Directors must declare a conflict of interest to avoid the possibility of tainting the reputation of a public entity board.
A conflict of interest can be either a real, perceived or potential conflict between the personal or business interests of a director and the director’s duty to act in the interests of the public entity.
The board should adhere to the principles specified in the Public Administration Act 2004.
This includes conflicts of interest for financial and non-financial interests (s. 81(1)(f) of the Public Administration Act for public entities governed by Division 2 of Part 5 of the Act).
Directors may find that their personal, family or financial interests make it difficult to perform board duties impartially in the public interest. The decisions of the board can be tainted if there is a reasonable perception that directors, their family or close associates could benefit personally from decisions of the board.
Wherever a conflict of interest may be perceived, the matter must always be resolved in favour of the public interest rather than the individual director.
If a director is in doubt about whether they have a conflict of interest they may seek guidance from the chair, department or the minister (who in turn may seek advice from the department).
The board must determine whether a conflict of interest in a matter is material. These breaches should be dealt with in the same way as any alleged breach of duty.
Conflicts of Interest Example Scenarios
Possible conflicts of interest include:
- A director holding shares in a company that is in some form of competition with the public entity or that will be affected in some material way by a board decision.
- A director owning property in a location where the public entity is considering construction (a public entity’s construction activity may affect property values in the locality).
- A director has a close relative who is a potential consultant, contractor or service provider for the public entity.
- A director’s organisation has provided services in the past to the public entity (a conflict in itself) and a question on the quality of those services has arisen such that some action may be contemplated against the organisation.
- When information gained through a director’s board work itself is used in commencing a business that is in competition with the board’s public entity or for making investments intended to benefit the director personally.
Public Sector Employee or Stakeholder Nominee
Generally, appointment of a public sector employee to a board is only made when legislation requires it.
In public sector employee appointments not covered by statute, the appointing body considers such matters as:
- possible conflicts of interest
- whether the public entity is commercially focused
- whether the public entity operates at arm’s length from government or helps facilitate government policy.
A departmental employee may be required to be a director of the board of a public entity in the same portfolio. This is possibly a public entity from which the department purchases services.
The departmental employee should try to ensure that the public entity complies with government policy objectives and considers the department’s interests as the customer. At the same time, the departmental employee is a director whose duty is to pursue the interests of the public entity.
Where a departmental employee is a director, the board may address possible conflicts of interest by:
- excluding the departmental employee from sensitive board discussions on matters such as the forthcoming budget strategy
- submitting government policy matters to the board of the public entity by a different person from the department
- handling departmental issues related to its status as a customer through stakeholder consultations outside the board process.
Industrial negotiations taking place between the government and unions can give rise to very real conflicts of interest for individual directors, particularly where they are also union nominees who sit on the board. Good practice would be for such directors to stand aside from board positions for the duration of such negotiations.
A risk management problem can also arise if a public entity fails to manage its relationships with stakeholders. A particular concern can arise with regard to stakeholder nominees on the board. Such individuals need to manage their relationships with their stakeholder constituency with care. In particular, given their director responsibilities and their requirement to make decisions in the best interests of the public entity.
A stakeholder nominee on a board may have a conflict of duty, that is, a duty to the board as well as a duty to the stakeholder organisation. Where a conflict of duty exists, the board should:
- consider the degree, nature and extent of such potential conflicts and make these known to all involved, including other directors
- agree that the stakeholder nominee be absent from some parts of board meetings
- consider dealing with stakeholder business matters in consultations between the public entity and the stakeholder outside the board process.
In some circumstances, directors may be relatives or have had long-term friendships with staff of the public entity. These relationships must not affect the impartiality of the director’s decisions.
The confidentiality of the board and the public entity must not be breached.
Conflicts as a Matter for Resignation
Some conflicts of interest may restrict a director’s participation on the board over an extended period. In this case, it is not appropriate for the director to continue on the board.
For example, a director is on the board of a public entity that has a legal conflict with a company of which the director is also a member. If the legal dispute is prolonged, the director may have to be absent from discussions and voting to such an extent that it interferes with the director’s service on the public entity board.
Declarations of Private Interests
A board is required to maintain a register of its directors’ interests.
Candidates for appointment to the board must complete declarations of private interests. These declarations may be used as the initial basis for a register of interests. Every director is required to review and update their declaration of private interests whenever their circumstances change, and at least once annually.
The chief executive officer may require a declaration from any other employee engaged in a role where there is the potential for a conflict of interest to arise. An example is where the employee is involved in the selection of a tender for a major project. These declarations should be made upon appointment, annually and whenever circumstances change.
Directors should be able to request and gain access to the declarations of private interests submitted by all directors.