Part 4: Management of conflicts of interest

Inquiry into the West Coast Development Trust.

Some of the specific concerns raised with us at the start of this inquiry involved matters of conflicts of interest. We considered how the Trust managed conflicts of interest where a trustee or staff member had a professional or personal interest in, or connection to, an applicant for funding from the Trust.

Managing conflicts of interest in the public sector

In the public sector there is a conflict of interest when a member's or official's duties or responsibilities to a public entity could be affected by some other interest or duty that the person may have. That other interest or duty might exist because of the person's financial affairs, a relationship or role, or something the person has said or done.

There are two aspects to dealing with conflicts of interest:

  • identifying and disclosing the conflict of interest (primarily the responsibility of the person 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).

The assessment of a conflict of interest focuses on:

  • the directness and significance of the conflict of interest;
  • the nature or extent of the conflicted person's current or intended involvement in the public entity's decision or activity; and
  • the risks that the public entity's capacity to make decisions lawfully and fairly may be compromised and its reputation damaged if the person participates.

In making this assessment, the entity needs to consider how the situation may reasonably appear to an outside observer. Usually, mitigation means that the person with the conflict of interest withdraws from, or is excluded from being involved in, the public entity's work on the particular matter. Sometimes this is required by statute.

This general public sector approach is stricter than that required of private sector company directors under the Companies Act 1993. Under that Act, directors are required to declare and record a conflict of interest, but the default position is that they are then able to participate in the discussion and decision.

Managing conflicts of interest requires careful judgement, and involves a balance. An approach that is too relaxed has legal and reputation risks, and can undermine public confidence in the entity. Equally, an approach that is too cautious and restrictive could frustrate the entity, its members, and its staff from operating effectively. General guidance on managing conflicts of interest in the public sector is available from the Auditor-General's guidance publication.1

Impartiality and transparency in administration are essential to maintaining the integrity of the public sector. Where activities are paid for by public funds or are carried out in the public interest, members of Parliament, the media, and the public will have high expectations. They expect people in the public sector to act impartially, without any possibility that they could be influenced by favouritism or improper personal motives, or that public resources could be misused for private benefit.

The existence of a conflict of interest does not mean that someone has done something wrong, and it need not cause problems. In small New Zealand communities, including the West Coast, conflicts of interest regularly arise and have to be managed. However, they must be managed carefully. Proper management of conflicts of interest benefits and protects both the individual and the public entity.

The requirements of the West Coast Development Trust deed

The Trust deed contains rules for managing conflicts of interests of trustees. It states that a conflict of interest occurs for a trustee when:

  • the trustee is associated with another entity, such as a company or another trust, that the Trust is dealing with;
  • the interests or duty of the trustee in any particular matter conflicts with their duty to the Trust; or
  • the trustee is dealing with himself or herself in another capacity.

Clause 19 of the Trust deed states that:

  • where a trustee has a conflict or potential conflict of interest, the onus is on the trustee to declare the nature of the conflict at a meeting of trustees;
  • a trustee with a conflict of interest is not able to take part in any deliberations or proceedings, including voting or other decision-making, on the matter in which the conflict exists; and
  • the chairperson may require a trustee with a conflict of interest to leave the meeting, and if the trustee does not leave the chairperson may adjourn the meeting until the trustee leaves.

Following the Treasury review in 2006-07, the Trust deed was amended in September 2007 to strengthen conflict of interest practices. These changes were intended to codify new practices that the Trust had put in place, and involved:

  • having a deputy chairperson, to step into the role of the chairperson if the chairperson has a conflict of interest;
  • applying the same conflict of interest rules to the advisory body that apply to trustees; and
  • stating that a trustee with a conflict of interest is not eligible to participate in a meeting of the advisory body in their capacity as a trustee2 about a matter in which they have a conflict of interest, and vice versa.

On various occasions, the Trust has sought legal advice on the meaning or application of clause 19 of the Trust deed. This advice is contained in the Trust's Policy Manual and is available to all trustees.

Declaring conflicts of interest

Our review showed that trustees generally declared conflicts of interests at Trust meetings when they arose. There was no suggestion that conflicts of interest were not declared at meetings.

The Trust keeps a register of declarations of conflicts of interest made at meetings. The register records the name of the individual, the matter in which the conflict was declared, the nature of the meeting, and in some cases the nature of the conflict in brief terms.

