Part 2: The nature of conflicts of interest

Managing conflicts of interest: Guidance for public entities.

As already noted, in the public sector there is a conflict of interest where:

A member's or official's duties or responsibilities to a public entity could be affected by some other interest or duty that the member or official may have.

This is the key test to keep in mind. The remainder of this Part discusses aspects of this test in more detail.

Another way of considering whether a conflict of interest may exist is to ask:

Does the member's or official's other interest create an incentive for them to act in a way that may not be in the best interests of the public entity?

However, that question does not always provide a complete answer because the issue is not confined to considering the possibility of financial loss or other direct disadvantage to the public entity. Sometimes it can relate to the risk that a member or official could:

  • use publicly funded resources or time to advance their own other interests; or
  • be influenced in their decision-making by a sense of loyalty or obligation to someone else, or by an unduly fixed view.

A conflict of interest can arise in a wide variety of ways.1 Sometimes a situation may be more accurately termed a "conflict of duty" or "conflict of role", but in this guidance we use the general term "conflict of interest" to cover these situations, too.2 We also use the term "conflict of interest" to cover circumstances that include or appear to include "bias" or "predetermination".3

Do the interests overlap?

The existence of a private interest, on its own, is not what causes a conflict. Everyone has multiple roles and interests at work, at home, in wider families, or in the community. Conflicts of interest arise where something practical at work overlaps with one of those other roles or interests.

Also, the question of whether a conflict of interest exists needs to be considered on a case-by-case basis – it is not usually worthwhile to ask whether the existence of a member's or official's interest creates a problem without relating that interest to something specific about their official role or a particular matter before the public entity.

In considering whether there is a conflict of interest, one must always focus on what the member's or official's other interest has to do with the particular matter (that is, the question, decision, project, or activity) that is being considered or carried out by the public entity:

  • Is there is a connection between the interests?
  • How could they be related?

When considering how to manage an identified conflict of interest (discussed in detail in Part 4), the question is not limited to whether the member or official concerned is likely to act improperly. Managing conflicts of interest also involves considering appearances – what an outside observer might reasonably perceive. Most often, what needs to be managed (and be seen to be managed) is the risk of the adverse public perception that could arise from the overlapping interests.

Sometimes there may be a perception of a conflict of interest where the interests come close but do not actually overlap, or where people might mistakenly believe that there is a conflict of interest. It may still be necessary to take some steps to manage these situations, because the perception of a conflict of interest can damage an entity's reputation or people's trust in it. Often all that will be needed in such a situation is some form of clarification to avoid public misunderstanding (rather than action to mitigate a conflict of interest).

There are no universal rules

There are no comprehensive rules for identifying and dealing with conflicts of interest that could apply to all situations throughout the public sector. Nor should there be. A vast range of situations can give rise to a conflict of interest. The seriousness of different situations may involve questions of degree.

Moreover, each public entity's own circumstances are likely to be different, and likely to generate different problems. Greater strictness might be appropriate for certain types of entity or function, such as:

  • an entity that sets or enforces ethical standards, or is expected to set an example for others;
  • an entity that deals with matters of great public significance or value, or the allocation of grants or contracts, or highly confidential information; or
  • a function that directly affects the legal rights, interests, and obligations of an individual or small group of individuals (often called a quasi-judicial or regulatory function and which may, for example, include a decision to grant a permit, confer a specific benefit, or impose a punishment).

What are sources of relevant rules and expectations?

Managing conflicts of interest is a fundamental part of good public sector administration.

Rules and expectations about conflicts of interest have a variety of sources. Some of the sources are general standards or expectations about what constitutes ethical behaviour, and some of the sources are legal rules. Both the ethical and legal dimensions of conflicts of interest need to be considered.

If a public entity has specific provisions about conflicts of interest in its governing legislation, complying with those statutory rules will be most critical. But many conflicts of interest are not covered by legal rules.4

Regardless of whether any relevant legal rules apply, ethical considerations should always be taken into account when seeking to identify and manage a conflict of interest in the public sector.

