Part 5: Managing conflicts of interest in regional councils

Insights into local government: 2020.

5.1
In this Part, we discuss the conflict of interest rules that apply to regional councils and some of the issues and challenges with managing conflicts of interest in regional councils.

5.2
Because regional councils have a regulatory role and many have elected members from the agricultural sector, managing conflicts of interest can be complicated. Some regional council members will be particularly affected by their council's regulatory and planning decisions.

5.3
We discussed these issues with several regional councils after the 2019 local government elections.24 We also considered the following two specific situations where regional councils had to manage conflicts of interest:

  • The first was about potential financial conflicts of interest. Four Otago regional councillors asked us for exemptions or declarations under the Local Authorities (Members' Interests) Act 1968 (the Act) so they could participate in significant water-related planning decisions in the region.
  • The second was a request from a regional council for guidance on how to manage a potential conflict of roles for councillors appointed as directors of council-controlled organisations (CCOs).

5.4
Our responses to these requests could be of interest not just to regional councils but to all councils. We outline them below, as well as two examples from regional councils that we have considered previously and material from our existing guidance to illustrate and explain the main points. First, we briefly set out the rules on managing conflicts of interest that apply to regional councils.25

Conflict of interest rules that apply to regional councils

5.5
Effectively, two different legal regimes govern how regional councils manage conflicts of interest. Which regime applies to a particular conflict depends on whether the councillor's interest is financial or non-financial.

Financial interests

5.6
The Act regulates financial interests, and its rules are strict. They are based on the common law view that a person with a financial interest is presumed to be biased because of that interest.26

5.7
The Act prohibits members of regional councils or committees of regional councils from discussing or voting on any matter that they have a financial interest in unless their interest is "in common with the public". (We discuss the meaning of "in common with the public" in paragraphs 5.11-5.18.)

5.8
A councillor can apply to the Auditor-General for an exemption from this rule or for a declaration that the rule does not apply in a particular instance. The Auditor-General may grant the exemption or declaration if they are satisfied that:

  • the councillor's financial interest is so remote or insignificant that it would not reasonably be regarded as likely to influence their participation in the matter;27
  • the council's business would be impeded if the councillor could not take part;28 or
  • it is in the public interest29 for the councillor to participate despite their financial interest.30

Non-financial interests

5.9
Councillors' non-financial conflicts of interest, such as those created by a personal relationship or a role in another organisation, are governed by common law. There are no particular statutory rules, and the Auditor-General has no role in determining whether councillors can or cannot participate in matters that they have a non-financial interest in.

5.10
The test for whether a non-financial conflict of interest exists is whether an objective observer who knows the relevant facts would perceive the person to be biased because of that interest.

Financial interests – meaning of "interest in common with the public"

5.11
Councillors will often have financial interests in matters that council and committee meetings discuss and vote on. Councillors are members of the community who will be affected by some council decisions, such as those involving planning matters or rates.

5.12
As mentioned in paragraph 5.7, a councillor whose financial interest in a matter is "in common with the public" is not prohibited from discussing and voting on that matter.

5.13
We discuss how to determine whether a councillor's interest is "in common with the public" in Part 4 of our guide on the Act for elected members.31 In summary, it depends on the following three components:

  • the nature of the interest (such as the kind and extent of the interest);
  • the size of the group who are also affected and whether that group is big enough to constitute "the public"; and
  • whether the councillor's and the group's interests are affected in a similar way.

Environment Canterbury example

5.14
We considered the meaning of interest "in common with the public" in regional council decisions in our 2009 investigation into possible conflicts of interest by Environment Canterbury (ECAN) councillors. We considered whether the financial interests of four ECAN councillors in proposed changes to the way the Council charged for water related resource consents were "in common with the public". The proposed changes involved ECAN recovering more of its water-management costs from a group of resource consent holders, rather than from general rates.

5.15
The four councillors were potentially affected by the proposal because they or their spouse held relevant consents. They therefore had a financial interest in the decision to implement a new charging regime that had more emphasis on "user charges".