The register that we reviewed covers the period July 2001 to September 2007. It records 205 declarations of interest during this period. Many of the trustees have declared conflicts of interests at meetings.

Managing conflicts of interest

We did not consider it necessary to review the minutes of all meetings at which conflicts of interest had been declared to check how the Trust had managed them. The matters we did consider were:

  • the role of the chairperson in managing conflicts of interest;
  • whether a trustee with a conflict of interest can address the meeting after the conflict of interest has been declared; and
  • managing conflicts of interest outside meetings.

The role of the chairperson in managing conflicts of interest

If a trustee declares a conflict of interest, the Trust deed provides that the chairperson may require that trustee to leave the meeting, and may adjourn the meeting until the trustee leaves.

It was suggested to us that Mr Dooley had previously overstepped the chairperson's role under the Trust deed. Minutes from a meeting in August 2007 show Mr Clayton expressing concern that Mr Dooley ruled that another trustee had a conflict of interest while that trustee was out of the room. Mr Dooley commented that he had legal advice confirming that it is the chairperson's responsibility to rule on potential conflicts.

The Trust had previously discussed the treatment of conflicts of interest with its legal advisers, who had attended a trustee meeting in October 2005. The minutes record the advice received was that “Trustees should declare associations in regard to agenda items to allow the chairman to rule whether a conflict situation exists.” We have also seen other legal advice obtained by the Trust which says that trustees should not judge for themselves whether they have a disqualifying conflict of interest, and that it is the chairperson who has the responsibility for deciding whether in any given case a trustee faces a conflict of interest that should disqualify the trustee from taking part in decision-making.

In an instance discussed with us, Mr Dooley raised a conflict of interest that he was aware of with Mr Williams, and told Mr Williams that he could not participate in voting on the matter. Mr Williams told us that he had not been aware of the matter and, when advised of it, did not think that it was significant.

Mr Dooley's actions were in keeping with the specific legal advice that the Trust had obtained to clarify the role of the chairperson in conflicts of interest. He cannot be criticised for acting on that advice in keeping with the Trust's documented procedures.

We note, however, that in practice it is often preferable for individual trustees to have an opportunity to identify whether they may have a conflict of interest, and to discuss this if necessary with the chairperson or the other trustees. Even if the chairperson has the formal power to rule on conflicts of interest, it is usually better if such issues are dealt with through discussion and agreement beforehand, so that all those concerned can agree on what action is appropriate. This would assist the transparency and probity of the Trust, and also promote individual and collective responsibility for the integrity of the decision-making processes of the Trust.

It will usually be helpful for a trustee who intends to declare a conflict of interest to discuss the matter with the chairperson before the meeting. The chairperson and the trustee can then discuss mitigation options, given the nature of the conflict and the nature or significance of the matter that the Trust is to discuss. Legal advice could also be obtained if necessary.

If a conflict of interest is not brought up by a trustee, it would be reasonable for other trustees or the chairperson to raise a potential conflict of interest that they are concerned about.

The chairperson then has a role in deciding whether a trustee with a conflict of interest may remain in the room while the matter is discussed.

Addressing the meeting after a conflict is declared

Some people we spoke with raised a concern about whether a trustee with a conflict of interest could address the meeting about the matter in which they have a conflict before refraining from voting or leaving the meeting, and whether the Trust had taken a consistent approach to this. The minutes of some meetings record that a trustee has declared an interest, addressed the meeting, and then left the meeting.

In the minutes of trustee meetings that we reviewed, there were several instances of Mr Dooley declaring an interest and then sharing some information with the other trustees before leaving the meeting.3 Minutes from an April 2007 meeting record that some trustees expressed their concerns about the appropriateness of trustees with a conflict of interest making comment, and the acting chairperson for this section of the meeting undertook to discuss with Mr Dooley his method of sharing information. The minutes note that not all conflicts are clear cut and that often it may be appropriate for a trustee with a conflict of interest to comment.

Minutes from a meeting in August 2007 record Mr Dooley declaring an interest in an application, and being invited by the trustees to provide information relevant to the matter before leaving the meeting. In another example, Mr Williams declared a conflict of interest for a funding proposal and was invited by the chairperson to remain in the meeting and contribute to the discussion.

