Part 2: Background

Inquiry into the West Coast Development Trust.

Establishing the West Coast Development Trust

The Crown established the Trust in April 2001 to administer $92 million of a $120 million funding package, given by the Crown to assist the West Coast economy to adjust to the Government’s policies to end logging of indigenous forest. The remaining $28 million was divided equally between each of the four West Coast local authorities1 to spend as they saw fit.

The Trust is a charitable trust to benefit the community of the present and future inhabitants of the West Coast region. The Trust fund can be used to:

  • promote sustainable employment opportunities in the West Coast region; and
  • generate sustainable economic benefits for the West Coast region; and
  • support projects (other than infrastructure that is normally the responsibility of local authorities or central government), if those projects promote sustainable employment or generate sustainable economic benefits.

The Trust was initially governed by 12 trustees, six of whom were directly elected, four of whom were appointed by the region’s local authorities, one who was appointed by Te Rūnanga o Ngāi Tahu, and one appointed jointly by the presidents of the New Zealand Law Society and the New Zealand Institute of Chartered Accountants. The trustees’ role is to direct and supervise the conduct of the Trust’s business. The number of trustees was reduced to six in 2007, but has recently been increased to seven.

Unlike other public entities with elected boards (such as schools, local authorities, or district health boards), there is no “circuit breaker” mechanism in the Trust deed to enable the elected trustees to be replaced if there is a governance failure.

The trustees appoint an advisory body to act as expert advisers in distributing funds to business and community groups. Applications for more than $100,000 cannot be approved without a recommendation to do so from the advisory body, and the advisory body can recommend approving the application only if it considers that the application meets the objects, or purpose, of the Trust. A chief executive and staff support the trustees and the advisory body.

Under the Public Audit Act 2001, the Auditor-General is the Trust’s auditor, and appoints an auditor to conduct the Trust’s annual financial audit on his behalf. The appointed auditor has issued clear audit opinions on the Trust’s financial statements since it was established.

The Trust’s own systems for measuring its performance, including its stakeholder satisfaction surveys, have also been positive.

Our performance audit of the West Coast Development Trust

We carried out a performance audit in 2006 that considered how the Trust and the four local authorities were administering the funding they had received. Further information on the establishment and structure of the Trust is set out in the report of that performance audit, Management of the West Coast Economic Development Funding Package, which we published in May 2006.

Our performance audit looked at the governance arrangements for the Trust and tested that the distribution of Trust funds complied with the Trust deed. The performance audit’s findings were generally positive about the Trust’s governance arrangements, including:

  • governance of the Trust’s subsidiary companies;
  • management of conflicts of interest;
  • maintaining confidentiality; and
  • meeting the transparency and accountability requirements of the Trust deed.

We noted in that report that a number of people considered that 12 trustees was too many for effective governance, and were concerned that there were no skill requirements for trustees. We also reported some people’s concerns that the Trust was not sufficiently transparent and that perceptions of a “veil of secrecy” could lead to suspicion. Our report emphasised that confidentiality was important for the application process, given the range of personal, financial, and commercially sensitive information involved, but we also encouraged the Trust to continue with its initiatives to more regularly involve the public through meetings and by improving reporting on its performance.

All decisions to provide funding must ultimately be consistent with the objects of the Trust. Our 2006 report commented on the significant debate about aspects of the interpretation of the objects of the Trust, and that this lack of agreement sometimes affected the Trust’s operations and decision-making processes. We encouraged the Trust to resolve those debates, including by obtaining further legal advice and using a forthcoming review to clarify some issues.

The Treasury review

The Trust deed required the Trust’s settlor2 and the trustees to review the operations of the Trust after five years of operation. The Treasury, acting for the Minister of Finance, began this review in June 2006, working closely with the Trust. The review was completed in June 2007.

Issues considered during the review included the:

  • number of trustees and the composition of the Trust;
  • role of trustees appointed by local authorities, and their relationship to their appointing body;
  • changing governance and management needs of the Trust as the organisation moved out of the establishment phase and matured, and the need for a tiered system of clear delegated decision-making authority for the Trust, its subcommittees, and the chief executive;
  • extent of the Trust’s role in distributions to community groups, the assessment of those distributions against the objects of the Trust, and the role of the advisory body in those applications;
  • possibility of giving the Trust a power to borrow; and
  • interpretation of the “infrastructure clause” in the Trust deed’s description of the objects of the Trust.

Both our performance audit and the Treasury review noted the general agreement among the trustees and stakeholders that the number and mix of trustees was proving a barrier to effective governance. The Treasury review documents noted that stakeholders cited a number of factors that were inhibiting effective governance, the main ones being the Trust’s leadership style and the misalignment of local authority incentives with the objects of the Trust. The review noted that the Trust’s relationships with its stakeholder local authorities were “at a low ebb”, and that work would be required to improve them.