5.16
We considered whether the councillors' financial interests could be regarded as interests in common with the public. Many decisions about rating and charging, including targeted rates, are broad enough to be regarded as affecting the public generally, provided sufficient numbers of people are affected in the same way.

5.17
About 2.7% of ECAN ratepayers held consents that would be subject to the proposed water charges. We concluded that the interests of those consent holders were different in kind and extent from the interests of the general public (whose rates would slightly decrease because of the greater user charges), and that they formed a small and clearly identified subset of the rate-paying population.

5.18
We therefore found that the interests of the four councillors were not interests that could be regarded as interests "in common with the public", and they had breached the Act. We released a full report explaining our decision in December 2009.32

Application by Otago Regional Council for exemptions and declarations

Background

5.19
In February 2020, Otago Regional Council applied to us for exemptions and declarations under the Act. These would enable several councillors to take part in decisions about whether to notify two plan changes under the Resource Management Act 1991.

5.20
The plan changes were about freshwater management. They could have been financially significant to people who held certain historic permits to take water. The plan changes also included measures to improve water quality that would affect farmers and others in the agricultural sector. These measures included requirements to fence waterways (to exclude animals) and to obtain resource consents for intensive winter grazing.

5.21
Four of the regional councillors had possible financial interests in the proposed changes and applied to us for exemptions or declarations. They considered that, because the changes were significant planning decisions that were of high public interest in the region, all councillors should be able to participate in the process.

Criteria for granting an exemption or declaration

5.22
Our guidance sets out the criteria we use to determine whether to grant an exemption or declaration.33 (Paragraph 5.8 sets out the statutory grounds for granting an exemption or declaration.)

5.23
For an exemption, we consider the nature and size of the financial interest and the relationship of the interest to the matter being decided. We need to assess whether the financial interest would influence the elected member when they discuss or vote on the matter. The test is an objective one. Ultimately, we must assess how significant the interest looks to an outside observer.

5.24
For a declaration on the "public interest" ground, we consider information from the councillor and the council on why the councillor's participation is important. Relevant factors could include:

  • the matter being so significant to the community as a whole that it justifies the involvement of all members; or
  • the member having particular expertise in the matter or an important link with people in a particular area, organisation, or community group whose views would not be adequately represented if the member could not take part.34

5.25
For a declaration on the "business impeded" ground, we consider whether the quality of the council's decision-making would be affected if one or more members could not take part – for example, because there would be only a few members left to participate or a member has particular expertise that is not otherwise available.

How the criteria applied to the Otago regional councillors35

5.26
Based on the information provided by the councillors about their circumstances and financial interests, we:

  • granted an exemption for one councillor to participate. We considered that his indirect financial interest in the plan changes was so remote and insignificant that it could not reasonably be regarded as likely to influence him in making decisions about them.
  • declined to give declarations to enable two councillors to participate in the plan change matter related to entitlements to use water. Both councillors had a direct financial interest in the matter, and we did not consider that the criteria for the "public interest" ground had been met.

5.27
However, we found that those two councillors did not have a financial interest in the other plan change (related to water quality), so they did not need a declaration to participate in that matter.

5.28
We found that one councillor had no financial interest in either plan change and did not need an exemption or declaration.

The issue of representation

5.29
Two of the councillors argued that their background or involvement with communities that would be affected by the plan changes meant that they brought special skills and expertise to the debate.

5.30
They argued that they should be able to participate to contribute that expertise. They also argued that their respective constituents would not be adequately represented if they could not participate. Declaration requests often raise similar arguments about the need for a member to represent particular groups. In these situations, we consider whether the council can access the views of the people the member wishes to represent in other ways, such as in the submissions process or by receiving advice from council staff. It is important that we hear the council's views, not just those of the member concerned.

5.31
Members are required to act impartially in the interests of their whole district or region. They are not there to represent a particular group only, even if they are strongly associated with that group.