The Trust deed states that a trustee with a conflict of interest may not take part in any deliberations or proceedings, including voting or other decision-making, on the matter in which the conflict exists. The trustee may remain in the meeting unless required by the chairperson to leave.

According to the Trust's Policy Manual,4 the Trust adopted the following policy on 7 August 2006:

Where trustees have a conflict of interest, they will not address other trustees but vacate the room immediately before the item in question is discussed.

The Trust had received legal advice that, if a trustee has a possible conflict of interest but also has information that may be relevant to the meeting, that trustee should declare their possible conflict, pass on the information, and then leave the meeting should this be required.

It is reasonable for the Trust to follow the legal advice that it obtained. However, it should have a consistent approach to this issue, and it should document its approach in the Policy Manual. The concerns that were raised with us show that not all trustees were comfortable with, or understood the basis for, the approach being adopted.

In our experience with conflicts of interest in the public sector, we generally expect that a board member with a conflict of interest will not address the meeting about the matter in which the conflict exists. Permitting a trustee to do so at the meeting may raise concerns that the trustee has not sufficiently stepped aside from the matter, and may create a perception that the conflict is not being sufficiently or appropriately managed.

We discussed this matter with the Trust's legal advisers. They draw the distinction between an individual providing information and taking part in deliberations. We understand that distinction, and accept that it is a possible interpretation of the Trust deed. It strikes a balance between the public and private sector approaches discussed earlier (see paragraphs 4.2-4.6).

The legal advisers also thought it would not be in breach of the Trust deed if the conflicted trustee addressed the meeting in another capacity, such as that of financial adviser for the application being discussed. In our view, this could create its own risks of perceived unfairness. The Trust would need to ensure that other advisers to applicants had equal access and were able to address meetings of the trustees. Without such a system (and we have not seen evidence of one), we consider that this approach runs the risk of creating an actual or perceived advantage for the adviser who is also a trustee.

In our view, the approach taken by the Trust, based on legal advice, is a possible interpretation of the Trust deed and may be a practical approach given its circumstances. However, it is a less stringent approach than other public entities operate. We encourage the Trust to consider whether it would be possible for trustees with a conflict of interest to advise the chairperson or the chief executive of the Trust of any information that they consider necessary before the meeting. It would also protect the trustee and the Trust if that advice was documented, along with the conflict of interest and the reasons the information was nonetheless being provided.

All of the instances discussed in this Part are of trustees with conflicts of interest providing information to meetings. We did not come across any examples of trustees with conflicts of interest being involved in decisions on matters in which they had declared a conflict of interest.

Supporting administrative systems for managing conflicts

We considered whether the Trust's administrative systems were able to support the management of conflicts of interest. Adequate systems exist, but some improvements could be made.

For example, a trustee who has a conflict of interest with an application should not be provided with information on that application. The Trust staff responsible for sending out papers for trustee meetings should take steps to ensure that trustees with a conflict of interest do not receive information about matters in which they have that conflict of interest. The Trust takes this approach, but there have been instances of trustees receiving papers or correspondence they should not have. It was acknowledged at a meeting in April 2007 that there were some inconsistencies in the use of this process and that it needed some attention. Trust staff explained to us that Trust papers are often assembled and distributed to trustees urgently.

Although meeting papers might be distributed before any conflicts of interest have been declared at a trustee meeting, there is a process that should identify potential conflicts of interest in advance. At each monthly trustee meeting, the business enquiries register is provided and discussed. It contains the enquiries that the Trust has received about funding and that may result in formal applications. It gives the trustees an opportunity to declare at the outset any conflicts of interest that might arise if an application is made.

We understand that, if a member of the advisory body receives papers on an application in which they have a conflict of interest, the practice is to destroy the papers unread and to advise that they have done so. The trustees should consider adopting this practice.

The advisory body

We understand that the approach taken by the advisory body to conflicts of interest at its meetings is to permit the conflicted member to participate in the discussion and voting if they have only a minor involvement with the matter. The advisory body should reconsider this approach because the Trust deed does not permit partial participation based on the nature of the conflict.

Overall comments on managing conflicts of interest

The Trust deed contains clear rules and requirements for declaring and managing conflicts of interest. Trustees and Trust staff are aware of these rules. The Trust has considered how it should manage conflicts of interest, and has received advice from its lawyers. However, more effort is needed to improve the administrative processes that support the management of conflicts of interest.

