Governance Bites #150: Fiscal stewardship and intergenerational responsibility, with Sir Bill Birch

Sir William (Bill) Birch brings decades of high-level public leadership and governance experience to the conversation. A senior figure in New Zealand politics for more than two decades, he held several key ministerial portfolios, including Finance, National Development and Energy. During his time in government he was closely involved in major economic reforms and policy decisions that shaped modern New Zealand’s public sector governance. Since leaving Parliament, Sir Bill has remained active in the governance community, serving on a range of corporate and public sector boards. His experience spans government decision-making, board oversight, and strategic leadership, giving him a rare perspective on how governance works across both the public and private sectors.
In this episode, Mark Banicevich interviews Sir William Birch on fiscal stewardship and intergenerational responsibility. Sir Bill unpacks how boards can move beyond short-term performance to safeguard long-term value, drawing on lessons from managing national and organisational balance sheets. The conversation explores capital discipline, financial resilience, and the governance structures that counter short-term pressure. With practical insights on risk, debt, and decision-making, this is essential listening for directors committed to leaving organisations stronger for future generations.
Book: ""Bill Birch: Minister of Everything"" by Brad Tattersfield, https://natlib.govt.nz/records/42822277
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Transcript

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Hi, welcome to Governance Bites. My name is Mark Banicevich and today I again have the absolute honour of spending time with the Right Honourable Sir William Birch. Sir Bill, thank you very much again for your time. I really appreciate you sharing your knowledge. You're very welcome. Yeah. Sir Bill was a Member of Parliament [MP] in New Zealand between 1972 and 1999, both under the Muldoon government and then successive governments from 1991 under Jim Bolger. He was Minister of Energy and had a number of portfolios: Minister of Pacific Island Affairs and Minister of Finance. In fact, the biography calls him "Minister of Everything," which is pretty apt. So today the topic of conversation is around fiscal stewardship and intergenerational responsibility. Sir Bill, first question for you. Boards often focus on this year's performance. I remember attending a speech a few years ago, with Adrian Orr [then Governor of the Reserve Bank of New Zealand] talking about the short-term focus of corporates where they need a long-term focus. How should directors think about their duty to protect the interests of stakeholders who may not even exist yet— future shareholders, future taxpayers, future communities? What's the role of a board in that? Well, I think in terms of looking at the annual performance, it's got to be in the context of the long-term success of the company. I mean, it's just a step towards overall success over a long period of time. And I think the key thing there is to maintain a strong balance sheet. And you achieve that through fiscal discipline. I mean, I did six years as Minister of Finance from 1993 to 1999 and we set our minds at ensuring that we had a surplus through every year. And it was achieved by simply saying no to ministers. You cannot spend extra money unless you save that money from your current allocation. I mean, if you change your priorities, we have no problem with that as long as you can justify the change. But we need to get our debt down and we can only do that by not expanding our spending. So, we had a surplus for those six years and the debt came down quite substantially over that period, 'til we had it well down under 20%. That's right. Yeah. And I think I didn't find that too difficult. I mean, there were some teary-eyed ministers around, but they understood that they're part of a team and we had set our minds at improving the balance sheet and reducing the debt. You can only do that through fiscal discipline. The obligation of a director to act in the best interest of the company isn't just talking about today. It's talking about the long-term future of that company, isn't it. Oh, absolutely. Yeah. I mean, they should always have their eye on the balance sheet and make sure it remains strong. I mean, a company with a weak balance sheet is not going anywhere. No. What lessons have you learned from your political career, from those six years particularly as Minister of Finance, that help you manage corporate balance sheets? Well, I think that the example of fiscal discipline is the key. I mean, it's a bit like any household. You can't actually continue to spend more than the household earns. Yes. You've actually got to live within your income. In an earlier conversation, you also talked about the importance of cash flow. And we have a tendency in New Zealand, particularly in the residential sector, to have this fascination with property. We have a lot of debt to purchase that property and quite often we're asset-rich and cash-flow poor. So that becomes an important part in that too, doesn't it? Yes. But a strong balance sheet compensates for that to some extent, because if you've got a strong balance sheet, normally you can actually generate cash in times of crisis. Whereas if you've got a weak balance sheet, you can't. That's really the importance of fiscal discipline: to make sure that you are keeping your balance sheet strong enough to generate some cash if you need it.

