Tuesday, 4 June 2013

The Novopay Inquiry: Lessons from Lombard

I have a number of concerns about Stephen Joyce's Ministerial Inquiry into the Novopay debacle. First, a cabinet minister picked the investigators to undertake the inquiry. If an inquiry is to be undertaken that in part investigates the conduct of ministers and if the process is to have the appearance of independence, cabinet should remain removed from the appointment process. 

Secondly, the report  cleared ministers but blamed advisers; that is that the Ministers relied upon bad advice and are therefore are not to blame. This ignores the constitutional convention of ministerial responsibility in the Westminster system whereby a cabinet minister bears ultimate responsibility for the actions of their ministry or department. 

Lastly, what shouldn't be forgotten is that the same type of argument was run as a defence and rejected by the Court in the prosecution of Sir Douglas Graham et al over the Lombard collapse. 

"Michael Reeves, who read from a prepared statement when he gave evidence in the Wellington High Court yesterday afternoon, said not only did Lombard never respond to any regulatory authority without legal advice, but any document sent to an investor received the same treatment. Whatever area that advice covered, be it legal, audit or accounting related, the advice was always followed, Mr Reeves said." (NBR "Lombard decisions based upon expert advice - former CEO" 7/12/11)

In part the downfall of the directors of Lombard Finance came not from dodgy dealings, but from their failure to ask appropriate questions about the advice received. 

In R v Graham [2012] NZHC 265 (the Lombard decision) the directors argued that they properly relied on management and external professional advisers (eg professional auditors, the trustee and solicitors). Dobson J found that a  director cannot ignore an issue with an offer document raised by a professional adviser. Similarly directors cannot claim that they met the standard of care expected of them, "....  in the positive sense to the absence of warning signals from competent external advisers". The absence of such warnings may make it "marginally easier" for directors to establish a reasonable belief, however it is ultimately "directors' obligations in relation to the accuracy of content of offer documents are non-delegable". 

The same is true for reliance on management. Dobson J found that as long as directors adequately monitor management, and there is nothing to put the directors on notice of the need for further inquiry, "reliance on information provided by management in their delegated areas of authority will generally be appropriate". As Dobson J opined, "Directors are appointed to exercise judgment and that extends to testing the competence of management within areas in which managers are relied upon". 

The same logic has to apply to running the country. It is disturbing to me that those who are appointed to run a  private business are held, in the Lombard case, to a higher degree of personal accountability, than those who run an entire country. 

Labour's education spokesperson, Chris Hipkin's was right when he said, "... ministers had to ask the difficult questions about advice provided to them. "It is up to the ministers to say, "That advice is not good enough and I want better."" (Dompost 5 June 2013).