While individual trustees are responsible for declaring any conflicts of interest, the chairperson also has general and specific responsibilities to protect the integrity of the Trust's decision-making processes. We expect the chairperson to work with trustees in managing conflict issues, with assistance from Trust staff and legal advice as necessary.

Managing conflicts of interest requires integrity and good judgement by the trustees, careful leadership and management by the chairperson, and advice from the chief executive and legal advisers as necessary. The Trust needs to work towards an environment where conflicts are declared and managed without controversy, in the interests of protecting the individual with the conflict of interest and the Trust. This may require the trustees to act with more goodwill towards each other than was evident during our inquiry, where the focus of some trustees after the 2007 elections was on alleging conflicts on the part of other trustees rather than taking individual and collective responsibility for managing them to protect the integrity of the Trust's decision-making processes.

The former chairperson's management of conflicts of interest

We considered how Mr Dooley, the chairman until he stood down in March 2008, dealt with instances when his clients applied for funding from the Trust.

Mr Dooley is a chartered accountant with a business practice in Westport. He has been a trustee since the Trust was established in 2001 and is the longest serving trustee. His accountancy practice has submitted funding applications to the Trust on behalf of three clients, and has also been the accountant for a further three applicants. These six applications amount to about 5% of all the applications considered by the Trust since 2001.

Our review of the files for applicants where Mr Dooley had a professional connection showed that he declared his conflicts of interest at meetings of the Trust. The minutes of relevant meetings record this declaration and whether he left the meeting or remained present after declaring his interest.

Mr Dooley has a good understanding of conflicts of interest and knew that he should not be involved as a trustee in matters where he has a conflict of interest. However, we are aware of one instance where Mr Dooley's conflict of interest was not properly managed by him or by Trust staff. We emphasise that it is only one instance, that the circumstances were complex, and that we do not consider that Mr Dooley intended to act improperly.

It concerned an application that the Trust received from Mr Dooley in his capacity as financial adviser to a client in October 2005. At the applicant's request, it was considered by the advisory body on an urgent basis. It was declined. The minutes of the advisory body meeting list the various aspects of the application that concerned them, and note that any future application would need to address these issues.

Mr Dooley received a copy of the advisory body's recommendation and associated executive summary report in his role as a trustee, which was mistakenly provided to him by Trust staff. The Trust was due to discuss the matter at a meeting two days later. Mr Dooley disagreed with the manner in which the application was presented by Trust staff to the advisory body, and felt that the information before him showed that the Trust staff had not met appropriate standards in their work. Because of the many errors in the executive summary report, he regarded it as fundamentally flawed as a basis for decision-making. Mr Trousselot, the Trust's chief executive at the time, confirmed that the quality of the report was poor and that he disciplined the relevant staff member as a result.

Mr Dooley told us that he sought advice from another accountant about what he regarded as a difficult ethical issue. That advice confirmed that he had a duty as a professional accountant and as a trustee to draw the errors to the attention of those who would be making the decision. He also considered that his actions were in keeping with legal advice previously given to the Trust that trustees had a duty to disclose relevant information. He wrote an urgent letter to his fellow trustees setting out his comments on the matter and attaching a full copy of the application and an independent adviser's report.

The letter was printed on Mr Dooley's professional letterhead and contained comments from his perspective as financial adviser to the applicants, from his experience in the relevant sector, and in his capacity as a trustee. The letter included a number of angry and at times personal comments. In our view, the tone of the letter was not appropriate. Mr Dooley asked the trustees not to adopt the recommendation of the advisory body and to refer the application back to the advisory body for further analysis and consideration.

The minutes of the meeting to discuss the advisory body's recommendation record that Mr Dooley had declared a conflict of interest in the application. Before leaving the meeting, Mr Dooley discussed the letter he had written and circulated a further one-page summary of facts about the performance of the applicant.

After Mr Dooley left the meeting, the trustees resolved to remove the letter from the application information. In the discussion about the application, Mr Trousselot commented that his staff had not had enough time to assess the application, and that he believed that a true analysis of the application would have resulted in a favourable outcome. The trustees decided to refer the matter back to the advisory body with additional information and analysis for further consideration, and resolved that an independent consultant be used to assess the information if required. The advisory body later recommended supporting the application in principle, subject to various requirements including a report from an external consultant.

