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Office of the Comptroller and Auditor General
The States as Shareholder - Follow-up
14 March 2019
R.25/2019
The States as Shareholder - Follow up
Introduction
- The States control seven companies. These have a substantial financial impact for the States and economic impact for the Island (see Exhibit 1). These companies comprise:
- four strategic investments' with a total valuation of £374 million at 31 December 2017; and
- three other companies the results of which are consolidated in the States' accounts with net assets of £1,270 million at 31 December 2017.
Exhibit 1: States of Jersey controlled companies
Company | Nature of company | Percentage of share capital | Percentage of voting rights | Valuation at 31.12.17 | Net assets at 31.12.17 |
Jersey Electricity plc | Limited by shares | 62% | 86% | £88.4m | - |
Jersey New Waterworks Company Limited | Limited by shares | 76% | 83% | £43.7m | - |
JT Group Limited | Limited by shares | 100% | 100% | £212.0m | - |
Jersey Post International Limited | Limited by shares | 100% | 100% | £30.6m | - |
States of Jersey Development Company Limited | Limited by shares | 100% | 100% | - | £57.5m |
Andium Homes Limited | Limited by guarantee | n/a | n/a | - | £789.6m |
Ports of Jersey Limited | Limited by shares | 100% | 100% | - | £422.8m |
Source: States of Jersey Annual Report and Accounts for the year ended 31 December 2017 and Annual Reports and Accounts of controlled companies
- Although each company has its own management with responsibility for effective stewardship of the company, the States have an important role as owner to ensure that their interests are being protected and advanced. Discharging this responsibility requires:
- clarity about the objectives of ownership;
- measurement of performance;
- effective engagement;
- clear arrangements for holding management to account; and
- sufficient resources and expertise.
- In 2014 I undertook a review of the States of Jersey shareholding in the JT Group Limited (JT) to:
- report on the adequacy of the States' governance arrangements to discharge their responsibilities as a shareholder; and
- follow up the recommendations from a 2010 consultancy report on the proposed shareholder relations function.
- My report made wide-ranging recommendations, from identifying the reasons for ownership of JT to improving public accountability about its performance. Many ofthe recommendations were applicable to the other companies controlled by the States. Indeed, with the incorporation of Andium Homes and Ports of Jersey, the number of States controlled companies has increased from five to seven.
- More recently, the States have announced a move to a new Target Operating Model. This will involve the retention of an investment function in States Treasury and Exchequer and the establishment of a client-side partnership function in the Growth, Housing and Environment Department. The new arrangements are not yet fully established.
Objectives, scope and approach
- The objectives of the review are to evaluate:
- the progress Treasury and Exchequer has made in implementing agreed recommendations;
- the extent to which the recommendations as implemented have addressed the improvement areas identified in the report;
- the adequacy of plans for the implementation of any outstanding recommendations; and
- the effectiveness of the design and operation of the current governance arrangements for the States as shareholder.
- The review focusses in particular on the States' role as the sole shareholder of JT and Ports of Jersey Limited (PoJL). It does not extend to the internal governance arrangements of the States controlled companies.
- In undertaking the review, I looked at the areas identified in my 2014 report (Exhibit 2).
Exhibit 2: Focus of my work
Monitoring
Reasowonsningf or against Novatersure ightof accountabilityPublic
objectives
Reasons for owning
- Clarity about whether to own a company and the reasons for ownership are necessary preconditions for effective monitoring as a shareholder. In my 2014 report I highlighted the changed nature of JT's business, involving new activities and an increasing volume of activities outside Jersey. I concluded that, as a result, it was appropriate to reconsider the decision to own the company and the reasons for doing so.
- Although there was a recognition of the need to address my recommendations and some initial steps were taken, progress on implementation has been slow (See Exhibit 3).
- I recognise that, in the context of the JT Group, States Treasury and Exchequer was dependent on the development of the Telecommunications Policy that was not published until January 2018. In November 2018, the States appointed consultants to review the shareholder governance oversight arrangements, including making recommendations concerning objectives of ownership. The consultants have recently completed and reported the results of their work.
