Part 3: Governance and management issues

Inquiry into the West Coast Development Trust.

By the time we concluded our investigations, it was clear that the specific issues raised with us were symptomatic of more fundamental governance and management problems, rather than major issues in themselves. In this Part of the report, we discuss those general problems that have occupied the Trust during the past 18 months and during the period of our inquiry. We discuss conflict of interest issues in Part 4.

We accept that the Trust has operated effectively for most of its existence. It has received favourable assurance on its performance in the form of stakeholder satisfaction surveys, unqualified annual audit reports, and favourable reviews by this Office and by the Treasury.

The Trust has put considerable effort into building a set of policies and procedures for matters such as managing confidential information and conflicts of interest, based on legal advice.

During the past 18 months, however, the Trust has consumed significant resources in addressing governance issues, some of which had previously been regarded as settled. We have already detailed the background to these issues – in particular, the deteriorating relationship between trustees and the differing views held on the appropriate relationship for the Trust with local authorities. The time and money spent dealing with these matters are likely to have adversely affected the Trust's effectiveness and reputation, and it is clear that the Trust's ability to operate effectively has been harmed during this period of disputes about basic governance issues.

In this Part, we expand on some of the behaviours by trustees that have concerned us. The most significant issues are:

  • different views on the role of the Trust;
  • relationships between trustees, and between trustees and Trust staff;
  • disclosure of information;
  • transparency and accountability; and
  • authority for decision-making.

Some progress was made on basic governance issues at a facilitated meeting between all trustees and their individual legal advisers in February 2008. That such a meeting was needed at all, and that each trustee was separately represented by lawyers, is evidence of the level of dysfunction. Nonetheless, we commend the trustees for the agreements that were reached. A great deal more is needed, however, if the trustees are to restore effective working relationships and to build clear and shared understandings on core governance questions.

The role of the West Coast Development Trust

In Part 2, we noted the different dimensions of the Trust's role and the debates that have taken place in recent years between trustees on the role of the Trust.

One particular aspect of this debate between trustees that has surfaced in the past few months concerns the extent to which trustees must act through the Trust or individually. The Trust got legal advice on corporate governance principles in July 2007.

The advice noted that the Trust is a charitable trust board that must give effect to the objects in the Trust deed, but must also act in a commercial manner to achieve those objects. The advice noted that “the Trust is a commercial entity within a charitable structure. The Trustees must operate as a commercial board, not a political council.” The Trust resolved to adopt this and other basic corporate governance principles on 6 August 2007.

In mid-2007, Mr Williams obtained his own legal advice (see paragraph 2.28), which took a different view from the Trust's lawyers on some corporate governance matters − including the extent to which a trustee can act independently of the Trust. Correspondence shows that the debate between the legal advisers (and the trustees) on these issues continued for some time.

There has also been some debate about whether newly elected trustees are bound by resolutions of the Trust made before they were elected. All trustees have now accepted that they are bound by lawfully made formal resolutions of the Trust that have not expired, been varied or rescinded, or been overturned by a court. They have also accepted that the principles of transparency and confidentiality bind the Trust as a whole and each individual trustee.1

We discussed with some of the trustees their view of the nature and role of the Trust. They were clear about the legal nature of the Trust and their obligation to give effect to the Trust's charitable objects. The Trust is involved in the commercial and community sectors, and clearly needs to act in a commercial manner when investing and when dealing with clients. This does not now appear to be contested.

The trustees may have different views on how they should best give effect to the objects of the Trust, and the level of risk that is acceptable. This is to be expected in a group of people with different experiences and backgrounds, and it is not necessary for the trustees to have a common view on such matters. The trustees are free to debate their views at Trust meetings when considering applications and when setting the Trust's strategic direction.

However, it is important for the Trust as a whole to have a shared understanding of the way in which the Trust will operate and organise itself as it blends the different aspects of its context into a practical working organisation. It is also important for trustees to agree on the strategic direction. That is the process for bringing together the different perspectives of individual trustees into a coherent framework that can guide the Trust's day-to-day decision-making on applications. Once the strategic direction and governance and management systems have been agreed, all trustees should work within them. If they have concerns or questions, those should be worked through collectively with their fellow trustees in keeping with the Trust's procedures.