After the Treasury review, the Trust deed was amended to reduce the number of trustees from 12 to six. The Treasury review noted that six trustees would be able to make decisions efficiently and have a strong sense of direction, while still achieving a strong West Coast presence and a link to the local authorities. The change included reducing the number of local authority-appointed trustees from four trustees (appointed by each of the four local authorities in the West Coast) to one trustee appointed by the four local authorities. This change came into effect with the local authority elections in October 2007.

The Treasury review noted that the role of local authority-appointed trustees had been queried during the review. The review clarified that, once appointed, trustees had a fiduciary duty (see paragraph 2.22) under general law and the Trust deed to act in the best interests of the beneficiaries “as a whole” (that is, the West Coast region) rather than any one district. The review also noted that improving the trustees’ governance dynamics and external relationships would largely come down to the abilities of trustees and their approach in these areas.

Other findings of the Treasury review included that:

  • the Trust had succeeded in getting its operations established and supported by a strong set of policies and processes within a short time frame;
  • the Trust had managed its funds well under its investment strategy;
  • the Trust had been involved in community distributions to a greater extent than envisaged by the settlor, and would review its involvement (particularly in minor distributions with limited economic effect); and
  • as the Trust had grown in size, capability, and operations since it had been formed, the trustees needed more of a governance focus than they had in the establishment phase (that is, a focus on determining the direction and major policy settings of the Trust). The review noted that an intended shift to a more tiered application process, with greater delegation to the advisory body and chief executive, would support this approach.

A number of detailed changes were made to the Trust deed because of this review. It was also agreed that another review would take place in five years.

Emerging difficulties

Our 2006 performance audit described an organisation that had established itself well and was reasonably effective, albeit with areas where further work was needed. The Treasury review also noted much that was positive, but acknowledged some emerging difficulties. The review alluded to problems with the relationship with the local authorities, disagreements about the role and allegiances of trustees, and ongoing debate about the meaning and application of core provisions of the Trust deed.

Our discussions with people during our inquiry, our review of documentation, and our review of the various events and media commentary of the past 18 months confirms that those issues have now become major difficulties. We discuss particular issues in more detail in this report, but it is useful to note some points now as general background.

At least some of the difficulties arise from a question about the core nature of the Trust, and whether it should be regarded as similar to a local authority (given its composition of locally elected and local authority-appointed trustees) or to a commercial investment organisation. This issue links to questions about the appropriate levels of transparency and public accountability, systems for disclosing information, and decision-making roles and responsibilities within the organisation.

In our view, the Trust is a hybrid organisation:

  • Three of the seven trustees3 are elected based on local authority boundaries, and another is appointed by the region’s local authorities. There is clearly a democratic and therefore political element to the Trust, which is likely to colour its relationship with the community and other locally elected organisations. The Trust is partially representative of the people of the region, and must therefore be in some way responsible to the community that elects it. That element is implicitly recognised in the Trust deed, which includes a general requirement for the Trust to operate with transparency and accountability.
  • At the same time, the organisation is established as a trust. This means that trustees have very specific legal responsibilities under the Trust deed and general law to act in the best interests of the beneficiaries of the Trust. These responsibilities are often referred to as fiduciary duties and impose high standards of conduct, diligence, and probity on trustees.
  • The Trust is also set up to make commercial investment decisions. The nature of its activity means that, in many respects, it is operating similarly to a venture capital fund. It operates in a commercial environment that sometimes involves access to commercially sensitive and confidential material, and a significant measure of risk-taking.

These different aspects of the Trust create a complex working environment, and the lack of a shared view on the way in which those different aspects come together has clearly been behind many of the issues we identify in this report. It is not straightforward in practice to protect commercially sensitive information and meet public transparency and accountability obligations, or to balance the risk-taking required for venture capital investments with traditional trustee duties of prudence or the dictates of political accountability. But the Trust has to agree on a balance and to build that balance into its governance and management systems. It achieved that in the first years of its operations, but more recently has not been able to maintain the necessary level of agreement among trustees on these critical issues.

Relationships between the trustees

Relationships between the trustees have deteriorated significantly since we completed our performance audit of the Trust in mid-2006.

In late 2006, when the Trust and local authorities were involved with the Treasury review, the Westland District Council replaced its appointed trustee. The trustee appointed by the West Coast Regional Council also resigned at this time. Mr John Clayton and Mr Tony Williams became the appointed trustees for the West Coast Regional Council and the Westland District Council respectively, and attended their first meeting on 6 November 2006.

Mr Clayton has challenged and questioned some Trust policies and processes since being appointed, including Mr Dooley’s practices in managing information. Mr Clayton considered that the Trust could be more open with its policies and information. He has a local authority background, and thought the Trust should operate more along the lines of a local authority than a commercial organisation. He has questioned the Trust’s confidentiality requirements and how they fit with the requirement in the Trust deed to operate transparently and accountably.4

We have reviewed the range of legal advice on the meaning of the requirement in the Trust deed to operate transparently and accountably. We agree with the conclusion in the Trust’s advice that this is an overall reporting obligation on the Trust as a whole, not individual trustees, and that it is compatible with a confidentiality policy designed to protect commercial information.

