12 January 2010

ASC Board: changes ill-advised

On 15 December 2009 the Minister for Finance announced the retirement (completion of term) of two directors of ASC, and the appointment of four new directors.

The retiring directors are:

(1) Dr Bill Schofield AM, a lifetime defence scientist, having served in various positions in the Defence Science and Technology Organisation (DSTO) from 1965 to 1991. From 1995 to 2001 he was Director of the Aeronautical and Maritime Research Laboratory at Fisherman’s Bend. In my time as Secretary, Department of Defence, he played a key role in the resolution of outstanding technical issues with the Collins Class submarine. As a member of the Kinnaird Review of defence acquisition which reported in 2003, he was instrumental in the recognition by government of the role which DSTO can play in minimising and managing technical risk in major defence projects. At the time of his retirement from the ASC board he was chairman of its risk committee, a function in which domain knowledge would appear to be critical.

(2) Mr Michael Terlet AM, who spent twenty years in defence industry before retiring in 1992 and becoming a professional company director. He was Chief Executive Officer and Deputy Chairman of AWA Defence Industries, prior to which he was Managing Director of Fairey Australasia Pty Ltd at the time of its merger with AWA.

The new directors are Ms Sally Pitkin, Mr John (Jack) O’Connell AO, Mr Bruce Carter and Mr David Miles AM. So we have replaced two engineers with four professional company directors, two of whom are lawyers and two of whom have an accounting background. None, as far as I can see, have any domain knowledge concerning the building and sustainment of submarines.  In his media release announcing their appointment (see here), Finance Minister Lindsay Tanner said:

... the appointees bring a range of skills and experience in legal and financial matters to the board, and will enhance the board’s high level of expertise and standards of governance.

The new appointees on the ASC board join its Chairman, Vice Admiral Chris Ritchie AO RANR (who has a background  in surface ships), Director Mr Geoff Phillips (a company director with a background in finance and management), and newly appointed Chief Executive Officer and Managing Director, Mr Stephen Ludlam (formerly President – Submarines for Rolls Royce (UK)), bringing the total Board membership from five to seven.

This means that the only person on the board as reconstituted who has a deep background in submarines is the Chief Executive Officer.

Several questions arise. None of what follows is to be taken as questioning the suitability of any single member to serve on the ASC board – each person individually clearly has the background and qualifications to make a contribution to the governance of ASC. My questions relate to balance of skills, where the Government thinks it is heading, and what is really going on here.

In no particular order my questions are:

(1)  Why was it considered necessary to increase the size of the ASC board at this time?

(2)  Given that the board was being increased in size, why was it decided to narrow the range of skills available? Why not, for example, retain Dr Schofield and Mr Terlet, and simply appoint someone with a legal and someone with an accounting background?

(3)  What does this change signify regarding the Government’s approach to ASC?  Does it see this wholly owned entity as a fundamental element of Australia’s defence capability, or is it just another company which the government still hopes to sell one day? Is the Government more interested in the sale price it will one day receive than it is in the defence value of the last remaining Australian-owned prime defence contractor? The Government’s ongoing refusal to commit to ASC as the designer and builder of the future submarine, the only sensible game in town, suggests that the defence value of ASC is seen to be of small moment.

(4)  The key risks faced by ASC are technical risks, not the normal range of commercial risks. Now that the only person on the Board with domain knowledge of submarines is the CEO, who will ask management the hard questions? Who will evaluate the answers it receives? How will the board know what risks it is taking on? Who will chair the risk committee?

Given that the Government shows no sign of moving with the alacrity required to bring the future submarine into service by 2025, this is a more important question than it might appear. My guess is that we will be lucky to introduce the new submarines into service before 2030, by which time we will be managing Collins class submarines as aging platforms, managing a whole new suite of emerging risks.

(5)  Where did the idea of letting Dr Schofield and Mr Terlet go actually come from – who recommended this to the Minister for Finance and why?

(6)  Is this reconstitution of the ASC Board just another step in the Defence Materiel Organisation’s ongoing warfare against ASC?

(7)  If so, why is the Government so cheerfully tolerant of, let alone complicit in, bureaucratic warfare between two wholly taxpayer-owned entities? Is it in on the game, or simply asleep at this particular wheel? Read Combet captured? before you answer that.

(9)  Why is such a key defence asset as ASC run as an asset of the Department of Finance rather than an asset of the Department of Defence?

(10) Why is there no-one in the mainstream media with the wit to ask these questions?

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