After the 2007 elections, the Trust intended to hold a planning day to work through such matters with the new group of trustees. However, it was not possible to have the planning session at that time, given the state of relationships. It was held in April 2008, and a strategic plan has now been agreed. We are also aware that Trust staff have carried out a significant amount of work to prepare new protocols. We encourage the Trust to hold such meetings and to use them to finalise and adopt the protocols. They are the appropriate forum for debating and resolving different views on the role of the Trust, and for the trustees to collectively agree on the policies and procedures under which they and the organisation will operate.

Relationships within the West Coast Development Trust

The Treasury review in 2006-07 led to a reduction in the number of trustees from 12 to six. This change was a direct response to the governance and relationship problems referred to in paragraph 2.14. The Treasury noted at the time that improving the trustees' governance and stakeholder relationships would largely come down to the trustees' abilities and their approach in these areas.

Unfortunately, the six trustees who have been in office since the 2007 elections have not been able to work together effectively in some respects. They have been clearly and publicly split into two factions, each of three trustees, on many issues. During the inquiry, we have seen some of the email communications between trustees. We have been surprised by the tone of some of the emails and the extent of animosity between some of the trustees. We were told that the trustees agreed to a truce on “inflammatory” emails towards the end of 2007. However, our review of communications and minutes of meetings during 2008 shows a continuing problem of unprofessional behaviour and personal animosity.

The trustees should note that, in a situation with some similarities to this one, the High Court has criticised trustees for “playing games”. In that case, a faction of Part 3 Governance and management issues 22 trustees attempted to remove the chairperson of a charitable trust before a vote on a significant issue on which they disagreed with the chairperson.2 The trustees first boycotted a meeting to vote on the issue, leaving the meeting without a quorum. They then sought to call another meeting to remove the chairperson and appoint one of their own in his place. This would have given them the numbers to win the vote on the significant matter. The High Court issued orders prohibiting the dissenting trustees from holding a meeting to remove the chairperson, and directing them to attend a meeting to vote on the proposal. The High Court said that the trustees were attempting to misuse the processes of the trust by using trust powers for an improper purpose.

We refer to this case to show that trustees must be careful not to use Trust processes for improper purposes or with an ulterior motive, and that in extreme cases such behaviour can become a legal issue as well as an ethical one. The trustees must give effect to the objects of the Trust and must not use their powers or trust processes for any other reason. The Trust has spent a significant amount of money in the past few months on legal advice to consider and address differences between trustees. The Trust will be less effective in delivering on its objects if Trust resources continue to be consumed in addressing and resolving disagreements between trustees. People may be less likely to apply to the Trust for funding if they perceive the Trust's focus to be on sorting out its own governance problems rather than conducting its ordinary business of promoting economic development.

The elected trustees have been elected for a three-year period and have a mandate from the people that voted for them to be trustees for that three-year period. The appointed trustees have a mandate from their appointing bodies to hold office as trustees for the term of their appointment. Once they become trustees, their primary duty is to the Trust. There is no mechanism in the Trust deed to enable trustees to be replaced with an appointed commissioner if there is a significant governance failure. The expectation is that the trustees will make it work. Any trustee who is not able to work with other trustees or Trust staff should consider whether they are able to be an effective trustee. The trustees need to put aside any personal animosity towards each other and work together in the interests of fulfilling the objects of the Trust for the period of their election or appointment.

One of the new trustees, Mr Smith, has placed considerable demands on Trust staff in terms of information requests. We understand that, in the past, requests by trustees for information from Trust staff were channelled through the chairperson as a way of managing the interface between the governance and management arms of the organisation. The general code of conduct that is being prepared includes a protocol on communication between trustees and staff. We encourage the Trust to finalise this protocol, given the need to maintain clear lines of accountability, to maintain the distinction between governance and management, and to manage the potential for such requests to place undue demands on staff. It is important that there is a clear and shared understanding of the trustees' information needs for their governance role, and of the systems that are in place to meet those needs, to avoid all parties becoming frustrated.