Ethical expectations

Public business ought to be conducted with a spirit of:

  • integrity;
  • honesty;
  • transparency;
  • openness;
  • independence;
  • good faith; and
  • service to the public.5

In our view, these principles should guide any decision-making about conflicts of interest.

There is no single source of rules or expectations specifying what constitutes ethical behaviour for all situations or all public entities. Any rules or expectations applying to a particular situation, public entity, member, or official may come from a variety of sources, including:

  • the entity's founding or constituting document;
  • the entity's code of conduct or relevant internal policies and procedures;
  • other sets of mandatory requirements that apply to the public sector or a particular part of it (such as the Code of Conduct for the State Services, or the Cabinet Manual, or the State Services Commission's Board Appointment and Induction Guidelines);
  • relevant clauses in an employment agreement or contract for services;
  • rules of conduct or codes of practice applying to members of a profession or industry;
  • general guidance or best practice publications (such as this one);
  • customary practice and behaviour in the public sector or a particular part of it;
  • commonplace understandings of the concepts of integrity, honesty, transparency, openness, independence, good faith, and service to the public; and
  • analogies drawn from legal rules that apply to similar situations.

A list of other useful sources of guidance is set out in Appendix 1.

Statutory rules

Some rules for particular types of public entity (but mainly applying to members of a governing body) are set out in statute. Statutory rules commonly do one or more of the following:

  • prohibit members from discussing and voting at meetings on matters in which they have an interest;
  • require members to disclose interests before appointment, and/or in a register of interests, and/or at relevant meetings;
  • prohibit members from having an interest in certain contracts with their entity;
  • prohibit members from signing documents relating to matters in which they have an interest; and
  • provide mechanisms for seeking exemptions from the general rules.

Some key statutory rules can be found in the:

  • Crown Entities Act 2004;
  • New Zealand Public Health and Disability Act 2000;
  • Companies Act 1993;
  • Local Authorities (Members' Interests) Act 1968; and
  • Education Act 1989.

Summaries of these statutory provisions are set out in Appendix 2.

Common law rules

The common law requires that public decision-making be procedurally fair. In particular, conflicts of interest are usually dealt with under the rule about bias.6

The rule about bias applies to an entity (or member or official) exercising powers that can affect the rights and interests of others. Members and officials in such a position must carry out their official role fairly and free from prejudice. The current judicial expression of the test for bias is:

Is there a real danger of bias on the part of a member of the decision-making body, in the sense that they might unfairly regard with favour (or disfavour) the case of a party to the issue under consideration?7

Also, there is a common law rule that a person who has a fiduciary obligation towards someone else (such as a trustee of a trust or director of a company) is not allowed to put themselves in a position where their official role conflicts with their personal interests.

A list of some New Zealand court cases that consider conflicts of interest is set out in Appendix 3.8

What could happen if the rules or expectations are breached?

A poorly managed conflict of interest can have consequences for both public entities and members and officials.

Breaching a statutory rule may constitute grounds for removing a member from office. In some cases, it might constitute an offence. Sometimes, the law provides that a transaction of the public entity might be able to be cancelled. Some matters might adversely affect the public entity's audit report.

If an entity's decision is tainted by bias or breach of a fiduciary duty, the courts may declare the decision invalid or may prevent a person from exercising a power. The risk, delay, and expense in defending a decision against a legal challenge can be significant.

More often, if a conflict of interest is not handled well there is a risk that the member or official, their managers, and the public entity may become the subject of public criticism by politicians, the media, or members of the public. A regulatory agency may conduct a formal inquiry into the public entity. The entity may take disciplinary action against an employee.

A public scandal could be severely damaging to the public entity's reputation, and could lead to people losing their jobs.