Mr Dooley was placed in a difficult position after receiving the advisory body recommendation and executive summary report. We acknowledge his concerns with the information provided to the advisory body and the resulting decision, and that he considered he had a professional duty to correct this information. However, a perception could be drawn from the events that followed that Mr Dooley was using information obtained as a trustee to advocate for, and obtain special treatment for, his client.

In our view, his concerns could have been handled better. Writing a letter to the chief executive would have been more appropriate. The letter should have begun with a clear acknowledgement of the conflict of interest and the steps being taken to manage it, as well as the reasons he was taking the unusual step of intervening in the decision-making process despite that conflict. The letter should also have made clear that on this matter he acted as an adviser and not as a trustee. He could not write in both capacities. The letter should then have set out in dispassionate terms the information that he thought needed to be known by the Trust.

Mr Dooley should then have relied on the chief executive and the Trust's organisational systems to deal with the matter appropriately, and should not have participated at all in the Trust discussion. This approach would have enabled the conflict of interest and the associated ethical dilemma and factual concerns to be clearly recorded, along with the actions being taken to manage them. Mr Dooley would have been able to provide the information that he thought was important for the Trust to have, while visibly remaining at arm's length from the decision-making.

Clear documentation is the simplest way to manage such risks, and would have better protected both Mr Dooley and the Trust. It is also important in such circumstances to set out the relevant facts calmly and clearly, and to avoid letting emotion cloud the issues. The risk of a perception of inappropriate influence was exacerbated by the letter not clearly separating out Mr Dooley's roles and perspectives, and by its tone.

Mr Dooley is committed to economic development in the West Coast and spends a lot of time on Trust business, such as attending advisory body meetings to take part in discussion on applications. Mr Dooley's access to Trust staff and the advisory body, and his knowledge of the Trust's approach to applications, could easily be seen as advantageous to his clients. Mr Dooley told us that he decided in August 2006 not to act as financial adviser for new applications to the Trust. He has not done so since then.

It was generally clear from the files we reviewed when Mr Dooley was liaising with Trust staff in his professional capacity. It is the usual approach of the Trust for the Trust staff to liaise with applicants and the applicants' advisers when preparing an application.

However, we consider that the two capacities held by Mr Dooley could create confusion or difficulties for Trust staff in dealing with Mr Dooley. We saw one instance when a staff member asked Mr Dooley, as chairman of the Trust, to approve expenditure on a consultant to help the advisory body with an application where Mr Dooley was the applicant's accountant. Mr Dooley's association with the applicant would have been evident from the application form. He did not give the approval sought, but referred the matter to the chief executive.5

It was suggested to us that applications from the Buller district, where Mr Dooley resides, had been preferred. We did not consider it necessary to review this in any detail because information about Trust distributions is publicly available in the Trust's annual reports. It does not show any undue favour to the Buller region.

The chief executive's management of conflicts of interest

We considered the position of Mr Trousselot, as the chief executive of the Trust, when he was appointed as director of companies receiving funding from the Trust.

It is sometimes a condition of receiving funding from the Trust that the Trust is able to nominate or appoint an individual to the board of directors of the company. This gives the Trust direct involvement with the governance and performance of the company, and can be useful in providing assistance to the company in a specific skill-set. The Trust usually arranges for an external person with the appropriate expertise to be appointed to the board on its behalf.

The Policy Manual provides for Trust staff being appointed as directors, but only where the company is a wholly-owned subsidiary. The Trust had received legal advice in 2002 that recommended that Trust employees should not be appointed to company directorships, because there was a significant risk of actual or potential conflicts of interest arising. The individual would have obligations to the Trust as an employee and to the company as a director.

The Trust's practice evolved as its understanding of its role developed. It later received legal advice suggesting this previous advice may not be appropriate to the nature of the Trust. The Trust was advised that equivalent organisations in the private sector (in the field of venture capital) do sometimes appoint employees as directors to companies in which they have made a significant investment, to help protect their interests.

