Part 4: Managing conflicts of interest

Reflections from our audits: Governance and accountability.

4.1
Some of my Office's inquiry work is about actual or perceived conflicts of interest. Conflicts of interest are ever-present for those in governance roles, particularly given New Zealand's small population. Conflicts of interest exist when two different interests are opposed, or are in conflict to some degree. For governors, the conflict needs to be with a governor's obligations as a governor, and/or with the interests of the organisation.

4.2
It is inevitable that those in governance roles will have interests that could come into conflict (whether real or perceived) and create risks to the impartiality of decision-making. For example, in small communities, elected members of local authorities will have many connections through family and friends with many of the matters coming to the Council for a decision.

4.3
Conflicts of interest are not necessarily problems – they are a reality. It is how they are identified and then managed that determines whether they are a problem.

4.4
Those in governance roles need to manage their interests in a way that is transparent and does not compromise the decision that is being made by the public entity. In many of our previous publications on conflicts of interest, we have said that there are three steps that governors and public entities need to take:

  • recognising that there is a conflict of interest;
  • disclosing the conflict of interest; and
  • managing the risks associated with the conflict of interest.

4.5
For elected councillors, the Local Authorities (Members' Interests) Act 1968 is a small subset of the law about conflicts of interest that must be considered. That Act has two specific rules – elected councillors cannot:

  • enter into contracts with their local authority worth more than $25,000 in a financial year; or
  • participate in matters before their local authority in which they have a financial interest (referred to as a pecuniary interest in the Act) other than an interest in common with the public.

4.6
If an elected member has a financial interest, they must consider the requirements of the Act in recognising, disclosing, and managing their conflict. Some of the actions below for managing and mitigating a conflict of interest will not be available to elected councillors with a financial conflict of interest.

Recognising a conflict of interest

4.7
In the public sector, there is a conflict of interest where:

A member's or official's duties or responsibilities to a public entity could be affected by some other interest or duty that the member or official may have.3

4.8
There are many different types of conflicts, from financial conflicts of interest to a conflict in roles or duty.

4.9
Most people in governance roles understand when they have a conflict of interest. There is a small minority who do not, and this can cause significant difficulty – from fractious relationships in the governing body, to judicial reviews of decisions, to community mistrust.

Disclosing the conflict of interest

4.10
Most governors and officials are good at disclosing conflicts of interest. When disclosing a conflict of interest, it is better to err on the side of openness. This is the responsibility of the person who has the conflict.

4.11
Many governing bodies have an established practice of their members declaring their interests as a matter of routine at the start of each meeting. Many entities require this – having a policy that sets out how members should declare interests is good practice.

Managing the conflict of interest

4.12
However, simply declaring the conflict of interest is not usually enough. The person declaring the conflict is not best placed to decide how it should be managed. The governing body needs to consider carefully what needs to be done to manage the risks associated with a conflict. The notion of managing conflicts of interest as a peer-driven activity around the board table is useful.

4.13
Our experience is that conflict of interest questions are more likely to be grey than black and white. Deciding how to manage them is sometimes neither clear nor straightforward and requires careful judgement.

4.14
There is a broad range of options for managing or mitigating a conflict of interest. The options (listed roughly in order of lowest to highest severity) include:

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

4.15
It ought to be rare that a conflict of interest is so pervasive and all-encompassing that a person cannot remain a member of the governing body.

4.16
When we considered allegations of conflicts of interest affecting Ashburton District Council's decisions on a second bridge, we noted that, although our good practice guides on conflicts of interest encourage a precautionary approach (with the advice "if in doubt, stay out"), for matters of high community and political significance, an elected member with a marginal non-financial interest might decide that this approach was unduly restrictive.

4.17
Our observation is that taking a precautionary approach has often become the "rule" in managing conflicts of interest, as opposed to careful consideration of the range of options outlined in paragraph 4.14.

4.18
Although this is often the result of the public entity and person trying to "do the right thing", the stand-down might not be necessary nor the best outcome.

4.19
It is reasonable that members of a governing body will bring their own experience and knowledge to a decision-making process. Often, people are in governance roles for this very reason. It would be unreasonable to expect that this knowledge is not used. In many instances, we have concluded that it would still be reasonable for the affected party to continue to be involved in the decision-making process with the consent of affected parties.

4.20
In our consideration of allegations of conflicts of interest relating to Katherine Rich's roles as a board member of the Health Promotion Agency and as chief executive of the New Zealand Food and Grocery Council, we noted that the Crown Entities Act 2004 states that a person does not have a conflict of interest only because they have "past or current involvement in the relevant sector, industry, or practice".

4.21
That said, we note that, in the recent Problem Gambling Foundation case,5 the High Court set a high standard for public entities managing conflicts of interest in a procurement process. The Court applied the rules set out in the then Ministry of Economic Development's Mandatory Rules of Procurement by Departments and the Ministry of Health's own internal procurement policies. The Court held that several members of the evaluation panel were biased because they had prior knowledge about the organisations submitting proposals and had a current or previous working relationship with them.

4.22
This means that public entities need to consider very carefully the standards they set for managing conflicts of interest and how they then meet those standards. We note that this case is currently subject to appeal.

4.23
It is necessary to point to a specific connection between the person's other interest and a particular matter or decision coming before the public entity. Public entities need to take responsibility for considering the options available and working with the person who has disclosed the conflict of interest. Wise heads, careful consideration, and sound judgement are necessary to better manage these situations. It might be necessary to seek appropriate specialist advice. However, the onus is on the person to comply with the appropriate course of action agreed.

4.24
With Ashburton District Council, we found that a councillor did not take the advice that Council staff obtained for him. It is possible that the councillor exposed the Council decision to some level of risk. However, the decision to participate in the decision-making process was a choice that was open to him.

4.25
In situations where a governor refuses to acknowledge or accept that they might have a conflict of interest, the chairperson has an important role to play in managing the situation.

4.26
Potential conflicts of interest were one of the issues we examined in our inquiry into two property investments, at Luggate and Jacks Point, by Delta Utility Services Limited (Delta), a council-controlled trading organisation of Dunedin City Council (the Council).

4.27
We found no evidence of impropriety or of poorly managed conflicts of interest for either investment. However, we did identify some breaches of the Local Government Act 2002 and the Companies Act 1993, and instances of Delta using alternative business structures to avoid public accountability.

4.28
The extent of the interests and involvement of one of Delta's directors in Jacks Point and how these interests and involvement were managed gave us cause to pause and think. These interests also concerned the members of the public who contacted our Office. In public office, having multiple roles and interests requires careful management. People with such interests need to behave with the utmost integrity and transparency to avoid real or perceived conflicts and risks to the public entities they serve.

4.29
Although Delta's overall management and disclosure of conflicts of interest were largely adequate, we identified some instances where there should have been earlier or fuller disclosure for better transparency. There was one instance where the director's involvement in both sides of a venture would have been problematic if the venture had proceeded.

4.30
Conflicts of interest also need to be managed so that they do not stop someone from doing their job. During our inquiry into how Queenstown Lakes District Council managed the chief executive's interest in a proposed special housing area, we noted that the conflict affected the chief executive's ability to meet his responsibilities. He was not able to advise the Council about special housing areas nor provide leadership to Council staff in this matter.

3: Controller and Auditor-General, (2007), Managing conflicts of interest: Guidance for public entities, Wellington, page 13.

4: Controller and Auditor-General, (2007), Managing conflicts of interest: Guidance for public entities, Wellington, page 31.

5: Problem Gambling Foundation of New Zealand v Attorney General [2015] NZHC 1701.