Types of other interests

A conflict of interest can arise in a wide range of circumstances. The other interest that overlaps with the official role might be financial or non-financial (see paragraphs 2.45-2.48). It might be professional or personal. It might be commercial or charitable. It might relate to a potential advantage or disadvantage. It might relate to the member or official themselves, or another person or organisation with whom they are associated. It might be something the member or official is actively involved in, or something they have no control over. It might arise from a longstanding state of affairs, or something that has only just happened.

For instance, the member's or official's other interest could be:

  • holding another public office (see paragraphs 2.49-2.50);
  • being an employee, advisor, director, or partner of another business or organisation;
  • pursuing a business opportunity;
  • being a member of a club, society, or association;
  • having a professional or legal obligation to someone else (such as being a trustee);
  • owning a beneficial interest in a trust;
  • owning or occupying a piece of land;
  • owning shares or some other investment or asset;
  • having received a gift, hospitality, or other benefit from someone;9
  • owing a debt to someone;
  • holding or expressing strong political or personal views that may indicate prejudice or predetermination for or against a person or issue (see paragraphs 2.40-2.44); or
  • being a relative or close friend of someone who has one of these interests, or who could otherwise be personally affected by a decision of the public entity (see paragraphs 2.34-2.39).

Which "relatives and close friends" need to be considered?

Considering the interests of relatives and friends requires careful judgement. For matters covered by the Local Authorities (Members' Interests) Act 1968, the interests of a spouse, civil union partner, or de facto partner must be considered. For matters covered by the Crown Entities Act, the interests of children and parents must also be considered.

In general, we consider that, at least, the interests of any relative who lives with the member or official (or where one is otherwise dependent on the other) must be treated as being effectively the same as an interest of the member or official.

For other relatives, it will depend on the closeness of the relationship, and the degree to which the public entity's decision or activity could directly or significantly affect them. (We discuss assessing the seriousness of a conflict of interest in Part 4.) A relationship could be close because of the directness of the blood or marriage link, or because of the amount of association. There are no clear rules because these questions involve matters of degree, but it will usually be wise not to participate if relatives are seriously affected.

Some cultures, including Māori culture, have a broad concept of who is regarded as a family member or relative. The same general principles apply. In our view, a conflict of interest issue will not often arise where the connection is simply that the other person is part of a member's or official's wider kin group descended from a common ancestor (such as an iwi or hapū).10 Nevertheless, care needs to be taken.

Questions of judgement and degree also arise when considering friends and other associates. However, in our view it is unrealistic to expect the member or official to have absolutely no connection with or knowledge of the person concerned. New Zealand is a small and interconnected society. So, for example, we consider that simply being acquainted with someone, or having worked with them, or having had official dealings with them, will not usually create any problem. However, a longstanding, close, or very recent association or dealing might.

Where the public entity's decision or activity affects an organisation that a relative or friend works for, it may be legitimate to take into account the nature of their position – for instance, whether they are a senior executive or owner, or whether they are a junior staff member who is not personally involved in the matter and who would not be personally affected by the decision.

Prejudice and predetermination

Members and officials are, of course, entitled to have their own personal views. Indeed, a member or official may often be expected to use their own particular opinions or ideas in carrying out their work.

However, sometimes having strong views about a matter can create a risk of prejudice or predetermination. A member or official might be regarded as biased if their behaviour or beliefs indicate (especially, but not necessarily, when expressed in a public statement) that they have made up their mind about a matter before it came to be heard or deliberated on. In other words, that they have a "closed mind" or fixed position, and are not willing to fairly consider all relevant information and arguments.

The degree of strictness with which this principle is applied will depend on the context. For quasi-judicial decisions, decision-makers are held to an exacting standard of impartiality and objectivity.

In other contexts, it may be more acceptable to expect members or officials to:

  • have a preliminary position (especially where a proposal is being consulted on or where the public entity is expected to perform an advocacy role); or
  • already hold – and perhaps have expressed – strong personal views about the matter (especially for decisions that are made by an elected or representative body, and which are political in nature or involve high-level policy-making); or
  • draw on their own knowledge or experience (especially for decisions that are entrusted to particular people because of their special expertise in the subject).