Disclosure of information

During the inquiry, we discussed the issue of confidentiality with trustees and Trust staff. Everyone that we talked to raised the issue as a concern. We were told that problems first surfaced when confidential Trust information was leaked from the Trust in 2006 and published in the West Coast media.

More recently, and since the 2007 elections, matters discussed at Trust meetings have been made public and the trustees have argued among themselves about whether statements they have made to the media were authorised.

We have not attempted to investigate the detail of these various incidents. It is unclear whether we would have been able to ascertain who had dealt with information inappropriately. Nor did we consider it necessary for the purposes of this inquiry to try to establish those facts. What is clear, from Trust minutes, media commentary, and our discussions with those involved, is that disclosure of Trust information through unauthorised channels has been a significant factor in the breakdown of effective relationships at the Trust in the past 18 months. We have already noted (see paragraph 2.39) the length of time that it took to resolve the legal issues associated with Mr Smith's role in the disclosure of information to the Greymouth Star, even after he was elected as a trustee.

The fact that confidential Trust information on applications for funding and on internal governance debates has been made available to the public through the media, including since the election in October 2007, is likely to have reduced the level of trust that people have in the Trust and to have affected the Trust's effectiveness and reputation. Some people that we spoke to consider that leaks of confidential information about applicants has led to a drop in the number of applications for funding. The fact that other matters discussed at Trust meetings since the election have been made public has not helped public confidence, or the confidence of relevant public sector agencies, in the Trust's effectiveness.

The Trust is not subject to the Official Information Act 1982 or the Local Government Official Information and Meetings Act 1987, which provide a system for determining which information should be released and which should be protected. It is therefore not subject to the statutory principles and rules that guide most other public entities. It has had to develop its own approach based on the Trust deed.

It would be impossible for the Trust to conduct its operations as a provider of funding to individuals and businesses without protecting the confidentiality of material supplied by applicants. Applicants for Trust funding often include sensitive information in applications, and some seek an undertaking that information will be given to relevant Trust staff and members of the advisory body only, and not given to trustees.

The Trust has legal advice that each trustee is bound by an obligation of confidentiality, and that any failure to maintain confidentiality would be a serious breach of duty. The Trust adopted a series of corporate governance principles in August 2007, including that “each trustee is bound by an obligation of confidentiality”.3 The current trustees agree that material submitted to the Trust by applicants must remain confidential. Five out of the six trustees have signed a standard confidentiality agreement agreeing not to disclose any confidential information while as a trustee and after ceasing to be a trustee, and agreeing to indemnify the Trust for any loss or damage suffered through the trustee's unauthorised disclosure of confidential information. Mr Smith has signed a modified version. Trust employees are also required by their employment contracts and the staff code of conduct to maintain the confidentiality of sensitive information.

The Trust needs to be clear about the authority for communicating Trust matters to the public,4 but there does not appear to be more that the Trust could do to protect confidential information. The system relies on the personal integrity of trustees and employees. The confidentiality agreement between the Trust and trustees makes the requirement very clear and imposes a potential financial liability on trustees for breaching it. The requirement to keep sensitive material confidential is a core obligation on the part of employees and members of governing bodies in the public sector. A trustee who inappropriately discloses confidential information is unlikely to be acting in the interests of the Trust, given the likely resulting damage to the Trust's reputation and effectiveness. Similarly, any employee who leaks confidential information would be in breach of their employment agreement and face serious employment consequences if found to be responsible.5

The trustees should consider the nature and extent of the Trust's disclosure of information and reporting to the four local authorities and other appointing bodies as part of the requirement to act transparently and be accountable. This is something the trustees should consider and agree as a group, rather than it being a personal matter for the appointed trustees. The results of that agreement should then be built into the general procedures of the Trust. We understand that work is now well advanced to document appropriate policies and procedures on these issues, and we encourage the Trust to finalise and adopt them. All trustees should then operate in keeping with the agreed systems.

The issue of reporting to appointing local authorities is less significant now than in the past, given the changes to the Trust deed to reduce the number of local authority-appointed trustees from four to one. However, we agree with the views in the Treasury review and the Trust's legal advice that a trustee's primary loyalty is to the Trust. It is unhelpful for an individual trustee to take on reporting obligations to an appointing body, and it is likely to be inconsistent with that person's legal duties as a trustee. The nature and extent of reporting to an appointing body should be agreed and managed by the Trust as a whole.