Exhibit 3: Reasons for owning: progress in implementing recommendations
Recommendation |
| Action |
| Evaluation |
R1 Reconsider whether the States wish to continue to own JT in whole or in part and, if so, articulate clearly all the objectives of ownership. |
| Overall arrangements
|
| Partially implemented Since the publication of my 2014 report, there has been:
However, there is a recognition of the need to refine or develop objectives of ownership of all States controlled companies. |
Recommendation | Action | Evaluation |
| Jersey Telecom
Ports of Jersey
| The appointment of consultants in November 2018 provides an opportunity to progress this recommendation. However, successful implementation will require effective working between the shareholder function in States Treasury and Exchequer and other departments responsible for policy development. |
R2 Schedule periodic reviews of the States' continued ownership of JT and associated objectives. | No periodic reviews of the States' continued ownership of JT and PoJL have been scheduled. | Not implemented Implementation of this recommendation is dependent on the implementation of recommendation R1 above. |
Monitoring against objectives
- In my 2014 report I highlighted the importance of developing and monitoring performance against objectives for ownership. I recommended:
- the adoption of Key Performance Indicators (KPIs) that stemmed directly from the reasons for ownership as expressed in the Memorandum of Understanding (MoU) in place between the States and a controlled company; and
- the adoption of a specific metric relating to risk appetite.
- Progress in implementation of my recommendations was in part dependent on the development of clear objectives for ownership that, as discussed above, have yet to be formulated. Progress has been slow but the development of proposals for KPIs is within the scope of the consultancy review commissioned in November 2018 (see Exhibit 4).
Exhibit 4: Monitoring against objectives: progress in implementing recommendations
Recommendation | Action | Evaluation |
R3 Adopt and monitor performance against Key Performance Indicators (KPIs) that are directly linked to all the ownership objectives in the MoU. | Overall arrangements
Jersey Telecom
| Not implemented. Performance monitoring relates to the JT / PoJL Business Plans that are developed by the companies. These are not driven by agreed objectives of ownership as these have yet to be developed. Much of the monitoring is around financial objectives. |
Recommendation | Action | Evaluation |
| However, the approval process is in the absence of agreed objectives of ownership.
Ports of Jersey
|
|
R4 Adopt a specific objective to reflect the States' risk appetite as shareholder and associated Key Performance Indicators. | Overall arrangements
Jersey Telecom
| Not implemented No objective has been adopted and no KPI has been identified in relation to risk. Discussions of risk have taken place but in the absence of an agreed risk appetite from the States. |
Recommendation | Action | Evaluation |
| in the context of the States' risk appetite.
Ports of Jersey
|
|
Nature of oversight
- To serve as an effective shareholder the States must have the resources, tools and approach that allows them to perform the function effectively. In my 2014 report I recommended:
- reviewing the resources devoted to the shareholder function;
- undertaking a thorough review of the MoUs; and
- reviewing the nature and frequency of meetings between the States and the company.
- There is evidence of action to enhance the resourcing of the shareholding function. However, arrangements are yet to be finalised as part of the move to the Target Operating Model. Progress on review of the MoUs has been slow (see Exhibit 5).
Exhibit 5: Nature of oversight: progress in implementing recommendations
Recommendation |
| Action |
| Evaluation |
R5 Reconsider the resources devoted to the shareholder function, including in light of the change in the nature of JT's business and the increased risk to the States' investment. |
|
a new Director of Treasury Operations and Investments in April 2016;
|
| Partially implemented. Resources have been reconsidered and the shareholder function strengthened. However:
|
Recommendation | Action | Evaluation |
| shareholding matters, have been put on hold pending the new Target Operating Model which separates the investment management function and partnership liaison function.
