Part 3: Our conclusions and recommendations

3.1
In this Part, we:

• discuss the changing nature of the proposal for a contract between the School and the College;
• conclude that there were conflicts of interest;
• discuss whether the conflicts of interest were managed properly;
• assess whether the School suffered any financial loss as a result of any conflict of interest; and
• make 2 recommendations.

The changing nature of the proposal

3.2
We were hampered throughout our inquiry by limited and, at times, contradictory documentation. We were given explanations which, at times, did not tally with what was in the documents.

3.3
We were also unable to draw any conclusions on why the proposal changed in mid-2002 (see paragraphs 2.28-2.34) because no documents were provided to us.

3.4
It is possible that the Board decided not to pursue the original proposal and Mrs Annan decided to take advantage of the business opportunity herself. If that were the case, we would have expected there to have been some documentation recording the Board’s decision, such as:

• A report to, and minute of, the Board. We could not find anything in the Board and Committee papers that we reviewed to explain the change in the proposal.
• A letter to the agent-owner saying that the Board had decided not to provide a comprehensive range of services to the College, and advising that the School’s name should no longer be used by the College, but agreeing that the Board would still help with the application for a private school licence.
• A letter to the Ministry and Minister of Education saying that the Board had decided not to proceed with the proposal.

3.5
We would also have expected to see a report to the Board from the Annans requesting permission to pursue the business opportunity in a private capacity.

3.6
Alternatively, the change in the proposal may have occurred because Mrs Annan decided that the business opportunity would be better handled using a private company rather than the School to provide the services to the College. We would still have expected to see written information to the Board advising of the change.

3.7
There was nothing provided to us in writing about the establishment of Cambridge Class Limited before the date that the company was incorporated.

Were there any conflicts of interest?

Principal of Cambridge High School (Mrs Alison Annan)

3.8
In our view, Mrs Annan had a conflict of interest from September 2001 between her duties as Principal of the School and her involvement in the affairs of the College. Initially this was because she had a financial interest in the affairs of the College, intending to gain personally from assisting with its establishment and operation.

3.9
Mrs Annan’s report to the School’s Resources Committee in October 2001 referred to payment for the senior staff involved in managing the project. This was the first indication of a conflict of interest on her part.

3.10
In 2003, the School’s auditor raised the question of a possible breach of legislation in relation to this conflict of interest. Mrs Annan was not excluded from meetings of the Board when it considered matters relating to the College. In August 2003, the Board and Mrs Annan accepted that there had been a breach of legislation. In March 2004, the breach of legislation was reported in the School’s financial statements for 2002. (The audit of the financial statements was delayed because of consideration of, among other things, the relationship between the School and the College and Cambridge Class Limited by the appointed auditor and the Office of the Auditor-General.)

3.11
From September 2002, Mrs Annan’s conflict of interest continued because she had an ownership interest in Cambridge Class Limited, which provided educational services to the College. The College, in turn, was in competition with the School for the enrolment of Chinese students seeking pre-university education.

3.12
Both Mrs and Mr Annan told us that the College was not in competition with the School because the 2 organisations were recruiting from distinctly different groups of students. Mrs Annan told us that the College was intended to provide a means for older students (sometimes aged 20 or more) who had completed secondary education in China but wanted to complete New Zealand qualifications at university.

3.13
The College provided only a one-year course, that was based on the study of purpose-designed workbooks. They asserted that this was different from the School, which did not provide a one-year course, educated its students by teacher contact rather than workbooks, and provided contact with students from other countries. Mr Annan told us that the only role of Cambridge Class Limited was to provide workbooks.

3.14
In our view, these distinctions are not sufficient to conclude that the School and the College were not in competition. Both offered pre-university education to Chinese students. The education offered by the 2 institutions was different in some respects, but the client group was sufficiently similar to conclude that there was an incentive for the Annans to seek students for the College, which would result in personal financial gain, possibly at the expense of student numbers at the School.

3.15
Some students had transferred from the School to the College, which is further evidence of competition between the 2 bodies. The number of students at the College affects the profitability of Cambridge Class Limited, because the contract between those 2 organisations provides for a set sum to be paid for each student, which therefore affects the financial gain of the Annans.

3.16
As late as June 2003, 6 months after it was decided that the School would not receive any financial benefit from an association with the College, Mrs Annan expressed the view to the College that: “A successful one year programme [by the College], endorsed by Cambridge High School, would be very popular indeed [with students].”

3.17
This remark illustrates, in our opinion, Mrs Annan’s inability to distinguish between her private interests and those of the School. She appears to have been of the view that she was able to give the School’s endorsement to a competing supplier of educational services, a supplier from which she stood to make a personal gain.