In 2006, Mr Trousselot was appointed as a director on the board of three companies receiving financial assistance from the Trust.6

The roles of chief executive and director have different responsibilities, and may give rise to conflicts of interest because the interests of the Trust and the company will not always be the same. Directors are required to act in good faith and in what they believe to be the best interests of the company,7 while the role of chief executive is to provide objective advice and guidance to the governing body. The role of chief executive of the Trust includes making sure that there are enough checks and balances within the Trust's systems to ensure that funding decisions are implemented appropriately. We therefore considered how the Trust managed this issue.

In guidance we produced for the local government sector,8 we expressed the view that chief executives should not be put in a position of conflict between their roles as advisers to the local authority and their obligations as company directors because this arrangement exposes the local authority to possible allegations of bias and impropriety, regardless of the integrity of the chief executive. For many public sector organisations, the same considerations will apply.

The balance may be different in some organisations. For example, more commercial entities, such as State-owned enterprises, will often establish subsidiary companies and joint venture arrangements. They may build in structural links across the group of companies by appointing the chief executive or other board or staff members to the boards of those companies. This model can be appropriate in a closely held group of companies where there is synergy in the activities of the group, and the chief executive can be seen as having a high degree of responsibility for the group as a whole rather than just the parent entity.

The Trust is not a local authority, nor is it a purely commercial organisation. It is a trust with a commercial function. The relationship between the Trust and the companies it provides funding to is an investment and commercial relationship rather than an ownership or company group interest. It is appropriate for the Trust to have considered the range of ways in which it can manage its investment risk and to have sought legal advice on that question. We agree that the practice of private venture capital businesses is an appropriate model for the Trust to emulate.

The trustees agreed to the appointment of Mr Trousselot as a director to help protect the Trust's investments and to give the Trust access to more detailed information and knowledge about the applicant companies.

In the case of the Trust's nomination of Mr Trousselot to the two related companies, the minutes of the meeting where Mr Trousselot was nominated as director do not record any discussion of the potential for a conflict of interest. Questions were raised by some trustees about Mr Trousselot's workload, the directors' fees, and what benefits would be achieved by the arrangement, but the potential for a conflict was not discussed.

Mr Trousselot told us that thought was given to the management of the inherent conflicts of interest with his three directorships:

  • The Trust's relationship manager9 was to liaise directly with the applicant companies and report independently on the status of the funding conditions and key performance indicators to the Trust. Reports were also provided to trustee meetings by Mr Trousselot as director.
  • Mr Trousselot was to liaise with the Trust's relationship manager regularly to discuss any areas of difficulty. He acknowledged that there could be potential for tension, and suggested that any issues could be referred by the relationship manager to the Trust's chief financial officer, auditors, advisory body, or the chairperson.
  • Mr Trousselot was to act in the best interests of the Trust, and advise the company of this if any conflicts of interest arose in doing so.

In April 2007, some time after the appointments were made, a paper outlining proposed Trust structures and board compositions, prepared for discussion by the Trust, contained a section about terms of engagement for board members as directors. It stated that there should be a deed of engagement for all board representatives or director appointments that would clearly specify any reporting requirements and the channels for this. It also commented that:

  • where directors were appointed to companies receiving Trust funding, confusion had arisen about the flow of information from directors to the client relationship manager;
  • it was important to ensure that the relationship manager was able to monitor the covenants and ensure that financial reporting requirements were adequately fulfilled – it therefore proposed that the relationship manager should continue to deal directly with clients to manage the funding; and
  • any reporting requirements of a director should be to the parent organisation (Trust or holding company) and on more general aspects of the client, rather than around the management of the funds.

In our view, it was reasonable for the Trust to appoint Mr Trousselot as a director, and consideration had been given to the terms of engagement, how conflicts of interest should be managed, and how reporting lines should be adjusted. The understandings that underpinned the appointments may well have been enough if the Trust's operating environment had not deteriorated in the way it did. Once that happened, however, it affected both trustees and staff. We have already noted the effect on general levels of trust and co-operation, and the increasing tendency to level allegations at one another that emerged. That concerns were raised with us shows that the arrangements were not robust enough for the changed environment. Some people developed the perception that the conflicts of interest were not being properly managed.