So the simple lessons for corporates are: 4:25

(1) earn more than you spend, and (2) keep your debt to a manageable level for future options. Yeah. And sometimes there are differences between short-term and long-term decisions. But I mean, you can often make a short-term decision as long as you can cover it in the long term. Right. What lessons from managing a national balance sheet translate directly to corporate or not-for-profit boards when thinking about capital structure, borrowing, and risk? Yeah, well, those factors are all present in the private sector, as well. And I don't think there's too much difference between a household budget and a - A corporate budget or a national budget. - a corporate budget or a national budget. I mean, the principles are basically the same, although the scale and - The number of zeros. - factors around it are different. Yes. But the basic principle is that you cannot actually achieve good results with a weak balance sheet. And to achieve a strong balance sheet, you've got to live within your income. Right. And fundamentally, around the concept of borrowing, it means when you're borrowing money, you've got to have the cash flows to be able to pay the interest. And also be aware that the amount of interest may change as interest rates change over time. So you've got to have the flexibility or the fat in that cash flow to be able to accept the shocks when the interest rates increase, to be able to continue to pay the interest out of your balance sheet—out of your cash flows rather. Well, absolutely. And I mean, we've just had a period when the Reserve Bank hiked interest rates. The OCR, Official Cash Rate, went up to a point where it caused quite a lot of failures of companies. Yes. In fact, I've been amazed and disappointed at the extent that there has been of receiverships over the last few years. And those receiverships are a direct result of not being able to generate the cash to meet their obligations. Sometimes the IRD [Inland Revenue Department] obligations, you know, paying their tax. Yes. Sometimes paying the creditors. But it all goes back to living within your income over a long period. Yeah. And we had a bit of a double whammy, right. We had this period after the GFC [Global Financial Crisis] when we had interest rates that were quite, really, historically low. And if people were borrowing based on that expectation, as you say, when the interest rates hiked, there were some shocks there. But also we had a cost-of-living increase, so costs were going up quite quickly, as well. So any company that wasn't factoring in the possibility of those increases could have been caught blindsided by those, and end up in an awkward situation. Well, you could. Yes. Well, I think the good qualities that you need in a director are that conservative qualities that take those factors into account. They've got to be experienced enough to know that times of high inflation can get high interest rates because you're in the hands of the Reserve Bank. And even the government's got to live with that. Which comes back very much to the risk management concept of looking at today's cash flows, but also thinking what would happen if the interest rates—in the example that you just gave—they tripled, right. Absolutely. Yeah. Almost. Now I've been through that with my property company. I saw the interest rates rise from, I don't know, 5% to about 8% I think at one stage, and it made a huge difference to your cash flow, because you've got to pay those interest payments. It's also, I think, quite important to translate those percentage increases into dollars. Because a lot of us think an increase from 5% to 6% isn't overly significant. But when you translate that interest rate into dollars, it's actually a significant amount of extra money each week. Particularly when you've got a mortgage for three or four million [dollars]. Yes. Absolutely. From a governance perspective, how should boards build financial resilience into their organisation? You've talked about fiscal responsibility here. Is there anything else that is of importance? Well, it comes back to the overall balance sheet, maintaining a strong balance sheet. A strong balance sheet has got to be capable of being converted into cash in times of increased cash requirements. It's got to get you through that sort of period. So you need to understand the liquidity of your assets, as well. Absolutely. Yeah. But I think there are several ways of doing that. I mean, in my own case, I run a Kiwibank account which is there in the case of urgent cash requirements. Right. Yes. Having an emergency fund available, which we should do as individuals, as well as companies should have. Yes. And if there's suddenly a big tax requirement or something like that, I have to dig into that. Right. Yes. Governments talk about not passing today's costs to tomorrow's taxpayers. Do you think corporate boards sufficiently consider the equivalent issue about leaving today's leaders with structural finance for future generations? I'm not a great supporter of intergenerational wealth. I mean, I'm keen that my own family benefit from the assets I've got. I've got a private sector view about that. But I don't get carried away with the private sector having responsibility for other things like ESG [Environmental, Social, and Governance] and that sort of stuff. I think that's for the government to decide; if they want to do that, that's their business. But yeah, I mean, it does have an effect. I get even family members who are saying,"Look, I do want to invest in this company because it's involved in some activity." But I don't think that's... in the private sector, I think you've got to be thinking about generating investments that produce solid returns, and you've got to take everything into account, but you've got no obligation, I don't think, to look after government policies in that respect. And what about the corporate equivalent of today's directors making sure that they're considering the long-term future of the company rather than just the next bonus period, for example? Yeah. Well, a director is not doing her or his job if he's not looking at the long-term survival of the company. I mean, part of the responsibility of a director is to grow the benefits of the company, to make it more prosperous and do well. I mean, success in the private sector is generally measured in cash at the end of the day. Right. Yes. What governance structures or board disciplines best counteract that pressure of short-term results? Now, I know, for example, to elaborate on this, that we have, tend to have a structure in New Zealand where the CEO [Chief Executive Officer] is often remunerated on the basis of short-term, and in some cases, some long-term results, and directors tend to be paid more of a salary rather than being paid a bonus. But what sort of structures are in place to make sure that the CEO is focused on the long term, not just on the next bonus cheque? Yeah, interesting question, really. I mean, I guess that comes back to the framework of the company itself. I mean, my experience in private sector companies is that they are focused on growing the balance sheet of the company, making investments which give better returns over time. And I think that's