3.18
In our view, even if she did not believe or realise that she had a conflict of interest, Mrs Annan should have known her responsibility under the Act to exclude herself from meetings where she had a financial interest. She also should have known that it was prudent to seek professional advice about her involvement in the 3 organisations. She could not necessarily have been expected to have the knowledge to manage the conflict of interest situation appropriately by herself.

3.19
Mrs Annan told us that she believed she acted in good faith at all times, and that the interests of the School she served as Principal were always uppermost in her mind. Although she was involved with both the School and the College, she never thought her roles were in conflict as she was never responsible for day-today management of the College, nor for policy development there.

3.20
Mrs Annan’s conflict of interest ceased in September 2004 when she left the employment of the School.

Director, International Student Programme of Cambridge High School (Mr Ron Annan)

3.21
In our view, Mr Annan also had a conflict of interest from September 2001. He told us that he had not declared an interest in the College because, in his view, he did not have an interest in that body.

3.22
On the basis of the information we reviewed, we have concluded that he did have a financial interest in the College. Information provided to the School’s solicitor in March 2002 said that there was to be an additional contract with the College for various services, valued at $100,000 a year, which were to be supplied in part by Mr Annan as an employee of the School.

3.23
In addition, Mr Annan signed a document on behalf of the College (see paragraph 2.100) as “Executive Officer”. Also, his wife had a financial interest in the College, which, under normal practice in respect of conflicts of interest, he would be deemed to share.

3.24
From September 2002, Mr Annan’s conflict of interest continued because he had a financial interest in Cambridge Class Limited, which provided educational services to the College, which in turn was in competition with the School.

3.25
Mr Annan’s conflict of interest ceased on his resignation from the School on 11 August 2005.

Were the conflicts of interest managed properly?

3.26
We considered:

• whether the School had policies and procedures for managing conflicts of interest; and
• how the Board managed the Annans’ conflicts of interest.

Did the Cambridge High School Board have policies and procedures to manage conflicts of interest?

3.27
The Board did not have any written policies or procedures for identifying or managing conflicts of interest. However, we were told that there was an informal expectation that any conflicts would be disclosed.

3.28
Mrs Annan submitted her own conflict of interest declaration form to the Board Chairperson on at least 2 occasions. We found no evidence that these forms were assessed by the Board to see if the conflicts of interest were manageable.

3.29
Mrs Annan told us that it was the Board’s responsibility to manage conflicts of interest. She did not know whether the Board’s policies and procedures for managing conflicts of interest had been written down. We note that Mrs Annan, in her capacity as Principal, was a member of the Board, and its chief adviser.

3.30
Mrs Annan also told us that she did not see the communication of the Board’s informal policy on conflicts of interest to the School’s staff as being her responsibility, as the Board had not delegated this to her.

3.31
We do not share this view. It is reasonable to expect that a school principal would communicate information to staff about the school board’s attitude to conflicts of interest as part of their role in day-to-day managing of the school (see paragraph 1.12).

How did the Cambridge High School Board manage the conflicts of interest?

3.32
In our view, the Board did not identify or manage the Annans’ conflicts of interest properly. However, we consider there are mitigating factors.

3.33
Schools’ Boards of Trustees comprise representatives of the community who may have little or no experience in, or understanding of, the management of public bodies; in particular the concept of public accountability and the need to ensure that conflicts of interest are managed properly.

3.34
Most of the country’s 2500 state schools are unlikely to ever have to address conflicts of interest as complex as those we have investigated in this inquiry. Therefore, as the issue may not have been given attention by school boards generally, when a conflict of interest does arise, the board involved may not be fully able to manage it properly.

3.35
To a large extent, school boards are reliant on their principals, as their chief advisers, to inform them of the proper processes to ensure compliance with legislation and proper accountability. In this case, the Board’s chief adviser, who was the source of the conflict of interest, did not provide the Board with full information about the conflict of interest, or guidance that it should seek its own advice on how the conflict should be managed.

3.36
In the view of Mrs Annan, both she and the Board did everything that could reasonably have been expected of them in the absence of Ministry guidelines. Mrs Annan also is of the view that the Ministry was aware of her involvement with the College. However, we have no information that Mrs Annan informed the Ministry that she had an interest in Cambridge Class Limited.

Management of Mrs Annan’s conflict of interest

3.37
In our view, Mrs Annan’s conflict of interest was not managed properly.

3.38
The conflict of interest was declared to the Board some time after it came into existence. The first time Mrs Annan’s interest in the College was declared formally was in November 2002, more than a year after the interest first became apparent in September 2001.

3.39
The first time her interest in Cambridge Class Limited was declared formally was in January 2003, at least 5 months after the company was first contemplated in August 2002. There was no evidence that the Board considered this declaration. From our enquiries, it appears that, in general, the School had not heard of Cambridge Class Limited until its auditor raised the issue in the middle of 2003.