As with all conflicts of interest, there will often be perception issues to manage. It is possible for relatively simple procedural matters to take on a life of their own when conflicts of interest are not managed very clearly and openly, with careful attention to detail. This is particularly so when operating in an environment of distrust. One such matter raised with us was about a letter on behalf of the Trust to the bank of one of the companies of which Mr Trousselot was a director. Mr Trousselot had finalised the letter, using Mr Dooley's electronic signature. It was suggested to us that Mr Trousselot was under pressure from the company to present an option to the bank that would be more favourable to the company's future financial situation than Mr Dooley and advisory body members were prepared to agree to before any Trust decision on the matter.

During our inquiry, Mr Trousselot told us that he would have sent the same letter regardless of his directorship with the company. Mr Dooley also assured us that he had no concerns about the use of the signature or the content of the letter. It is clear from the documentation at the time the letter was sent to the bank, however, that he had had some initial concerns.

We do not regard this incident as significant. Given the conflict of interest, it would have been preferable for Mr Trousselot not to have been involved with this matter, but we acknowledge the practical difficulties that can arise in an entity with a small number of staff members working under time pressures.

We accept the Trust's view that the directorship appointments provided the Trust with an enhanced level of information about its investments. However, this should not be a substitute for a formal monitoring relationship, carried out independently of the person appointed as a director. We note that some difficulties arose out of this arrangement, in part because of a deteriorating working relationship between Mr Trousselot and the relationship manager. Mr Trousselot had concerns about the monitoring and reporting against the Trust's conditions that was carried out by the relationship manager. Given these issues, it would have been preferable for a formal arrangement to have been adopted where the relationship manager had a separate reporting line (not to Mr Trousselot) for the purposes of these companies.

A deed of engagement was entered into for two of Mr Trousselot's three appointments as director. The deed provides for various matters, including the release of information by the directors to the Trust, but does not alter the duties of directors to act in the best interests of the companies.

The Trust's approach for independent directors appointed by the Trust to a subsidiary company is for a deed of engagement to be entered into between the director, the subsidiary, and the Trust's holding company requiring the company's constitution to be altered to allow the director to act in the best interests of the holding company.

The Trust should also clarify and document the treatment of directors' fees and expenses incurred in fulfilling the director roles (such as costs incurred in attending board meetings). We were told that the Trust permits directors' fees to be retained by the individual but that any expenses incurred should be reimbursed by the company to the Trust. At the time we carried out our fieldwork, Mr Trousselot had asked Trust staff to keep a record of his expenses but the Trust staff had not yet sought reimbursement for the Trust. We understand this has since been done.

As we noted in paragraph 4.78, it was reasonable for the Trust to appoint Mr Trousselot as a director, but the arrangements for managing this would have been stronger if they had been more carefully and clearly documented and explained to Trust staff and other interested parties. On the question of reporting lines for staff within the Trust who were managing relationships with companies where the chief executive was a director, it would have been better if the reporting lines were formally changed for all issues relating to those companies. To keep the usual reporting lines until trouble emerged was not a robust enough approach.

1: Managing conflicts of interest: Guidance for public entities (June 2007) – available at

2: Meetings of the advisory body are not open to applicants for funding or their financial advisers, so it would be difficult for a trustee who is a financial adviser to participate in that capacity.

3: Minutes of meetings on 7 November 2005, 3 April 2006, 12 June 2006, 1 April 2007, 6 August 2007, and 10 December 2007.

4: Policy Manual, Part 2 Trustees, clause 14, page 11 – Conflicts of interest (adopted 7 August 2006).

5: We note that Mr Dooley responded to the staff member immediately and angrily when he received this request. The language in which he responded was inappropriate and unprofessional.

6: One directorship was an appointment by the Trust; the other two directorships concerned related companies where the chief executive was nominated by the Trust and appointed by the shareholders. The chief executive resigned from the Trust-appointed position in October 2007, and from the two other positions in April 2008 when he resigned as chief executive of the Trust to take up another position.

7: Companies Act 1993, section 131(1). There are some modifications to this duty for subsidiary companies, where a director may be permitted by the company's constitution to act in the best interest of that company's parent company. If the company is not a wholly-owned subsidiary, the prior agreement of all the shareholders is required.

8: Local Authority Governance of Subsidiary Entities (2001); Governance of Local Authority Trading Activities (1994).

9: The role of the relationship managers (who are Trust employees) is to monitor the Trust's investment with each successful applicant, including ensuring compliance with funding conditions and requirements, and report back to the Trust.

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