The Trust needs clear systems for working out what is and what is not confidential, and agreed processes for making information available to the public. The Trust had a system for this that used three categories of information. We are pleased that the trustees have recently confirmed previously established principles for determining confidentiality and making information available to the public.

Transparency and accountability

In our 2006 performance audit, we considered that the Trust had mostly met the accountability requirements in the Trust deed in terms of making certain information available to the public. However, we noted that some people thought that the Trust was not transparent in its operations and should conduct more of its business in public. We said that we considered it appropriate for the trustees to discuss applications for funding in closed session, but encouraged the Trust to continue with recent initiatives to hold public meetings on high-level public interest matters (such as regional economic development).6 We also encouraged it to continue to improve its systems for measuring and reporting on its performance to the community it serves.

There has been some debate among the trustees about how they should give effect to the requirement in clause 4.2 of the Trust deed, which states:

The Trust shall conduct its affairs in a manner that is transparent and accountable to the people of the West Coast Region.

During our inquiry, we received different views from current trustees about the extent to which the Trust should conduct some of its business with the public present. Some trustees consider that the Trust should be more open in its processes and would favour the local authority model, where Trust meetings would be open to the public unless there is good reason to exclude them (for example, when considering applications for funding).

In our performance audit, we said that it was up to the Trust to determine how to meet the transparency and accountability requirements of the Trust deed. From time to time, the Trust has actively considered how best to do this, and uses a range of ways to communicate with the community, as reflected in its strategic plan.

The issue has been debated by current trustees, and they recently confirmed the policy that certain information, such as material about major regional and district initiatives, will be publicly available without request. The trustees also determined who is responsible for communicating this information and the methods of communication, which include public forums.

The approach adopted appears to us to strike a good balance between the need to be transparent and accountable, and the need to protect confidential information. The trustees are likely to need to consider and review their approach from time to time.

Authority for decision-making

This aspect of our inquiry focused on the extent and clarity of delegations by the Trust in the area of distribution of funding to applicants, and the authority for certain other contentious decisions made in the past few months.

Until recently, the Trust has not delegated decision-making powers on applications for Trust funds to committees or to staff to any great extent. Several people that we spoke to told us that trustees had been very “hands on” in terms of decisions on applications. We noted that the advisory body has occasionally questioned its own role given the trustees' close involvement in operational decisions. The Treasury review found that the trustees needed to have more of a governance focus than they had in the past. This suggests that the trustees need to devote their efforts more to strategy and governance matters than to operational decisions.

The Trust has previously delegated some decision-making authority on applications to a subcommittee known as the committee of chairs – for example, approving expenditure on expert advisers to assess significant proposals and to approve variations to approved funding arrangements on the recommendation of the advisory body. More recently, the Trust has agreed to give a greater level of authority to the chief executive in the area of distribution of funding to applicants. The delegations are now in place for a system of cascading decision-making. But the then chief executive, Mr Trousselot, advised that he and his staff had not been willing to exercise their delegated authority to any significant extent while the governance environment had been so unstable.

In our review of Trust files, we noted that the then chairman, Mr Dooley, had advised trustees at a meeting in October 2006 that he had authorised two separate payments of funds for a Trust client after having considered the negative effects on the business and the Trust's image and reputation if funds had not been made available. Not all of the pre-conditions required for the Trust support of the client had been met. Mr Dooley told us that he had no specific delegation to authorise payments but, in the case in question, believed he needed to act to ensure that the Trust's reputation was maintained and because the Trust's staff with responsibility for distribution had played a part in the client's failure to meet all of the pre-conditions.

In another case, discussed in paragraph 5.18, an applicant sought a variation to the terms of a funding arrangement. The variation was not significant to the Trust's position but was to the financial advantage of the applicant. The advisory body approved the variation but Mr Trousselot did not seek approval from the trustees or committee of chairs at that time. The variation was later ratified by the trustees.