Hawke's Bay Regional Council example

5.32
That said, representation can be a valid argument in some circumstances. In 2016, we gave a declaration to enable a councillor on the Hawke's Bay Regional Council to take part in decision-making on a proposed water storage and irrigation scheme. The councillor owned land that could benefit from the scheme in the future.

5.33
The councillor also had extensive expertise in the matter and represented the constituency that contained most affected landowners.36 We considered that it was important that the councillor could represent her constituency in the matter.

5.34
We gave the declaration on the grounds that:

  • the benefits of allowing the councillor to participate outweighed the risk that their financial interest could be seen to unduly influence the outcome; and
  • the decision was especially significant for the local authority and region, warranting all members being involved.

Exemptions and declarations are only for financial interests

5.35
It is important to understand that, in some instances, the financial interest regulated by the Act might be only part of the issue. It might not even be the major risk.

5.36
The Act regulates only financial interests. It does not regulate more general conflicts of interest, such as those that arise from other roles that a councillor has or from their personal associations.

5.37
Under the Act, we can give exemptions and declarations only for financial interests. We are not empowered to give them for non-financial conflicts of interest or for predetermination – where a councillor has made strong statements that indicate that they have already made their mind up about a matter.

5.38
This means that an exemption or declaration to allow a member or members to participate despite a financial interest has no effect on their non-financial interests or predetermination. A council decision could still be challenged on those grounds.

Request for guidance on managing a conflict of roles

Background

5.39
We received a request from a regional council for guidance on how to manage potential conflicts for councillors who are appointed as directors of CCOs.

5.40
The council had appointed two councillors and the chief executive as directors of a council-controlled holding company that manages the council's investments. The council's policy was to have an equal number of councillors appointed as directors (including the chief executive, as appropriate) and independent directors on the Board of the holding company, assuming there were enough suitable candidates.

5.41
The councillors appointed as directors asked us to clarify their roles, including the balance between a director's responsibilities under the Companies Act 1993 and a councillor's duties under the Local Government Act 2002. The council asked us whether a declaration under the Act would be a way to manage any future conflicts for the councillors appointed as directors.

5.42
We told the council that we considered it more likely that any conflict of interest would come from a conflict of roles than from any financial interest in the matters under discussion. We said that, because we can make declarations under the Act only for financial interests (see paragraph 5.9), we could not make one in this situation.

5.43
We referred the council to relevant parts of our good practice guidance on managing non-financial conflicts of interest – in particular, those on how to manage a conflict of roles.37

When roles conflict

5.44
A conflict of roles or conflict of duties can happen when an official performs duties for two or more entities who have competing or incompatible interests or objectives. The issue with a conflict of roles is generally not that they have a personal conflict but that the interests of the entities they work for or represent conflict.

5.45
The conflict might exist in a general sense (for example, if one entity is responsible for regulating the activities of the other), or it might relate to a particular matter or transaction that both entities are involved in.

5.46
Officials who are responsible for making decisions on behalf of an entity are obliged to act fairly and impartially when making those decisions. They will generally also have other obligations to the entity, such as to protect and advance its interests and to not use or disclose confidential information.

5.47
If a person owes duties to more than one entity, and the interests of those entities coincide in some way, the risks are that the person:

  • will not be able to make fair and impartial decisions in the interests of both entities at the same time; or
  • in acting for one entity, will breach one or more of their obligations to the other entity, such as the obligation to hold certain information in confidence.

5.48
Conflicts are less likely to arise when the interests of the two entities are clearly "complementary" – for example, where one entity has been set up for the purposes of advancing the interests of the other. However, a person might still have conflicts in that situation, such as when one entity is making decisions about funding the other, its continued existence, or on a formal submission it has made.

5.49
Depending on the severity of the conflict, the person might have to withdraw from one or both sides of the transaction or take some other form of mitigating action to manage the conflict.

Our 2015 report on governance and accountability of council-controlled organisations

5.50
We also referred the council to our discussion of the pros and cons of appointing councillors as directors of CCOs in our 2015 report on governance and accountability of CCOs.38 That report states our view that councillors should be appointed as directors only in exceptional circumstances. However, when they are appointed, an open and transparent process that uses the same appointment criteria as for independent directors should be followed.

