Part 1: Background

• Why we conducted an inquiry
• Conflicts of interest
• Overview of the organisations, individuals, and events referred to in this report
• How we carried out our inquiry

Why we conducted an inquiry

1.1
In September 2004, we decided to conduct an inquiry into how the Board of Trustees (the Board) of Cambridge High School (the School) managed any conflicts of interest in relation to its arrangements with a private company, Cambridge International College (NZ) Limited (the College).

1.2
The decision was made after the Minister of Education asked the Auditor- General to inquire into these matters, and after preliminary enquiries to find out the nature of the issues involved. The full terms of reference for our inquiry are in Appendix 1.

1.3
Primarily, our inquiry looked at the circumstances in relation to establishing a partnership between the School and the College to educate overseas students, and whether any member, office-holder, or employee of the School had any conflicts of interest through their relationships with the College.

Conflicts of interest

1.4
In the public sector, a conflict of interest exists where a person’s duties or responsibilities to a public entity could be affected by some other separate (usually private) interest or duty that he or she may have. Impartiality and transparency in administration are essential to maintaining the integrity of the public sector.

1.5
Managing conflict of interest issues in the public sector involves more than consideration of the law. The ethics of the situation must also be considered.

1.6
Assessing whether a conflict of interest exists in the public sector involves considering not only the possibility of financial loss to the public entity concerned. The potential for public funds, resources, or time to be used by someone to advance their own private interests is also a consideration. Assuring the public that those entrusted with the proper management of public sector resources do not have any interests that are incompatible with that role is another important aspect.

1.7
This highlights the need for decisions on conflicts of interest to be made on the basis of what an informed objective bystander would think of the situation.

1.8
In these respects, the rules and expectations for handling conflicts of interest may differ between the public and private sectors.

1.9
The existence of a conflict of interest does not necessarily mean that the person concerned has done anything wrong. What it does is create an issue that needs to be managed carefully by the public entity.

1.10
In the public sector, simply declaring a conflict of interest may not be enough. Once a conflict of interest has been identified or disclosed, the entity may need to take steps to remove both the perception and the actuality of any potential for taxpayers’ funds to be used for private gain.

The statutory position in schools

1.11
There are about 2500 state schools, each governed by its own Board of Trustees, made up of members of the local community. Each Board of Trustees is a Crown entity in its own right and has legal obligations, which include being subject to the Education Act 1989 (the Act).

1.12
Each state school principal is also subject to the Act – as the Board of Trustees’ chief executive in relation to the school’s control and management, and in managing day-to-day administration of the school.

1.13
Section 103A of the Act disqualifies a person from being a member of a Board of Trustees (a trustee) in some circumstances where they have a conflict of interest. That section did not apply in relation to this inquiry.

1.14
Clause 8(8) of Schedule 6 of the Act requires a trustee who has a financial interest in any matter to be excluded from any meeting of the Board while it discusses, considers, considers anything relating to, or decides, the matter. This requirement has been strengthened recently to include non-financial interests.

Relevant guidance

1.15
The Ministry of Education (the Ministry) has issued some guidance on conflicts of interest in its handbook Financial Information for Schools. It defines a conflict as–

A conflict of interest arises where a prospective or existing trustee has an interest which conflicts (or might conflict, or might be perceived to conflict) with the interests of the board itself. The key question to ask when considering whether an interest might create a conflict is:

does the interest create an incentive for the trustee to act in a way which may not be in the best interests of the body?

If the answer is “yes”, a conflict of interest exists. The existence of the incentive is sufficient to create a conflict. Whether the appointee would actually act on the incentive is irrelevant.

A conflict of interest may be more perceived than actual. Perception is a very important factor; the processes must be fair and ethical, and must be very clearly seen to be so.

1.16
The guidance for schools does not address how to manage conflicts of interest. However, the Ministry has issued more detailed guidance for tertiary education institutions (TEIs),¹ which gives hypothetical examples of conflicts of interest, such as–

Example 1: An appointee to the Council of a TEI holds shares in a private training enterprise that is in direct competition with the TEI.

1.17
In our view, such a situation is equally relevant in the school sector. In that context, it could be a school trustee who holds shares in a private training enterprise that is in direct competition with the school to attract students. A poor performance on the part of the school may translate into greater profits for the competing company and its investors (including the trustee). The trustee therefore has an incentive to put their own financial interest ahead of the interests of the school.

1.18
The Ministry’s guidance for TEIs also describes how, having established the existence of a conflict of interest, the [school] should consider whether the conflict of interest is manageable, and possible mechanisms for avoiding or managing the associated risk.