3.40
When Mrs Annan declared her interests, the information she provided was incomplete. At no stage was the Board informed that Cambridge Class Limited was providing educational services to the College. Mrs Annan explained to us that this was because Cambridge Class Limited is a private company and therefore, in her opinion, of no interest to the Board. In our view, this shows a lack of understanding on the part of Mrs Annan of the nature and management of conflicts of interest in the public sector. In many cases, it is the potential for personal gain through private interests that causes a conflict of interest.

3.41
In November 2002, when the School’s Personnel Committee considered Mrs Annan’s declaration of interest in the College, it relied on her assurance that there was not a conflict of interest and that, if one did arise, she would address it immediately. At no stage did the Board attempt to identify or manage the conflict of interest in the manner exemplified by the good practice set out in the Ministry’s guidance to tertiary education institutions. Again, in our view, this shows a lack of understanding of the nature and management of conflicts of interest on the part of the Board. As we have mentioned, the Board’s chief adviser did not provide it with guidance that it would need to seek external help.

3.42
Mrs Annan told us that she had conversations with other Board members about the relationship between the College and Cambridge Class Limited, and that she received no indication that the Board or those members did not consider her disclosures to be adequate. We have not seen any documentary evidence of Mrs Annan making such disclosures.

3.43
The then Board Chairperson told us that she had no clear recollection that the Board was informed of the nature of the contract between the College and Cambridge Class Limited, or that the Annans expected to receive remuneration from Cambridge Class Limited.

3.44
In our view, the late and incomplete declarations of interest by Mrs Annan were caused partly by a lack of understanding on her part about the nature of a conflict of interest and the appropriate conduct for a public official with a conflict of interest, and partly as a result of her wish to keep private that which she thought of as her own private business.

3.45
This lack of understanding was shown by:

• Mrs Annan’s attendance at Board meetings when the College was considered, thereby breaching legislation;
• her refusal to provide information about the private company in which she had a financial interest to the Board, to the School’s auditor in 2003, and in the context of this inquiry; and
• the view she expressed in June 2003, 6 months after the proposal was changed and it was clear that the School would not receive any financial benefit from an association with the College, that “A successful one year programme [by the College], endorsed by Cambridge High School, would be very popular indeed [with students].”

3.46
We consider that this lack of understanding of the nature and management of conflicts of interest on the part of an experienced principal of a large school is of concern, and indicates that the guidance for schools needs to be strengthened. We have made a recommendation for the Ministry accordingly.

3.47
We have considered whether Mrs Annan’s conflict of interest was manageable, and concluded that it would not have been appropriate for her to have a financial interest in the College or Cambridge Class Limited while she was Principal of the School.

3.48
The only way that the situation could have been managed while she was employed as Principal of the School would have been for her to divest herself of involvement with the private companies, thus removing the source of the conflict of interest.

3.49
In our view, it is not possible for the most senior employee of a public body to manage a contractual relationship between the public body and a private company in which they have a financial interest.

3.50
When there was no longer any possibility of the School having a contract with the College, it was still not appropriate for Mrs Annan to have a financial interest in a company that was providing similar services to the same client group as the School. The most senior employee of a public body should be solely concerned with the interests of their public employer, without any possibility of personal gain from a private business providing a similar service to the same client group.

Management of Mr Annan’s conflict of interest

3.51
In our view, Mr Annan’s conflict of interest was not managed properly.

3.52
His interest in the College was not declared at all. We are of the view that Mr Annan’s mistaken belief that he did not have an interest in the College is primarily because of his lack of understanding of the nature of conflicts of interest. This was apparent at our interview with him.

3.53
Mr Annan’s interest in Cambridge Class Limited was declared to the Chairperson of the Board in November 2003, more than a year after the company was first contemplated in August 2002. The information about the nature of the interest was incomplete. The interest was not reported to the Board as a whole.

3.54
While Mr Annan’s conflict of interest was not managed properly, there were mitigating factors. At no stage was Mr Annan given adequate guidance on the management of conflicts of interest. Also, the School’s Principal was fully aware of Mr Annan’s interests through their marital relationship, and therefore he was entitled to assume that his employer was managing any conflict that may have existed.

3.55
Although Mr Annan resigned from the School in August 2005, we considered whether his continuing conflict of interest could be managed, particularly given that an integral part of his responsibilities was to market the School to current and prospective students. We provide our findings as an example for similar situations.

3.56
If Mr Annan’s position as an employee had been, for example, a maths teacher or groundsman, the implications of the situation might have been different and more manageable. However, the nature of his position involved recruiting and retaining students from overseas, so it directly involved him in matters that might touch on his interests in Cambridge Class Limited.

