Part 7: Managing employee conflicts of interest generally

Queenstown Lakes District Council: Managing a conflict of interest in a proposed special housing area.

We carried out this inquiry because we considered that the complaints raised matters of trust and confidence in the Council’s processes and about how a chief executive can participate in one of those processes.

In this Part, we provide some general comments for the Council and for the local government sector about managing employee conflicts of interest generally. We discuss:

The importance of public perception

Conflicts of interest arise all the time. Usually, they cannot be avoided, so need to be managed. A poorly managed conflict can create legal and reputational risks. Impartiality and transparency are essential in managing these risks. Public officials should be cautious when conflict of interest situations arise that could undermine trust and confidence in the officials or their employer.

Public perceptions are important. It is not enough that the official is honest, they must be seen to be so. Despite careful management, some actions just might look bad.

The risk of negative public perception is more significant when the person concerned is in a senior position. When the person is the chief executive of a local authority – the most senior employee – and responsible for providing advice to elected members and for leading staff, the conflict problem is greater and they need to behave with the utmost integrity.

Rules about conflicts of interest

Elected members are subject to stringent rules about financial interests in the Local Authorities (Members’ Interests) Act 1968. We have a statutory role under that Act. Elected members must also comply with their Council’s Code of Conduct, as required by the Local Government Act 2002.

There is no similar statutory rule for local authority employees. However, most local authorities have staff policies and procedures for identifying and managing conflicts that set out expectations for minimum standards of behaviour. Employment agreements and codes of conduct for staff are also likely to address these matters.

It is important for local authorities to have robust policies and procedures to provide employees with clear guidelines on what constitutes a conflict and how to manage it.

Our role in commenting on employees’ conflicts of interest

The Auditor-General can consider matters of probity in public entities, which can include conflicts of interest. We issued guidance on managing conflicts of interest for local authorities (in 2010) and for public entities generally (in 2007). The general guidance covered employees as well as members of governing bodies.

Public entities often ask us for advice on how to manage conflicts of interest. We are not a local authority’s legal advisor. Our comments should not be taken as legal advice, or relied on instead of getting legal advice. Our approach when asked for advice is to try to be helpful. Often it is enough to refer the enquirer to the relevant part of our published guidance. However, in some instances, we also suggest that the enquirer get legal advice about how to manage the matter. In doing so, we need to make it clear that our comments are not a substitute for getting legal advice.

Many requests are from elected members but, sometimes, we are asked about managing conflicts of interest for chief executives. Most of these requests have been about how to manage conflicting roles, rather than conflicts between private interests and the responsibilities of chief executives. For example, we have been asked by chief executives about managing potential conflicting roles when they are asked to be on the boards of council subsidiaries.

Lessons for local authorities

Elected members and officers of local authorities will often have many connections in their communities through family and friends. From time to time, they will be conflicted when matters come before their local authority for decision. Our guidance for public entities on managing conflicts of interest notes that such conflicts are inevitable in a small country and not necessarily a problem if they are managed properly.

Our guidance also says that, most often, what needs to be managed (and be seen to be managed) is the risk of adverse public perception that could arise from overlapping interests.

Pre-existing or inevitable conflicts, such as those that arise from connections or existing interests, are slightly different from a conflict created by pursuing an opportunity while in the job. A local authority employee who wishes to pursue a private interest that might conflict with their role needs to consider the risk of adverse public perception of their actions. A conflict created by an employee’s actions is likely to be perceived less favourably than a pre-existing or inevitable one beyond the employee’s control.

Some people see no problem with a local authority employee pursuing an opportunity available to others, provided the conflict of interest that arises can be managed. Others will think it inappropriate, especially for a chief executive. In making judgements about whether to pursue private interests that conflict with their roles, employees need to consider how their actions will be perceived and the risk of opening their employer to criticism.

Even if the conflict is properly managed, some people may still perceive it as inappropriate for local authority staff members to pursue private financial interests and for their local authorities to allow them to do so. This shows that even an adequately managed conflict can lead to public perception problems.

Any senior local authority employee should carefully consider the effect of choosing to pursue a private financial interest, where that interest creates a conflict with their ability to perform their job. This requires judgement and thinking through possible scenarios, including whether the conflict might affect other areas of responsibility in the future. Their manager – and, for a chief executive, the Mayor – should also think through the implications and be comfortable with their plan to manage those implications. This is particularly so for a chief executive because of the statutory responsibilities to advise councillors and lead staff.

Although all local authority employees have the same rights and privileges as private individuals, those rights and privileges must be considered in the light of their responsibilities to the local authority. In some instances, a choice might have to be made.