

Should a person who advises shareholders on board composition be ruled ineligible for appointment to that board? The public record is silent. There is no guidance in the Australian Stock Exchange corporate governance guidelines, or the OECD guidelines on corporate governance on whether or not this is good practice. Sometimes it happens.

Should a chair of a board be chosen from among internal candidates? That is much more common, but not essential. It can lead to inward looking and complacent boards.

Executive search processes can aid such complacency. Boards will conduct a national or international search for a candidate for chair or CEO, and following the search, to amazing fanfare, they announce that the best candidate was sitting under their noses all along. That kind of vanity searching is as bad as vanity publishing. Better corporate practice is that a search is done when a board is serious about getting in someone new.

What is undeniably poor governance practice though is when board members speak out in public against their board chair.

It will be hard for the Future Fund board to work in a cohesive fashion in the face of such public division.

There have been two strands of comment about the Future Fund appointment process: that it should be more open and transparent, and that it should be more like the corporate sector. These two are inconsistent.

Appointments to large corporate boards are anything but transparent. They are done behind closed doors, with no publicity until the favoured candidate emerges.

At the extremes, some companies still cling to the English tradition of board selection by what private school and university a candidate attended, how they behaved in the rugby locker room, and the gentleman’s club they belong to. That is clearly poor governance, and something professional bodies such as the Australian Institute of Company Directors have been aiming to overcome.

There are good practices in selection of a good range of skilled directors who can represent the interest of the shareholders. The problem in the public sector is that the shareholder or owner interest is represented by the government of the day. We can’t complain — that’s how democracy works. But it does mean the government will be criticised by the opposition for any decisions, and there will be a dispute about how well the interests of citizens are represented.

In the public sector, therefore, there is a case for greater transparency and an arms-length selection process. Professor Meredith Edwards argued for this in yesterday’s edition of The Australian Financial Review.

Her solution would include an impartial panel, with departures from the panel recommendations to be tabled in a parliament. It is not a complete answer (who selects the selectors?) but better than what we have now.

The outburst from Costello is hard to understand. It is not going to change the outcome of the selection process, but will add to tension in the board. A divided board is a less effective board. It is a good thing the Future Fund has effective and competent management, or we would be really worried.

Maybe he was egged on by his former colleagues who are still in politics. Perhaps he was just caught up in the moment.

All one can surmise from the public record is that Costello felt some sort of entitlement. He said last night “… the Future Fund was something that I conceived, I legislated it and I put every dollar of capital into it — every dollar”.

That is an overstatement. The advisers in his office, the officials in Treasury, his colleagues in Cabinet, and the Coalition members who voted for it also had a hand in creating the fund. The capital came not from Costello’s pocket but from taxpayers. He should take credit for his surpluses and is entitled to do so. Remember though that a surplus comes about only because the tax revenue we pay to government exceeds its spending.

It is also a rather tricky argument to suggest that because a politician thinks up a fund — or any other government body for that matter — they become the right person to look after it.

That would create a perverse incentive for ministers to set up high-profile independent bodies as often as possible, in the expectation of being appointed to their boards.

Some jurisdictions, such as the USA, go so far as to prohibit cabinet members from ever being appointed to the bodies with which they had dealings while they were in the executive. There, the problem of conflict of interest and a desire to control excesses by the executive government are the prevailing governance principles.

It all shows how difficult this whole business of public sector boards is, compared with the private sector.

Peter Fray

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Peter Fray
Editor-in-chief of Crikey