3.57
We concluded that it might be difficult for the Commissioner of the School to find an appropriate mechanism to manage the conflict of interest other than for Mr Annan and Mrs Annan to dispose of their interests in Cambridge Class Limited. This is because, under normal practice in respect of conflicts of interest, Mr Annan would be deemed to share his wife’s ownership interest in Cambridge Class Limited.

3.58
This is not because we considered that Mr Annan would have exploited his official position for personal gain. However, it could be perceived that he had an interest in encouraging the School’s current and prospective students to enrol with the College, which would increase the income of Cambridge Class Limited, in which he had a financial interest.

Did Cambridge High School suffer any financial loss as a result of any conflict of interest?

3.59
Under our terms of reference, we considered whether the School has suffered any financial loss as a result of any conflict of interest.

Use of Cambridge High School’s name

3.60
The College used the School’s name for promotional purposes. The Board had been informed that it would receive an annual payment of $100,000 for the use of its name and expertise. The College’s promotional and other material made frequent reference to its relationship with the School, even after it had been decided that the School would not receive any benefit from the arrangement.

3.61
Although a financial contribution of $100,000 a year had been envisaged, in part for use of the Board’s name, the School did not receive any financial contribution for the use of its name by the College.

3.62
We have not sought to place a value on what an appropriate contribution would have been. However, we note that there may be a policy issue about the extent to which a non-commercial public entity may appropriately trade on its name.

3.63
The School’s auditor addressed the use of the School’s name by the College in the auditor’s report of 24 March 2004 on the School’s financial statements for 2002. That report noted that the College had referred to its relationship with the School as part of its case for gaining accreditation for its courses from the NZQA. But, at the time accreditation was sought, the Board had not considered the nature of the relationship other than in principle. The auditor recommended that the Board take steps to ensure that third parties, such as the College, obtained its consent before claiming any form of relationship with the School.

Competing for students

3.64
We consider that there is a potential loss of income to the School from the competition with the College for Chinese students seeking pre-university education; in particular, that students who might otherwise have enrolled or continued with the School may enrol with the College.

3.65
In our view, there was no actual loss of income in 2003 or 2004, because there was sufficient demand from Chinese students for the School to achieve the maximum number of overseas students it wished to accommodate. We have not considered the position in 2005, as the School received substantial media coverage in the middle of 2004 which may have affected the enrolment of overseas students.

3.66
However, there is some evidence that the Annans may have considered the School to be a source of students for the College:

• The College’s application for registration as a private training establishment in August 2002 included the names of 5 prospective students who were enrolled with the School at that time.
• Two of the School’s students transferred to the College in 2003, and 6 transferred in 2004. It is quite possible that these transfers may have been because the students decided that the College would better meet their needs than continuing with the School. However, this is evidence of the competition between the School and the College.
• Mr Annan’s record of a marketing trip to China (see paragraphs 2.60-2.66) in September 2002 notes that: “If they can persuade year 12 students to go to the College, then we can replace with new students.”

3.67
The competition between the 2 institutions could have resulted, and could still result, in a loss of income for the School, if the demand from Chinese students for pre-university education were to decline and the School were to be unable to achieve its target for overseas students from other countries.

Paying for the overseas marketing trip

3.68
In September 2002, the Annans accompanied the agent-owner on a trip to China to help with marketing the College. At Mrs Annan’s recommendation, the School’s Resources Committee agreed to pay for the flights at a cost of $9,864. The agent-owner paid for the accommodation and meals at a cost of about $2,760. The justification recorded at the time for the School paying for the flights was that the visit would benefit the long-term relationship with the College and that some marketing would be carried out for the School.

3.69
Mrs Annan told us that the marketing effort, which she and Mr Annan applied to the business of the College and that of the School, was proportionate to the costs that each body met. That view would suggest that about 80% of the marketing effort was devoted to the School and about 20% to the College.

3.70
In our view, the Board should not have met the full cost of the flights because:

• At that stage, after the proposal was changed and it was clear that the School would not provide full educational services, there would have been little financial benefit to the School from the establishment of the College.
• Mr Annan informed a marketing firm in China just before the visit that: “The seminar and promotion is mainly the College because the School roll for next year is full however we can speak to prospective students, but primarily we are promoting the College.” (See paragraph 2.61.)
• A record of the trip indicates that there was some marketing for the School, but nothing like as much as 80%.

3.71
However, we do not think it is appropriate to pursue recovery of the money from the Annans at this stage because the Resources Committee approved the expenditure, albeit, in our view, based on an incomplete understanding of the Board’s future relationship with the College.

Other costs

3.72
The School incurred other costs to help with the establishment of the College. For example, as an interim measure it approved student admissions and acted as an agent for student fees while the College established its own administrative procedures.

3.73
Again, we consider that recovery would be inappropriate, as the costs would be difficult to quantify with certainty and were not subject to agreement in advance.

Recommendations