General personal factors, such as a member's or official's ethnicity, religion, national origin, age, political or philosophical leanings, wealth, or professional background, will not often constitute predetermination (unless it gives rise to a strongly held personal belief that directly relates to the matter being considered).

Distinguishing financial and non-financial conflicts of interest

Sometimes it may be necessary to decide whether a conflict of interest is financial (sometimes called pecuniary) or non-financial. This is because financial conflicts of interest are often treated more strictly than non-financial conflicts of interest. Some of the statutory requirements focus primarily on financial interests. At common law, any financial conflict of interest (except one that is trivial) amounts to an automatic disqualification from participation in the decision, regardless of any other appearance of bias. (In other words, where the conflict of interest is financial, bias is presumed to exist.)

A financial conflict of interest is one where the decision or act:

…could reasonably give rise to an expectation of financial gain or loss to the person concerned.11

A financial conflict of interest need not involve cash changing hands directly. It could, for example, relate to an effect on the value of land or shares that the member or official owns, or an effect on the turnover of a business that the member or official is involved in.

A non-financial conflict of interest does not have a financial component. It may arise, for example, from a personal relationship, or involvement with a non-profit organisation, or conduct or beliefs that indicate prejudice or predetermination.

Where the other interest is a direct consequence of the official role

Sometimes a member or official is involved in a second entity quite deliberately. They may have been appointed specifically to represent the first entity (for example, a councillor of a local authority appointed as its representative on a community trust, or a board member appointed as a director of a subsidiary company), or simply because of their position in the first entity. In those cases, it could be consistent with their role for them to participate at meetings of the first entity in some matters that concern the second organisation – especially if that second role gives them specialised knowledge that it would be useful to contribute. This may be legitimate, and mutually beneficial, because for many matters there will be no risk that the member or official could advance any private interest, or show partiality, or otherwise act in a way that was not in the first entity's best interests.

However, the member or official must be careful not to assume that this is always the case. Conflicts of interest could still arise with some decisions. This is especially likely where the member or official may be under a legal duty (as, say, a director or trustee) to act in the best interests of one entity. For instance, a conflict of interest might arise where one entity is making a decision about funding the other, or about the continued existence or viability of the other, or about a formal submission that the other has made.

1: See the definition of "other interest" in the Glossary, and the range of types of other interest discussed at paragraphs 2.32-2.33.

2: An example of this is discussed at paragraphs 2.49-2.50.

3: See the definition of "bias" in the Glossary, and the discussion at paragraphs 2.40-2.44.

4: For example, legal rules may often be irrelevant to officials who are not on the entity's governing body, officials who are not exercising statutory powers or fiduciary duties, officials who make decisions outside formal meetings or hearings, or subordinate officials who are not the decision-maker.

5: Similarly, the State Services Commission's Code of Conduct for the State Services summarises the key principles as being fair, impartial, responsible, and trustworthy.

6: However, one recent judicial decision appears to suggest that conflicts of interest can be regarded as a standalone aspect of the general requirement of procedural fairness in public decision-making, and need not necessarily be characterised using "bias" language and concepts: see Diagnostic Medlab v Auckland District Health Board (HC, Auckland, CIV-2006-404-4724, 20 March 2007, Asher J).

7: See, for example, Riverside Casino v Moxon [2001] 2 NZLR 78 (CA).

8: Applying the rule about bias to members of local authorities is discussed in detail (together with summaries of relevant cases) in our publication Guidance for members of local authorities about the law on conflicts of interest.

9: In this area, issues about conflicts of interest overlap with the management of sensitive expenditure. For further guidance, see our 2007 publication Controlling sensitive expenditure: Guidelines for public entities.

10: However, there may be cases when an iwi interest could create a conflict of interest (such as where the member or official is working for a public entity on a Treaty settlement where they are likely to end up as a beneficiary – but in that case the interest belongs to the member or official themselves rather than to their relative).

11: See Downward v Babington [1975] VR 872.

page top