Interests, conflicts and other due diligence checks
To maintain the confidence of the Government and the public, boards and other bodies must conduct their affairs impartially and be seen to be doing so. It is essential that any interests are made known, so that the potential for a conflict of interest can be assessed in advance of an appointment being made. Public and political trust in the soundness of a board's decision-making or advice will be severely compromised if appointments are found not to have been made on appropriate grounds, or if the necessary checks have not been made.
Further guidance on the management of interests and conflicts can be found on the Office of the Auditor-General web site: Managing conflicts of interest: Guidance for public entities, refer www.oag.govt.nz/2007/conflicts-public-entities/.
The importance of declaring interests
An interest arises where a person has a financial, familial or other personal interest in a matter that could give rise to bias or the appearance of bias in the work of an agency. There are many aspects to be considered, including:
- what comprises an 'interest'
- the obligation under legislation e.g. the Crown Entities Act requires appointees to register details of interests in respect of the individual and of family members
- reviewing/checking of disclosure statements
- how a conflict of interest can impact on the quality of a board's decision-making, and on its integrity and reputation
- providing assurance to Ministers that conflicts can be managed if an appointment proceeds
- the need to protect personal information provided.
New Zealand's comparatively small population and the limited number of people who possess particular combinations of skills and experience, mean it is always possible that the question of interests will arise. This will tend to put a focus on identifying and managing interests, rather than disqualifying all those who have interests.
Candidates for all positions must be asked to declare relevant interests. Candidates for Crown entity boards are required to identify whether they (or a partner, child or other close family member or friend) have or are likely to have any financial, personal or professional interests that might create a conflict if they were to be appointed. Departments need to realise that potential appointees:
- may be reluctant to disclose details of personal finances, or to disclose interests that might be commercially sensitive
- could have difficulty in, or be unwilling to, seek personal information on the financial situation or dealings of family members
- may not know enough about a Crown entity's business and operations to realise what could constitute an interest
- may not appreciate the significance of making (or not making) a full disclosure.
These enquiries need to be handled in a diplomatic way, but not avoided.
Departments need to put requests for disclosure of interests into a practical context, and try to ensure that all prospective appointees appreciate the significance of the request. Recent examples have indicated the importance of appointees being fully aware of the implications and perceptions surrounding interests and the need for active management of conflicts if appointed. Departments should advise candidates that the information they disclose will be forwarded to that board and/or body if the candidate is appointed.
Before any appointment or reappointment is made to a board, Ministers need to be confident that, where interests can be identified:
- their value is assessed and a disclosure made
- the candidate will be able to make an effective contribution, even if their interests mean they cannot participate in an activity of the entity that relates to a particular matter and/or
- measures can be put in place to manage conflicts, so that a reasonable person would not perceive any unacceptable influence on the entity's business.
When considering potential appointees to a board, interests fall under one of two categories:
- a manageable interest, which can be avoided or managed through an appropriate mechanism. This could be an agreement by the member to divest the interest (e.g. selling shares or putting them into a trust arrangement - see the paragraphs on Direct Financial Benefit on the next page), to sever the connection that causes the interest (e.g. relinquishing membership of an organisation), or a mutual decision that the interest affects only a narrow part of the board's operations; or
- an unmanageable interest, which arises if the interest is unavoidable and cannot be managed through an appropriate mechanism; for instance where the member cannot or will not divest him/herself of the interest, or the interest affects so many of the board's activities that management mechanisms would not be practicable. Where this situation arises prior to appointment, it would not be possible to give the Minister the necessary assurances about avoidance of conflicts and it is unlikely that an appointment should proceed.
The department should critically consider the information provided and seek additional information where questions or concerns arise, such as:
- is the declared interest likely to limit the candidate's contribution to the work of the board so much that the appointment should not proceed?
- is the department confident that the board has robust mechanisms for managing and recording declared interests, and for precluding access to information on and participation in matters relating to those interests?
Board members must ensure they perform all aspects of their work impartially, by:
- avoiding any situation where actions they take in an official capacity could be seen to influence or be influenced by their private interests (e.g. company directorships, shareholdings, financial rewards)
- avoiding situations that could impair objectivity or create personal bias that would influence their judgements
- ensuring they are free from any obligation to another party.
Keeping interests under review
It is important for those undertaking appointments to remind candidates that interests are not a matter to be dealt with only at appointment. At the time of consideration for appointment, and throughout a member's term of office, actual and perceived conflicts of interest must be borne in mind as interests, conflicts, and context can change. Interests held by a member's family as well as the member personally may change over time, as will the issues with which a board or body deals with. All boards are expected to have a register where interests are recorded. All board members need to review their interests regularly and add or remove them from the register as soon as the circumstances require it.
Crown entity board members have a collective obligation to be aware of their colleagues' interests. A board must notify the responsible Minister if it becomes aware that a member has not disclosed an interest, or has taken part in board discussions or decisions despite having an interest in a matter. A board member who fails to disclose a known interest is likely to breach the duties of acting in good faith and honestly, which is a basis for removing a member.
Making judgements about an interest: Illustrations
The following illustrations, from an appointed Crown entity member perspective, may help determine whether a person is interested. In the case of any doubt the presumption should be that the person has an interest.
Direct Financial Benefit
Subject to the statutory exceptions, any direct financial benefit is a conflict of interest that must be disclosed and managed. Generally, members must not seek to provide paid services to an entity other than through their role as a board member. They must not be involved in developing, supporting or advising on any matter considered by the entity.
A shareholding or other financial investment in a company engaged with the agency is a direct financial benefit and is therefore an interest, unless it meets the 'insignificance' exception. Many entities make decisions that can affect the value of a financial investment, so the potential for any increase in a member's interest must be considered when assessing insignificance.
