10. Controlling shareholders use a number of "shareholder levers" to ensure that their businesses will deliver agreed objectives. These levers include setting clear business objectives, approving management remuneration, monitoring performance and holding management to account for performance. One of the improvements brought about by the Executive is that these levers are applied in a more timely manner, whereas in the past public sector businesses were allowed to make poor investment decisions without sufficient critical challenge, or to record several years' poor performance without consequences.[28]

11. The Executive has the ability to replace management, particularly when it is failing to deliver business objectives, and also has a role in approving management remuneration, on which it can take external advice to ensure that the correct reward structures are in place.[29] These levers mean that management can be rewarded for good, and removed for poor, performance. The Executive has also strengthened the role of non-Executive Directors, particularly for the Trading Funds. Non-Executive Directors bring a range of skills to the Boards of these businesses, provide greater management challenge and warn the Executive when there are problems. The Executive currently provides details of management changes it has initiated in its annual report. [30]

12. A crucial lever not available to the Executive, but one which is available to equivalent bodies in the private sector, is the ability to arrange for the provision of finance to businesses where there is a robust case for investment.[31] Having this ability provides shareholders with additional influence on management and overall business strategy. Under the current system, however, such financing comes from departments or the National Loans Fund[32] and is counted against Departmental Expenditure Limits; senior officials must weigh up the need for investment in businesses against other public spending priorities. Public spending priorities will sometimes take precedence over public sector business investment, with a resulting lack of finance for businesses when needed, which is aggravated by their lack of direct access to capital markets.[33]

13. The Executive has negotiated a variety of relationships with government departments for working with businesses (Figure 1), which offer a pragmatic solution when a department is unwilling to delegate full responsibility to an external body for shareholder issues. Under the joint working arrangement with, for example, the Ministry of Defence (MoD), staff at the Executive work closely with the MoD's Directorate of Business Delivery and have a seat on the Ministerial ownership council.

14. Whilst the Executive has improved the government's approach to managing shareholdings, the good performance of some of its businesses in recent years (Figure 3) could be ascribed partly to favourable market conditions. The Executive's own internal measures point to an increase in the number of businesses with balance sheet risks, and to have strategies in place that will enhance shareholder value.[34] Eleven of the businesses in its portfolio made losses at some point in the last three years (Figure 4), and a number of its largest businesses face strategic challenges in the near future.[35] Problems often arise because businesses are not adequately compensated for delivering policy objectives or do not have access to investment, or because the shareholder levers are not used in a timely manner.

Figure 3: Total Operating Profits of the Executive's businesses 2000-2006

Notes:

1. As stated in the Shareholder Executive Annual Report 2005-06 (Annex A), the Shareholder Executive only advises on specific issues in relation to the Fire Service College and Northern Ireland Water Service. It does not therefore analyse the performance of these businesses in the Annual Report.

2. The figures for Northern Ireland Water Service show the net deficit on operations. This excludes the funding provided through money voted by Parliament, which accounts for the bulk of the agency's income, and will continue to do so until the introduction of charging in the context of the water reform programme.

Source: Shareholder Executive

29   Q 49-50 Back

30   Qq 13, 16, 23; C&AG's Report, para 2.7 Back

31   Q 8; C&AG's Report, para 2.24 Back

32   C&AG's Report, para 2.25 Back

33   Q 114 Back

34   C&AG's Report, Appendix 5, Figure 21 Back

35   Q 20; C&AG's Report, para 3.2-3.3 Back