fine. And I think along with that, you get better rewards for the CEO and the directors, as well. They should be remunerated. If the company's getting better results, they should share the benefits of that. I mean, the shareholders expect to get better returns if the company's doing well. Yes. But everybody should benefit and, I guess, in relevance to their contributions towards that success. Right. So, if the board is focused on the long term, in terms of its strategy, and then the CEO is responsible for a long-term strategy, then that will lead to that kind of long-term thinking. Yeah, that's right. Yeah. Well, I go back to that Freightways example that I gave you earlier. Yes. I mean, going into Australia was a no-brainer, really, I thought. The board weren't quite so enthusiastic about it, but it proved to be good. Yes. Your foresight in that case was particularly strong. How should boards think about external financial risks that largely sit outside of their control? Yeah. Well, I think that's what directors are for, as well, is to be aware of that. I mean, they've got to have enough common sense to be able to anticipate those risks or to identify those risks. I mean, the identification of risks is a major role for directors. You know, they've always got to be conscious of whether investment in a certain activity is going to produce an adequate reward for the size of the investment they're making. I mean, if it's not going to produce a good result, well, they shouldn't do it. So a huge portion of it is thinking about the risks that are outside of their control, and how they would react to those risks if they manifested. Yeah. Exactly, yeah. Not to the point where they're not, they're scared to make any investment. You can take that too far. But it's a measure of their ability, I think, to be able to assess a risk of that nature. All business is about taking risk, right. It's about taking the right risks and being careful in those judgements. From your perspective, where do modern boards most often misjudge long-term financial risk? Well, I think we've seen a fair bit of that recently in the construction industry. Yes. You've seen a lot of construction companies go under. Well, that, I think, is not adequately assessing the risk of the venture that they're getting into. Do you think there's anything in particular, any lessons that could be taken out of those failures across corporate governance that you're aware of? Now, I think there's been something in the construction industry which has been a bit soul-destroying in the last two or three years. I think it's probably not being able to gauge the demand in housing and high-rise buildings and things like that. You end up with high-rise buildings not being able to be sold and the construction company not being paid by the owner. Right. Yeah. Well, it's the construction company that takes the risk more than anybody there, I think. Yes. Although the landowner is also in a similar position. They are also such long projects with such long time lifecycles, right. Yeah, yeah. They can be such massive... So any one project for many construction companies will be a huge portion of risk for them, and if one falls over, it can be a massive problem for the business. Yeah. And you've got to take into account things like immigration risks, too—the government's policies on immigration. When that dries up, it influences demand on that sort of building. Yes. But there are a whole lot of projects outside of that, I think. I mean, government contracts generally for infrastructure are pretty safe bets. The government normally doesn't go broke on those. Yes. Absolutely. If a board's considering a major capital expenditure that may improve this year's dividends but increases long-term debts, what tests would you apply before you make that decision? Well, I think it depends on the extent. I mean, if you're going to put the balance sheet at risk with the long-term debts, you shouldn't do it. Right. Yeah. Absolutely. So, you'd be looking at, as you were suggesting over our conversation so far, your debt-to-asset ratio, your debt-to-total- assets ratio as a main test that you'd be looking at. Yeah, yeah. I'd certainly use that as a benchmark for any investment. Yeah. And then, of course, you'll be looking at your cash flow ratios, your quick ratio, and so forth, to make sure that the cash is there to pay the interest, both as it stands today, and as it might stand if the OCR were to be increased by 3%. Yeah. I've, in my 25 years on property management, I've used that ratio as being an absolute basis for making decisions, and by keeping below it, it has been a lifesaver for me. It's been of great value. So when a company that you're a director of has an opportunity for a project that'll increase dividends and return in the short term at a cost of debt, you would very much be looking at the risk appetite of the business, what its current debt-to-total-assets ratio is, and how much capacity it has for debt that still allows for the possibility of future shocks. Yeah. And its ability to repay that debt. Because the cost of debt is not something within your control. I mean, the Reserve Bank basically controls that to a large extent. For short-term debt in particular, but for long-term debt, it's even worse. It's overseas markets, right, that determine that cost. We've got even less control. Yeah. Exactly, yeah. And one final question for you. Over your career—through your political career, through your governance career in corporate governance and not-for-profit governance—what's the best advice you've received as a director? Oh, that's a pretty difficult question over that period of time. I'm sure you've probably got a long list if I left you long enough. Sorry. What come's to mind? Well, you don't get much in corporate environment, a private corporate environment; you don't get much advice as a director. I mean, who's going to give you that advice? You might use a consultant to give you advice on the quality of an investment or some characteristics of that investment, but I don't think anyone's going to give you advice about whether it's going to affect your debt levels or things like that. So let me clarify the question. I mean advice about how to be a director, advice about the sorts of things you do to be a good director. What's the best advice you've received from another director, or from a chair or something. Well, one thing is to understand the importance of that benchmark of a safe, of a strong balance sheet. You know, what characterises a strong balance sheet. Right. Because it can be different for different industries, right. Could be. Yeah, it could be. And I don’t know. I know in property it would, I wouldn't go above 40%. Yes. Yeah. Sir Bill, thank you very much again for your time. I really appreciate you spending time with me. Yeah, it’s been good talking to you, too. I’ll look forward to seeing you again soon, and see you next episode. Thank you for watching this episode of Governance Bites. We have more episodes on YouTube and your favourite podcast channel where I interview directors and experts on various topics relating to boards of directors and governance. We'd love to see you back, and please like, subscribe, and share the videos and podcasts.