| arrangements being established for a client-side partnership function. |
R6 Undertake a thorough review of the MoU. | Overall arrangements
Jersey Telecom
| Not implemented The JT MoU has not been updated in response to either the 2010 consultancy review or my 2014 review. The PoJL MoU does not fully reflect the recommendations from the 2010 consultancy review or from my 2014 review. |
Recommendation | Action | Evaluation |
|
Ports of Jersey
|
|
R7 Provide a clearer definition of proposed transactions | Jersey Telecom The JT MoU has not been revised and updated since my 2014 review. | Not implemented |
Recommendation | Action | Evaluation |
for which consent is required, taking into account the size, context and risk of the proposed transactions. | Ports of Jersey The MoU defines 'Important Management Decisions' that require Ministerial approval. However, these are very similar in nature those specified in the JT MoU which has not been updated since my 2014 review. |
|
R8 Consider whether transactions in respect of specific infrastructure should require prior consent. | Jersey Telecom
Ports of Jersey
| Partially implemented The recommendation in my 2014 report arose from the MoU for JT specifying two specific assets rather than, for example, core telecommunications infrastructure in the context of the States' wider objectives for JT. The PoJL MoU imposed a wide duty for notification but this was based on whether assets were transferred rather than the purpose for which the assets are used. |
R9 Review the form and frequency of meetings required in the MoU. | Jersey Telecom
| Partially implemented Although the form and frequency of JT meetings has not been reviewed within the JT MoU, meetings are taking place on a regular basis and there is a good level of engagement between JT and the shareholder function. Regular meetings |
Recommendation | Action | Evaluation |
|
| have been held between the States and PoJL but these were not fully in accordance with the requirements of the MoU. |
R10 Extend the requirements for Ministerial approval to remuneration of directors of subsidiary companies. | Overall arrangements
Jersey Telecom
Ports of Jersey
| Implemented |
- My concerns about MoUs extend beyond the two companies that are the specific focus of this report. For two other companies there are no such MoUs in place. Where they exist, the MoUs have rarely been reviewed and some have remained unchanged for over a decade. Where they reflect non- financial objectives of ownership, these are often not fully developed (see Exhibit 6). For example, three of the MoUs contain a very general objective about being a good employer' which does not provide a sound basis for developing Key Performance Indicators:
be a good employer; and be responsive to the wider interests of Jersey's Island community within the framework of any licence under which it operates. For the purposes of this objective, responsiveness will be measured by reference to the fact that a significant portion of the Island's residents are likely to be included in [the company's] customer base and therefore the interests of customers will be closely aligned to the prosperity and well-being of the Island.'
Exhibit 6: Memoranda of Understanding
Company | MoU in place? | MoU reviewed since inception? | MoU reflects both financial and social objectives? |
Jersey Electricity plc | No but Relationship Agreement in place - a requirement of Stock Exchange listing rules | Relationship agreement dated 14.11.14 | No objectives set out. Agreement focusses on legal aspects of relationship |
Jersey New Waterworks Company Limited | No | No MoU | No MoU |
JT Group Limited | Yes | Dated 01.01.06 No evidence of review | Yes - but limited |
Jersey Post International Limited | Yes | Dated 08.09.06 No evidence of review | Yes – but limited |
States of Jersey Development Company Limited | Yes | Dated 07.03.12 No evidence of review | No |
Andium Homes Limited | Yes | Dated 16.05.13 No evidence of review | Yes - but limited |
Company | MoU in place? | MoU reviewed since inception? | MoU reflects both financial and social objectives? |
Ports of Jersey Limited | Yes | Dated 01.10.15 No evidence of review | Yes - but limited |
Public accountability
- Although some of the States owned companies are operating in the commercial sector, they are owned by the public and so high standards of transparency can be expected unless there is a compelling reason to the contrary.
- In my 2014 report I highlighted that JT published only abbreviated rather than full accounts. As a result information that would be in the public domain for the States or for a UK company was not publicly available. JT's full accounts are now published as are those for PoJL (see Exhibit 7).
Exhibit 7: Public accountability: implementation of recommendations
Recommendation | Action | Evaluation |
R11 Require the publication of the annual accounts of JT excluding only those notes where the States are satisfied that publication would prejudice its commercial position. | Full accounts for JT and PoJL are laid before the States Assembly and publicly available. | Implemented |
- Public accountability is not only about the numbers in the annual accounts but also about the accompanying words in the annual report. I highlighted above the identification and management of risk appetite. In my 2014 report I highlighted the risks associated with expansion into new activities and operations outside Jersey. I would expect such risks to be reflected in an annual report that is fair, balanced and understandable.