5.51
The report also said:

We acknowledge the argument that elected members can make a contribution to CCO governance. We also recognise that councillor-directors may add value to a board by being a Council voice, by ensuring that the CCO's objectives are aligned to those of the local authority, and by providing a community perspective. However, a councillor-director must have the necessary skills and experience to contribute fully to the governance of the CCO.
If a local authority appoints councillors to the boards of its subsidiaries to ensure that the CCO remains mindful of its shareholder's expectations, the councillor's presence on the board should not be a substitute for a formal system for monitoring and accountability. There are other, more transparent methods for the parent local authority to influence a CCO, such as the statement of intent process, a letter of expectations, the dividend policy, and approval of major transactions.
In our view, effective monitoring and oversight, including setting clear expectations about the CCO's purpose and strategic alignment, should obviate any need for councillor-directors to provide an additional layer of oversight.

Balancing duties as a councillor and a director of a council-controlled organisation

5.52
The council asked us about the balance between a councillor's duties as an elected member and a company director's duties under the Companies Act 1993. The following discussion summarises our response.

5.53
The main points from our guidance on managing conflicts of interest are that people with potentially conflicting roles as a councillor and a director of a CCO need to be:

  • clear what their obligations to each role or organisation are;
  • confident that both organisations have clear expectations about how to manage any conflicts and, if necessary, have a protocol that explains those expectations; and
  • alert for situations where the interests of the two organisations might conflict, even if they generally do not.

5.54
We told the council that, under the Act, councillors:

  • are required by their Oath of Office to act impartially in the best interests of their region;
  • are bound by the Act for any conflict involving a financial interest (and by common law for any conflict involving a non-financial interest, including any conflict of roles); and
  • must comply with any relevant requirements in the council's code of conduct, including any rules regulating how they may use or disclose information obtained during their work as an elected member.

5.55
Under the Companies Act, directors:

  • are bound to act in the best interests of the company, unless there is a specific provision in the company's constitution that permits them to act in the interests of their holding company or appointing shareholder;
  • must comply with the requirements for managing and disclosing conflicts of interest in sections 139 to 144 of the Companies Act; and
  • must comply with the requirements for using or disclosing company information in section 145 of the Companies Act.

5.56
We told the council that, in their role as directors of the CCO, the councillors and the chief executive should not have any difficulty complying with these requirements, provided that the constitution of the CCO permits them to act in the interests of their holding company or parent entity (in this instance, the council).

5.57
Managing conflicts of interest under the Companies Act is based on transparency and disclosure. Directors disclose their interests in an interests register. This register focuses on financially beneficial transactions with other entities that the director is involved with.

5.58
Any conflict of those interests is discussed and managed at board level. It is not necessarily a barrier to the director participating in decisions about matters involving those interests.

5.59
Therefore, a director's "other role" as an elected member of the council would not generally prevent them participating in CCO decisions about matters that the council has an interest in.

5.60
However, it is more complicated for councillors in their role as elected members for two reasons. The first is that they are required to act impartially in the best interests of their region. The second is that common law governs how their non-financial conflicts of interest are managed, not the Companies Act.

5.61
The common law test for non-financial conflicts is whether an objective observer would perceive the councillor to be biased and not acting impartially because they are a director of the CCO.

5.62
In some instances, the councillors' participation in council decisions on regulatory matters could adversely affect the CCO. Their role as directors of the CCO could call into question their ability to participate in those decisions impartially.

5.63
In other instances, the councillors' conflict could be about particular transactions (such as when the CCO submits on, or appeals, a planning matter). The chief executive could also be conflicted for particular situations, such as when they need to advise the council on matters that the CCO has submitted on.

5.64
Our general advice was to remind the council that the councillors who are also directors need to consider on a case-by-case basis how their involvement in matters concerning the CCO would be perceived. They also need to consider whether their involvement in council decision-making could create a legal or reputational risk to the council.