These examples are not overly significant. We acknowledge that the Trust will sometimes be under pressure from applicants or funding recipients to make decisions urgently, that staff will sometimes make errors when there is urgency, and that in some cases general policies need to acknowledge that exceptional circumstances may sometimes require a different process. Nonetheless, it is important that all Trust expenditure is properly authorised. We expect all trustees and senior Trust staff to have a very good understanding of financial delegations and to ensure that all financial decisions are properly authorised. Financial delegations need to be accessible and clear.

Mr Trousselot told us that the governance difficulties in the Trust made it hard for routine business, such as approvals or variations of funding terms, to be conducted while maintaining commercial confidentiality. He also told us that in some cases he and Mr Dooley had had to act in the best interests of the Trust without having complied with the usual pre-approval processes. He told us that retrospective approval was sought in those situations.

Some of the current trustees were also concerned about whether a decision to take legal action against Mr Smith for releasing confidential Trust information to the media, made shortly before Mr Smith was elected as a trustee, was properly authorised. The decision was made by several trustees and the chief executive, but not all trustees were consulted. This issue was before the courts as part of the legal action between the Trust and Mr Smith while we were carrying out this inquiry, and so we have not formed a view on whether the decision was appropriately made. We note, however, that the prolonged debate about the authority for that decision highlights the importance of clear delegations and decision-making authority.

The Trust needs to be very clear where the authority for decisions involving expenditure of Trust funds resides, and the process for making decisions. The Trust deed authorises the trustees to delegate their functions or powers, but where there is no delegation the decision-making authority remains with the trustees.

The recent changes in the composition of the Trust, and the directions agreed to by the Trust in the Treasury review, provide an opportunity to reconsider and rationalise financial delegations, including in situations where urgency is required. The Trust also needs to decide whether it wishes to delegate any authority to the chairperson for financial decision-making. We encourage the trustees to consider and agree on financial delegations as soon as possible.

We also note that we were not always clear whether the delegations that we saw were current. We encourage the Trust to regularly review all policies, including financial delegations.

Overall comments

The operations of the Trust have been hindered recently by the dysfunctional relationship and, at times, animosity between the trustees, and by the inability of the trustees to reach an agreed position on some fundamental issues (for example, concerning leadership of the Trust). This, along with concerns that confidential Trust information has been released into the public arena, has the potential to cause significant damage to the reputation and viability of the Trust. It has certainly stopped it functioning effectively in recent months.

We are pleased to note that the trustees have reached agreement on some initial governance issues and that further work is under way, although it is not clear that these initial agreements are operating effectively yet. On some of these matters, it is essentially a question of the trustees together understanding and accepting the legal advice on the nature of the Trust and on their core obligations as trustees. On other matters, there are questions of direction and procedure for trustees to decide, supported by Trust staff and advisers as necessary.

The work that has already been done to implement the changes agreed as a result of the Treasury review also needs to be consolidated, so that the trustees have more of a governance focus. Strengthening the governance in practice would allow Trust staff to work effectively with the stronger system of delegated decision-making for operational matters.

We urge the trustees to continue to find ways to work together effectively in the interests of achieving the objects of the Trust. The most important change that is needed to alter the governance environment is for the trustees as a group to be able to work together and take collective responsibility for the governance of the Trust. The focus should be on the individual and collective legal and ethical duties they owe to the beneficiaries of the Trust rather than on personal or political differences.

1: Development West Coast – Facilitation Agreement, 4 February 2008. This document records the consensus reached on these and other matters at a facilitated meeting on 4 and 5 February 2008.

2: Kyd v Collinge & Ors (unreported, HC Auckland, CIV 2004-404-5049, 17 September 2004, Winkelmann J).

3: Policy Manual, Part 2 Trustees, clause 2, page 1 (adopted 6 August 2007).

4: We note that the trustees reached consensus on dissemination of information at the facilitated session on 4 and 5 February 2008. It is not clear whether these protocols are operating effectively yet.

5: Our comments here are not intended to apply to employees or office holders who have concerns about serious wrongdoing using the Protected Disclosures Act 2000.

6: Paragraphs 2.75-2.80 of our performance audit report, Management of the West Coast Economic Development Funding Package (May 2006).

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