Part 4: Dealing with conflicts of interest when they arise

Managing conflicts of interest: Guidance for public entities.

As noted in Part 3, policies and procedures cannot predict all situations, and the seriousness of some will be a question of degree. Accordingly, some situations will need to be the subject of discretionary judgements as and when they arise.

There are two aspects to dealing with particular situations:

  • identifying and disclosing the conflict of interest (primarily the responsibility of the member or official concerned); and
  • deciding what action (if any) is necessary to best avoid or mitigate any effects of the conflict of interest (primarily the responsibility of the public entity).

Identifying and disclosing a conflict of interest

Conflicts of interest can arise at any time. Members and officials need to remain ever alert to this possibility.

Whose obligation?

The member or official with the conflict of interest is obliged to identify it, and disclose it to the relevant people in a timely and effective manner.

The member or official concerned will always have the fullest knowledge of their own affairs, and will usually be in the best position to realise whether and when something at work has a connection with another interest of theirs. (However, managers and other senior personnel should remain generally alert for issues affecting other people that may create a problem.)

How to identify conflicts of interest

In Part 2, we discuss in detail the nature of conflicts of interest, and the types of other interest that can give rise to a conflict of interest. The key question that must always be addressed is:

Whether 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.

As noted in paragraphs 2.5-2.7, it is important to focus on the overlap between the two interests – that is, whether the member's or official's other interest has something to do with the particular matter that is being considered or carried out by the public entity.

It is better to err on the side of openness when deciding whether something should be disclosed. Many situations are not clear-cut. If a member or official is uncertain about whether or not something constitutes a conflict of interest, it is safer and more transparent to disclose the interest anyway. The matter is then out in the open, and the expertise of others can be used to judge whether the situation constitutes a conflict of interest, and whether the situation is serious enough to warrant any further action.

Disclosure promotes transparency, and is always better than the member or official silently trying to manage the situation by themselves.

How to disclose conflicts of interest

If a matter in which a member or official has an interest arises at a formal meeting, the member or official should declare to the meeting that they have an interest in the matter before the matter is discussed. The declaration should be recorded in the minutes of the meeting.

In other situations, the matter should be raised and discussed with a relevant person as soon as the potential for a conflict of interest is identified. For most staff, the relevant person will be their manager (or another designated person in the public entity). For a chief executive, the relevant person may be the board chairperson or responsible Minister, or another senior person in the public entity. Board members should make a disclosure to the chairperson or deputy chairperson.

There might be an applicable law or internal policy that requires a disclosure to be lodged in a register. It is always wise to record any disclosure in writing anyway.1

If something significant changes about the official role or the other interest, or the nature of the connection between them, the member or official should make a further disclosure, in case it is necessary to reconsider any decisions about how to deal with the conflict of interest.

Deciding on further action

Simply declaring a conflict of interest is not usually enough. Once the conflict of interest has been identified and disclosed, the public entity may need to take further steps to remove any possibility – or perception – of public funds or an official role being used for private benefit.

The public entity should carefully consider what, if anything, needs to be done to adequately avoid or mitigate the effects of the conflict of interest.

Whose obligation?

In some cases, the decision about what the member or official needs to do will be straightforward, because there may be a clear legal requirement or other written rule covering the situation, of which the member or official ought to be aware. (An example is where there are statutory rules about participating in meetings that apply to members of a governing body.) In such cases, the onus to be aware of the rule, and to comply with it, lies with the member or official concerned. The judgement is theirs to make.

However, in all other cases, the primary obligation to determine the appropriate next steps (and to direct the affected member or official accordingly) will lie with the public entity. It is a question of risk management for the public entity. The decision-maker will usually be the official's manager (or other relevant person as discussed in paragraph 4.11 in relation to disclosure).2 The public entity's chairperson, chief executive, legal advisors, human resources staff, and other managers may need to take an active part in helping to make decisions or off ering advice to decision-makers.

What should be done?

In each case, it is important for the public entity to actively consider whether something more ought to be done after disclosure. In doing so, the entity should have regard to the principles mentioned in paragraph 2.16, and the risk of how outside observers might reasonably perceive the situation. It is not safe to assume that a disclosure, with nothing more, is always adequate.

First, if any legal requirement applies, then compliance with that is critical, and overrides any other scope for discretionary judgement. (For example, where the situation involves a legal requirement about a board member participating in a meeting, the law will usually require the member to refrain from participating in discussions and voting on the matter. In those cases, there is usually no scope to decide on some lesser mitigation option.)

Secondly, the public entity should consider whether any relevant policy of the entity contains a clear rule covering the situation.

Thirdly, if no relevant legal requirement or policy applies (or after any such rule has been complied with), then the public entity should also consider whether anything more needs to be done. This is where there may be scope for a range of options. This assessment involves the exercise of a discretionary judgement. In especially difficult situations, it may be necessary to seek professional advice, and/or consult other published sources of guidance.

In exercising judgement, the public entity needs to assess carefully:

  • the seriousness of the conflict of interest; and
  • the range of possible mitigation options.

Assess the seriousness of a conflict of interest

Several factors may need to be weighed in assessing the seriousness of the conflict of interest. They include:

  • the type or size of the member's or official's other interest;
  • the nature or significance of the particular decision or activity being carried out by the public entity;
  • the extent to which the member's or official's other interest could specifically affect, or be affected by, the public entity's decision or activity; and
  • the nature or extent of the member's or official's current or intended involvement in the public entity's decision or activity.