5.65
Part of managing conflicts well is being open and transparent. If a council decision could adversely affect the CCO, the councillors who are also directors should declare that conflict and decide whether it precludes them from being involved in the council's decision.

General comments on the legislation governing conflicts of interest in local government

5.66
We are aware that our decisions about the Otago regional councillors in 2020 caused some concern in the sector. We received a preliminary request for guidance from another regional council that was involved in water-related plan changes and also had farmers on the council.

5.67
That council was keen to understand our approach to the representation issue (which we discussed in paragraphs 5.29-5.31). It also wanted clarification about when a financial interest in a matter might materialise.39

5.68
We have previously said that the rules for managing conflicts of interest in the local government sector are generally out of step with the approach other sectors take – for example, under the Crown Entities Act 2004.40

5.69
The legislation governing conflicts of interest for other sectors generally covers both financial and non-financial conflicts of interest. Under these regimes, an assessment of whether the interest is "material" is made.

5.70
The legislation might set out requirements for declaring interests. Sometimes, it will even specify rules on whether a person can participate in decisions they have an interest in. However, these rules are left to the entity to manage and administer. It is very unusual for an independent third party such as the Auditor-General to make final decisions on who can and cannot participate.

5.71
Finally, under these regimes, failure to follow the requirements might result in breaches of duty to the organisation or political accountability of some kind. However, unlike the Act, they do not involve a possible criminal sanction.

5.72
We will continue to advocate for a review of the Act and the rules governing how the local government sector manages conflicts of interest. We will encourage that review to consider whether:

  • the regime for managing conflicts of interest for members of local authorities should cover both financial and non-financial conflicts;
  • it remains appropriate for breaches of the Act to have a criminal sanction; and
  • there is a need for an independent decision-maker to determine whether someone with a conflict can or cannot participate in council decisions and, if so, who that party should be.

5.73
This reconsideration could fit within a review of the governance provisions in the Local Government Act 2002 or of the role of the Local Government Commission.

24: These discussions were at the post-election workshops discussed in Part 4.

25: For a more detailed explanation of these rules, which apply to all councils, see our two June 2020 publications Local Authorities (Members' Interests) Act 1968: A guide for members of local authorities on managing financial conflicts of interest and Managing conflicts of interest: A guide for the public sector.

26: The Act does not define "financial interest". The test we use is whether, if the matter were dealt with in a particular way, discussing or voting on that matter could reasonably give rise to an expectation of a gain or loss of money for the councillor concerned.

27: Section 6(3)(f) of the Act, which applies to a request for an exemption.

28: Section 6(4) of the Act, which applies to a request for a declaration.

29: The Act expresses the public interest as "in the interests of the electors or inhabitants of the district of the local authority or of the area under its jurisdiction".

30: Section 6(4) of the Act.

31: Office of the Auditor-General (2020), Local Authorities (Members' Interests) Act 1968: A guide for members of local authorities on managing financial conflicts of interest, paragraphs 4.35-4.44.

32: Office of the Auditor-General (2009), Investigation into conflicts of interest of four councillors at Environment Canterbury.

33: Office of the Auditor-General (2020), Local Authorities (Members' Interests) Act 1968: A guide for members of local authorities on managing financial conflicts of interest, paragraphs 4.45-4.65.

34: This can also be relevant to the "business impeded" ground.

35: Office of the Auditor-General (2020), Otago Regional Council: Applications for exemptions and declarations.

36: Office of the Auditor-General (2016), Application for an exemption or a declaration by Cr Hewitt.

37: Office of the Auditor-General (2020), Managing conflicts of interest: A guide for the public sector.

38: Office of the Auditor-General (2015), Governance and accountability of council-controlled organisations, paragraphs 5.15-5.28.

39: Office of the Auditor-General (2020), Local Authorities (Members' Interests) Act 1968: A guide for members of local authorities on managing financial conflicts of interest, paragraphs 4.28-4.34.

40: Our most detailed report was in 2005, The Local Authorities (Members' Interests) Act 1968: Issues and options for reform.