- It is interesting to note that Jersey Post explicitly discloses the risks relating to off-Island activities in its Annual Report even though such activities represent only 30% of its activities. In contrast, JT does not disclose the risks even though off-Island activities represent over 50% of its activities. I am concerned that:
- JT's Annual Report and Accounts does not disclose the scale of off-Island activities; and
- Although Jersey Post's Annual Report does disclose the scale of off-Island activities, its audited accounts do not include reporting of performance by major segments, including geographical segments.
- Such reporting is required for UK listed companies but is discretionary for JT and Jersey Post and has not been required by the States. Segmental reporting would enhance transparency by providing better information on the performance of States owned companies that linked directly to the risks to which they are exposed.
- I also found that the disclosure of significant risks to the business of JT and Jersey Post in their Annual Reports is limited and falls substantially short of the requirements placed on UK listed companies. Enhancing the public disclosure of risk would provide increased transparency of the operations of States owned companies.
Conclusion
- Progress in implementation of my previous recommendations, both in respect of JT and other States controlled companies, has been slow. Action is now in hand including:
- engagement of consultants to review the MoUs with controlled companies; and
- structural changes arising from the move to the new Target Operating Model that has established a client-side partnership function in the Growth, Housing and Environment Department.
- However, it is too early to evaluate the impact of these steps.
- The reasons for the slow progress in implementing recommendations that were accepted by management are less clear. I would identify two potential reasons:
- a culture where there was not a strong corporate priority to implement recommendations and monitor and report that implementation. Implementation was seen as the responsibility of States Treasury and Exchequer as the shareholder function. However, States Treasury and Exchequer was not responsible for the development of relevant policies that articulated why companies were owned or the non-financial objectives of ownership. In the absence of an agreed Telecommunications policy it was difficult for States Treasury and Exchequer to implement many of the recommendations I previously made; and
- a disparity in the expertise of the shareholder function and the controlled companies. Effective oversight of controlled companies requires significant insight into the operation of companies operating in different sectors. I welcome the strengthening of the shareholder function since my previous report but I consider that bought-in capacity is required to secure the expertise in different sectors to ensure that the shareholder function is fully effective.
- Many institutional investors formally adopt recognised principles, such as the International Corporate Governance Network Stewardship Principles or the UK Financial Reporting Council's Stewardship Code. Such principles require, for example:
- public disclosure of policies on how investors will discharge their stewardship responsibilities;
- robust policies on managing conflicts of interest in relation to stewardship which should be publicly disclosed;
- effective monitoring of investee companies;
- establishment of clear guidelines on when and how investors will escalate their stewardship activities;
- a clear policy on voting and disclosure of voting activity; and
- periodic reporting on stewardship and voting activities.
- In a UK public sector context, the Cabinet Office's Partnerships between departments and arm's-length bodies: Code of Good Practice sets out four principles:
- a mutual understanding of purpose, objectives and roles;
- a proportionate approach to assurance;
- a sharing of skills and experience to enhance value; and
- open, honest and constructive engagement based on trust.
- Adoption of recognised stewardship standards, reflecting both the ownership interest and the non-financial ownership objectives of the States, would provide a public demonstration of the States' commitment to acting effectively as a shareholder on behalf of the public.
Recommendations
R1 Review all outstanding recommendations from my 2014 report in the context
of all the States owned companies and, where recommendations are accepted, agree an action plan for implementation, with clear timescales and responsibilities.
R2 Take into account the findings of the consultancy review currently in progress
in developing the agreed action plan.
R3 Prioritise the development of the Ports Regulation Policy and Postal Services
Regulation Policy and reflect timescales and responsibilities in the agreed action plan.
R4 Adopt a policy for the enhanced transparency of public reporting by controlled
companies.
R5 Undertake a formal post-implementation review of the effectiveness of the
new arrangements for oversight of controlled companies under the Target Operating Model, including the shareholder and client-side functions, by the end of 2019.
R6 Adopt, with appropriate adaptations, recognised standards for stewardship as
an investor, reflecting the non-financial ownership objectives of the States.
KAREN McCONNELL COMPTROLLER and AUDITOR GENERAL
JERSEY AUDIT OFFICE, DE CARTERET HOUSE, 7 CASTLE STREET, ST HELIER, JERSEY JE2 3BT T: 00 44 1534 716800 E: enquiries@jerseyauditoffice.je W: www.jerseyauditoffice.je