Placing an interest in a blind trust is not of itself sufficient to avoid that interest. Where a member has recently placed an interest into a blind trust there is unlikely to be sufficient remoteness established to avoid what would otherwise be an interest. The perception will remain that the member has an interest which could influence decision-making unless a professional trustee, otherwise unconnected with the member, is appointed with the power to trade trust assets.
Family Members' Financial Interest
A distinction is drawn in the Crown Entities Act between immediate family members and other wider family connections. Section 62(2)(b) (www.legislation.govt.nz/act/public/2004/0115/latest/DLM329995.html) provides that an interest will arise through a spouse, civil union partner, de facto partner, child, or parent of a person who may derive a financial benefit from the matter. The Act requires that these interests be regarded in the same way as financial benefits of a member. Where the member, acting diligently and in good faith, is not aware of any financial involvement of a wider family member then the board member is unlikely to be interested, as the involvement would not be reasonably regarded as likely to influence the member's responsibilities with the entity.
Financial Interest in other Persons
The Crown Entities Act provides that a financial interest in another person may give rise to an interest, because of an apprehension of influence. This might include an employment relationship or engagement in a professional capacity with a party dealing with the entity or with someone else who may be materially affected by a decision.
For instance, a family member might be involved in acting for someone dealing with an entity, as a partner or employee of a law firm representing the party. In that situation the involvement may be regarded as too remote or insignificant to be likely to influence the carrying out of entity activities. The position may be different if the family member prepares material for consideration by the entity itself, or appears before the board member. In those cases, the latter may be reasonably regarded or perceived as likely to be influenced.
Section 62(2)(d) (www.legislation.govt.nz/act/public/2004/0115/latest/DLM329995.html) of the Crown Entities Act provides that an interest arises when a member is a partner, director, officer, board member, or trustee of a person who may have a financial interest in a person to whom the matter relates. Whether it comprises an interest depends on whether matters are so remote or insignificant as not to be reasonably regarded as likely to influence decision-making.
Exercising judgement on issues of perceived remoteness and insignificance is essential. For example, a member may be a trustee or director of an investment business. One of its investments may be with a party dealing with the entity. As the investment business will have a financial interest in the participant, the member as an officer of the investment business is probably interested.
Interests are not limited to financial matters (section 62(2)(f)) (www.legislation.govt.nz/act/public/2004/0115/latest/DLM329995.html). A personal, non-financial interest in a matter before the agency may include:
Family Members - Any family connection could give rise to an interest where there is a reasonable apprehension of bias, e.g. a member could have a close relative who is personally interested other than by way of a financial interest.
Friendship - Members may have an interest in matters affecting the interests of close friends. Close and reasonably long-standing relationships with demonstrable intimacy are likely to create strong perceptions of interest.
Acquaintance - General acquaintances are not likely to give rise to an interest. Involvement in professional or sporting associations with people interested in a party dealing with the entity would rarely create an interest. Overlapping directorships or similar interests could, however, mean a member is interested, especially where relationships are long-term or close collegiality has developed. Where a member has acted as an advocate, adviser or material witness in a matter, or a member's business partner has done so, and the matter is being considered by the entity or relates to a matter it is considering, the member is likely to be seen as having an interest.
Prior Business Relationships - Where someone had a close association with a business for a significant period before becoming a board member, there may well be a strong perception of an interest for at least six months after ending all associations. There is no set time period which establishes remoteness, but ending a long business relationship is unlikely to immediately make that interest so remote as to be irrelevant.
Pre-judgement - Pre-judgement of issues would exclude a member from participation in a matter before the entity. Having a definite point of view about a question of law or legislative interpretation of a policy is not sufficient to give rise to an interest, nor is prior knowledge of circumstances which are in issue. However, a publicly-stated opinion on those facts could raise issues of apparent pre-judgement.
Other due diligence checks
Departments should undertake other due diligence checks appropriate to the requirements of the vacancy being filled and any risks. The broader the check being undertaken and particularly if overseas information is required, the more likely the need will be for departments to engage a specialist firm to undertake the checks.
To assess whether checks in addition to interest and conflicts are required, some key questions are:
- What qualification or experience must any candidate have, without which they would be ineligible for appointment?
- What questions does the department have based on interactions with the applicant?
- What is the sphere of influence the role has on the board or body?
- Does the role involve responsibility for substantial public assets or funds?
- What is the experience required of candidates?
- What is the reach or impact of the entity's decisions on groups of people or sectors/s of society?
Some possible due diligence checks:
- Referee checks: referee checks can verify dates, duties, and experience. Confirm honesty and integrity. Substantiate or explore strengths and weaknesses. Give insights into attitudes, personality style and working style
- Educational qualification checks: if the role requires the person to have a particular level of qualification or hold a particular certificate (i.e. a practising certificate) these should be checked with the appropriate institution
- Other qualifications: one avenue is to search the Companies Office website to check directorship, including banned directors www.business.govt.nz/companies
- Criminal checks: some boards and bodies will have criteria that make people with certain criminal convictions ineligible for appointment. The Ministry of Justice Criminal Records Unit can undertake a check on any criminal records in the New Zealand Courts System (it does not deal with overseas offences). The timeframe is within 20 days, though genuinely urgent requests can be handled more quickly. It may be appropriate to make an appointment subject to the criminal check being completed. Further information, including forms, is available from www.justice.govt.nz/services/criminal-records
- Financial checks: one avenue is to use the publicly available Insolvency Register www.insolvency.govt.nz/cms
- A candidate's online profile may also be checked.
Departments must secure the agreement of the nominee/applicant before undertaking referee, educational and criminal checks where the information is not already publicly available. If consent is not given any recommendation to appoint may need to be reconsidered.