Seriousness is a question of degree. It involves a spectrum of directness and significance. Directness (and its opposite, remoteness) is about how closely or specifically the two interests concern each other. Significance is about the magnitude of the potential effect of one on the other.

Sometimes, the public entity may judge that the overlap of the two interests is so slight that it does not really constitute a conflict of interest. In other words, there is no realistic connection between the two interests, or any potential connection is so remote or insignificant that it could not reasonably be regarded as a conflict of interest.

However, it must be remembered that this judgement is not primarily about the risk that misconduct will occur. It is about the seriousness of the connection between the two interests.

Similarly, an interest might not be regarded as serious if it is a generic interest held in common with the public (that is, the interest is of substantially the same kind and size as one that is held by all members – or a large segment – of the public, and is not affected in any special way).3

Mitigation options

Selecting a suitable mitigation option will largely be informed by the judgement about the seriousness of the conflict of interest in each particular case. It may also be necessary to take into account the practicability of any options for avoiding or mitigating the conflict.

There is a broad range of options for avoiding or mitigating a conflict of interest. The options (listed roughly in order of lowest to highest severity) include:

  • taking no action;
  • enquiring as to whether all affected parties will consent to the member's or official's involvement;
  • seeking a formal exemption to allow participation (if such a legal power applies);
  • imposing additional oversight or review over the official;
  • withdrawing from discussing or voting on a particular item of business at a meeting;
  • exclusion from a committee or working group dealing with the issue;
  • re-assigning certain tasks or duties to another person;
  • agreement or direction not to do something;
  • withholding certain confidential information, or placing restrictions on access to information;4
  • transferring the official (temporarily or permanently) to another position or project;
  • relinquishing the private interest; or
  • resignation or dismissal from one or other position or entity.5

In instances where the public entity judges that a situation does not really amount to a conflict of interest after all, or is too indirect or insignificant, it may formally record or declare the disclosure and assessment in some form, but decide to take no further action.

However, it should not be assumed that this will always be enough. The risk to be assessed is not just the risk of actual misconduct by the particular member or official involved, but the risk that the public entity's capacity to make decisions lawfully and fairly may be compromised, and the risk that the entity's reputation may be damaged. In making this assessment, the public entity needs to consider how the situation may reasonably appear to an outside observer.

Continuing to be involved in a matter despite having recognised a conflict of interest may occasionally be necessary if the conflict is inevitable and unavoidable, and the matter cannot reasonably be dealt with without the member's or official's involvement. That should be rare (and in such cases other mitigation options might need to be considered, too). One example is where all relevant people have a conflict of interest.

The most typical mitigation options involve withdrawal or exclusion from involvement in the public entity's work on the particular matter – that is, the fifth, sixth, and seventh bullet points in paragraph 4.29. Taking one of those steps will usually be enough to adequately manage a conflict of interest.

Occasionally a conflict of interest may be so significant or pervasive that the member or official will need to consider divesting themselves entirely of one or other interest or role. But these cases are likely to be uncommon. The other interest needs to be considered in relation to a particular matter coming before the public entity, so it will not often be necessary to ask, in a general sense, whether a conflict of interest is so great that the member or official should not remain working for the public entity at all.

However, giving up an interest or role may not always adequately deal with a conflict of interest, if it happens at a very late stage.6 In other words, sometimes it might be too late for the member or official to choose to withdraw from one role or interest in order to be able to carry on with the other one.

If circumstances change, a decision about whether there is a conflict of interest, or how to manage it, may need to be reviewed.

Many situations are not clear-cut, and so a range of possible judgements could be reasonable. The decision about what to do in any particular case is an internal matter. It is for the public entity to judge (except in cases where a legal obligation falls directly on the affected member or official, in which case it is for them to judge).

But, in the interests of openness and fairness (and to minimise the risk of the public entity having to defend itself against an allegation of impropriety), it is always safer to err on the side of caution.

As noted above, once a conflict of interest is recognised, the most common response should be withdrawal or exclusion from considering the matter.

It is wise to make a written record about any decision. This might include details of the facts, who undertook the assessment and how, and what action was taken as a result.7

1: The entity may also be required to disclose some matters in its financial statements, to comply with relevant accounting and auditing standards – see SSAP-22 and AS-510. Those standards require the disclosure of transactions with related parties. In short, a "related party" is someone who has the ability, directly or indirectly, to control or exercise significant influence over the other party.

2: For convenience, we refer to the decision being made by "the public entity".

3: See part 5 of our 2007 publication Local government: Results of the 2005/06 audits (parliamentary paper B.29[07b]), for a discussion of the concept of "interests in common with the public" in the context of members of local authorities.

4: This might sometimes include post-employment restrictions, such as those imposed under a restraint of trade agreement.

5: It might even be necessary to refrain from having further dealings with a person or organisation.

6: See for example Diagnostic Medlab v Auckland District Health Board (HC, Auckland, CIV-2006-404-4724, 20 March 2007, Asher J), Collinge v Kyd [2005] 1 NZLR 847, and Auckland Casino v Casino Control Authority [1995] 1 NZLR 142 (CA).

7: Sometimes risk management may be helped by also considering whether to make an announcement to certain other people, or even publicly, about the conflict of interest and how it has been dealt with.

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