1.19
The State Services Commission revised its Code of Conduct for the Public Service in September 2001.² The Code applies officially in the core public service, but, in our view, is also relevant to employees in the wider public sector as an expression of the general standards expected. It requires public servants to avoid situations that might compromise their integrity or otherwise lead to conflicts of interest.

1.20
We have referred to the guidance issued by the State Services Commission and by the Ministry (for tertiary education institutions), not because they applied to the Board, but because they both set out standards that represent good practice in the public sector for the management of conflicts of interest.

1.21
More guidance on managing conflicts of interest in the public sector has been made available since our inquiry into this matter began. For example, our report Christchurch Polytechnic Institute of Technology’s management of conflicts of interest regarding the Computing Offered On-line (COOL) programme³ (the CPIT report) was published in November 2004.

1.22
The CPIT report contains a comprehensive statement of what we consider to be public sector expectations around conflicts of interest. It contains a detailed discussion of the concept, provides references to further relevant reading, and can be applied generally.

Overview of the organisations, individuals, and events referred to in this report

1.23
Our inquiry looked at the relationships between a number of organisations and individuals, and a series of events from September 2001 to mid-2004. The following paragraphs provide an overview of events and introduce those involved.

1.24
The School is based in the town of Cambridge in the Waikato region. It is a co-educational state secondary school, with a roll of more than 1000 students. It has been active in enrolling overseas students since 1989, with the help of a recruitment agent.

1.25
The School’s Principal from January 1992 to September 2004 was Mrs Alison Annan. Mrs Annan left the employ of the School in September 2004. As Principal, Mrs Annan was not only a member of the Board but also the Board’s chief adviser about management of the School.

1.26
Her husband, Mr Ron Annan, was employed by the School as Director, International Student Programme, until he resigned with effect from 11 August 2005.

1.27
In September 2001, the Board was asked to consider entering a partnership with a proposed private training college to provide pre-university education to students from China. The proposal was for the School to provide the proposed college with a comprehensive educational service, at cost, and to receive an annual payment of $100,000 for use of its name and expertise.

1.28
Subsequently, the College was incorporated in November 2001. Mrs Annan was the Foundation Principal of the College.

1.29
The owners of the College are the School’s recruitment agent for overseas students, and another person. The College is a fully functional private training establishment which now has no contact with the School. Nothing in this report is intended as a criticism of the College.

1.30
The situation became more complex in mid-2002 when the original proposal was changed. Instead of the School providing an educational service to the College, the new proposal meant the College would now receive its educational service from a private company, Cambridge Class Limited.

1.31
Cambridge Class Limited was incorporated on 9 September 2002, with Mrs and Mr Annan and 2 other people as the shareholders and directors. The Annans continue to be shareholders and directors of the company.

1.32
Under the new proposal, it was intended that the College would make use of the School’s facilities after hours. However, later in 2002, it was decided that the College did not need to make use of the School’s facilities, and that the College could manage on its own.

1.33
Mrs and Mr Annan were paid $15,000 each by Cambridge Class Limited in relation to their role as directors of the company during 2003.

1.34
The Minister of Education decided to dissolve the Board in September 2004 after a report from the Education Review Office into the Board’s governance of the School. The Minister directed the Secretary of Education to appoint a Commissioner to replace the Board. A Commissioner was appointed and was still in place when we published this report.

How we carried out our inquiry

1.35
During the course of our inquiry, we reviewed documents, and interviewed:

• the Chairperson of the Board at the time these events occurred;
• Mrs Annan;
• Mr Annan;
• the recruitment agent and part-owner of the College; and
• the current Principal of the College.

1.36
We were unable to gain access to all the information that we required, because the documentation of the School’s decision-making process was not of the standard we would normally expect. The School has acknowledged that it did not keep a file on its relationship with the College. Mrs Annan told us that she had provided us with all relevant documentation in her possession. Despite the lack of documentation, we were able to form conclusions, and have made 2 recommendations in Part 3.

1: Tertiary Advisory Monitoring Unit, Conflicts of Interest in Relation to Tertiary Education Institution Councils, available at: http://www.minedu.govt.nz/index.cfm?layout=document&documentid=7182&CFID=2646106&CFTOKEN=85758537.

2: The Code of Conduct was also updated in July 2002 and February 2005.

3: Report of the Controller and Auditor-General, November 2004, ISBN 0-478-18123-X. The report is available on our website at www.oag.govt.nz.