Mr Williams sought to clarify his reporting responsibilities to his appointing local authority, the Westland District Council. In mid-2007, he sought his own legal advice on governance issues, including the interpretation of the clause in the Trust deed about transparency and its relationship to the Trust’s requirement that trustees maintain confidentiality. Mr Clayton referred to that legal advice at a meeting of the West Coast Regional Council in June 2007. The legal advice was tabled at a meeting of the Westland District Council in August 2007, which at that stage agreed to pay part of the cost of the advice.

We would have expected an issue of this kind to be discussed first with fellow trustees and Trust staff. The fact that it was not was symptomatic of the relationship difficulties that were emerging among the trustees and between the Trust and the local authorities.

The Trust had sought its own legal advice on corporate governance principles about the same time. The matters of disagreement between the legal advisers were referred back to these advisers for consideration, and there has been extended correspondence between them.

Minutes of Trust meetings in the period from November 2006 to September 2007 record robust debates about governance issues at the meetings, and a deteriorating governance environment.

In September 2007, six of the then twelve trustees voted to replace Mr Dooley as chairman with Mr Williams. Six trustees supported Mr Dooley. With six for and six opposed, Mr Dooley remained as chairman.

Outcome of 2007 elections

Trustee elections were held on 13 October 2007. One new trustee was elected by Westland district – Mr Bruce Smith. Mr Dooley was re-elected by Buller district, and Mr Clayton was elected by Grey district. Mr Williams was appointed by a panel made up of representatives of the four local authorities. Mr Mark Lockington and Mr Barry Wilson continued in office representing their appointing bodies (the New Zealand Law Society and the New Zealand Institute of Chartered Accountants, and Te Rūnanga o Ngāi Tahu, respectively).

After the 2007 elections of trustees, the Trust was split into two factions, each of three trustees, and there was a dysfunctional relationship between the two factions. It was widely known on the West Coast that the trustees were unable to work together, and this affected the Trust’s effectiveness and the working environment for Trust staff. The trustees could not agree on who should chair the Trust. Minutes of the Trust meetings show heated argument on a wide range of procedural and substantive issues.

The trustees asked the settlor to appoint a seventh trustee to resolve the deadlock on various matters, including the appointment of a chairperson of the Trust. The Trust deed was amended to provide for the appointment of an additional trustee, and the Minister of Finance announced the appointment of a seventh trustee, Mr Brian Roche, on 15 February 2008. Mr Dooley stood down as chairman and the trustees unanimously elected Mr Roche as chairman at their meeting on 14 March 2008.

Disclosure of Trust information

The minutes of Trust meetings show that, from early 2005, the Trust has had problems with confidential information being discussed with people outside the Trust, and in some cases being reported in the media. In some cases, information has just been leaked. In other cases, the issues have been more complex and have related to:

  • the different views about the extent to which local authority-appointed trustees could report back to their appointing local authorities on Trust matters; and
  • a lack of clarity about the boundaries between different roles for local authority-appointed trustees who were also elected members of the appointing local authority.

In September 2006, a Trust subcommittee discussed these issues with a trustee whom some considered responsible for disclosing information outside the Trust. The matter was reported back to the Trust at a meeting on 6 November 2006. The trustee denied any wrongdoing and was asked to confirm his commitment to the Trust’s confidentiality requirements. The trustee did so and no further action was taken.

Leaks of confidential Trust information, and/or disclosure of information other than through the formal channels, have continued during the past 18 months. We have seen evidence of leaked material being debated in the community or in the hands of journalists since June 2007. Two recent and specific incidents are the leaking of information to the Greymouth Star at the time that information was provided to us, and the leaking of information arising from meetings shortly after the election in 2007. From mid-2007, Trust minutes show an increasing level of concern by the chief executive about leaks of confidential material and the effect on the Trust and Trust staff.

Mr Dooley and Mr Trousselot have told us that they were not concerned about confidential Trust information being sent to us, but were very concerned about such material being made public. With the agreement of some of the trustees before the October 2007 elections, they began legal action against Mr Smith, a candidate for election as a trustee (subsequently elected), asking for the return of leaked Trust information and disclosure of the source of his information. Mr Smith has confirmed that he received confidential Trust information about an application for funding and passed it on to the Greymouth Star. Despite Mr Smith becoming a trustee in November 2007, the substantive legal action between the Trust and Mr Smith was not resolved until June 2008.

Effect on Trust staff

The West Coast media has taken a keen interest in the Trust and its governance problems. The deteriorating governance environment, breaches of confidentiality, and negative media reporting about the Trust have adversely affected Trust staff. Mr Trousselot and the Trust’s marketing manager reported their concerns about the effect on Trust staff to trustees at Trust meetings in 2007.

1: West Coast Regional Council, Buller District Council, Grey District Council, and Westland District Council.

2: This is the person who created the Trust – in this case, the Minister of Finance on behalf of the Government.

3: A seventh trustee was appointed in February 2008. See paragraph 2.35.

4: Minutes of Trust meeting, June 2007.

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