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Video transcript: Conflicts of interest

Transcript for a video of a presentation about managing conflicts of interest filmed at the 2018 Audit New Zealand client update.

Title: Conflicts of interest, Melanie Webb, Assistant Auditor-General, Legal

Melanie Webb

I’m going to kick this afternoon off by talking to you about conflicts of interest. I want to talk a little bit about the general nature of conflicts of interest, and why they’re important to manage well, particularly in the public sector.

I want to talk a little bit about what a conflict of interest actually is, and the different ways in which conflicts can arise. What are the rules around conflicts of interest, and where those rules can be found, and how should public sector organisations best manage conflict of interest, and what should you do in the event that a conflict of interest arises.

Conflicts of interests, though, are one of those things that are easy to talk about in the abstract, but much more interesting when you use an example. So, I’m going to talk about a little case study which I am familiar with, well familiar with – so, let’s talk about me for a bit.

As Bethia said, I’ve been at the Office of the Auditor-General for about two-and-a-half years. Before that, I’ve worked in the New Zealand public sector for 22 years. I’m getting on a bit now! Most of that time has been in either legal or policy roles, and my most recent role, before the OAG, was as the Chief Legal Advisor at the Department of Internal Affairs.

When I first joined the Office of the Auditor-General, one of the first things I had to do was fill out our independence register, and many of your organisations will have one too. One of the things I had to do was to declare my previous roles, and we have a rule at the OAG that there’s a standard stand-down period of at least two years where you can’t work on anything or be involved in any work – if it’s a public entity – that relates to the entity that you have worked for most recently.

So, anything that came up in my role that related to the Department of Internal Affairs I removed myself from in that first two years, and there were actually some examples. We had a request to look at something – an inquiry request that my team dealt with. Ordinarily, I would oversee our consideration of that inquiry request. In that situation, I handed that over to one of my leadership team colleagues, and they actually did the leadership and management of that piece of work.

Having been in the public sector for 22 years I’ve made a few friends along that way, which is good. One of them I even married at one point. So, my husband is a senior manager at New Zealand Police. He’s responsible for risk and assurance, and he’s also responsible for the work that Police have done over the last number of years responding to the Commission of Inquiry into Police Conduct. So, that’s a piece of work that the Office of the Auditor-General has had some involvement in. We had a monitoring and oversight role, as the Police undertook that work. What that meant for me, as we did that work over the last couple of years. Again, I had to remove myself from any involvement in it.

My team weren’t directly involved in doing that work, but because I’m on the leadership team our draft report and our findings came to the leadership team for consideration and sign-off on a number of occasions.

In those situations, I stepped out of the room for the period of time that issue was being talked about, and I didn’t look at the drafts or any of the papers as they were being considered. So, I read it once it was published, along with everybody else who saw it at that point.

I’ve also, as I say, made a few friends. So, now that we’re all getting on a bit, some of those friends are in relatively senior management roles, and a number of other public entities in the public sector.

So, all of those that are at a particular senior level, where people make decisions, or are involved in the executive or leadership team, I have declared on our independence register. And again, there’s an agreement that should any issues come up from those organisations, that I will stand aside from.

That one wasn’t that straightforward. I had to stop and think quite carefully about which friends and/or relatives, that I would declare on that independence register. It’s people that I either have a very close friendship with. Some of them I’m godparent to their children. They’re people that I socialise with regularly, or they’re actually my relatives. They’re not people that I’ve worked with in the past, or people that I know, or have met along the way. So, there’s a real question of judgement there, and we’ll talk about that a bit more later.

Until recently, my child went to a public school, and of course we audit all of the public schools across New Zealand, so that is also in our independence register – in the unlikely event that any audit issues come up relating to that school, but actually it’s a good example, because this a presentation I put together a wee while ago, and my child has moved schools. So, a good reminder for me – I actually need to go into our independence register and update that issue.

We also have some rules at the OAG about not having any financial interests in any of the public entities that we audit. I don’t have any shares because I’m a public servant and I have not made a lot of money along the way. I’m here to make a difference, as Katherine would say.

We’re also required to think about whether any of our close family members have financial interests in public entities. I don’t know whether any of my family members do. I know my parents have a share portfolio, but I haven’t sat down and asked them questions, and we don’t actually require that we do that. It would be hard for anyone to suggest that I was acting, that I was, my role was conflicted because my parents owned shares in an entity that I didn’t know about.

And then I have a number of other interests that all of you in the room will also have. So, I own a house. I pay rates to my local council. I make complaints to the local council every now and again. Most recently about the lighting on the pedestrian zig-zag outside my house. Interactions with my district health board. Again, most recently with my nine-year-old – he shut his finger in the car door and broke it. That was fun.

These are not things that I’ve included in our interests register. They’re things that I have in common with members of the public, and again it’s unlikely that anybody would or could suggest that a real, or perception of a conflict of interest, would arise.

All of that’s a really long way of introducing myself, but actually a good way to prove my first point about conflicts of interest, which is they’re not a problem in themselves. We live in a country where there are not six degrees of separations. There’s usually one or two.

Peter talked before lunch about wearing two hats. I think often people are wearing, as per my example, many many more than two hats.

Conflicts are natural and they’re unavoidable. We will all in this room have interests outside of our work that we need to manage and think about, and it doesn’t mean that people have done something wrong if a conflict does arise. It doesn’t need to cause problems, it just needs to be identified and managed, and thought through carefully.

That is kind of important though because they can create risk, and they can have some serious consequences, and we’ll all be able to think of examples that are in the media. Where there’s been a conflict of interest, it’s not been managed well, and it has some consequences.

At an individual level, not declaring a conflict of interest can sometimes mean disciplinary action for an individual. At an organisation level, it might mean that there’s an investigation or an inquiry. Maybe SSC; maybe my team. We look at a number of conflicts of interest issues. It could constitute an offence, so there are offences set out in legislation.

If you’re an elected member, it could result in you being removed from office, could result in a legal challenge to a decision-making process. And then there’s all the reputational risk, which actually, in a conflict of interest situation, is where most of the cost comes. So, political or public criticism, damage to an individual’s reputation, and to the public sector more generally.

Greg talked this morning about the importance of trust and confidence in the public sector and conflicts of interest are one way in which that trust and confidence can really be damaged.

Conflicts of interest don’t always lead to serious wrongdoing, but they are usually at the heart of more serious wrongdoing. So, if you think about a conflict of interest, it’s where an individual could abuse their position for personal gain. If you think about corruption, like bribery or fraud, it’s where an individual does abuse their position for private gain.

So, it’s often referred to, conflicts are often referred to as a gateway to that more serious wrongdoing. So, another reason why we need to be really vigilant about managing them well. And for us in the public service, conflicts of interest are especially significant. Part of that’s because we’re all subject to judicial review. Our decision-making processes need to be impartial and transparent. But part of it also is because we’re spending tax payer, and rate payer, dollars.

So, members of Parliament, members of the public and the media have very high standards for the way that we should behave, and the way that we should manage the money and the decisions that we make as we go about doing our work.

So, that’s all of bit scary. What actually is a conflict of interest?

So, basically – at its most basic level – where two different interests intersect. In the public sector, that’s where an individual’s interests, outside of work, conflict with their duties or their responsibilities to the public entities – so, inside of work.  

Again, the mere existence of an interest doesn’t create a conflict, it’s only when those two interests intersect and there’s an overlap between your public responsibilities, and/or your responsibilities to a public entity, in your private interests. And, again, it’s not just about whether an individual is likely to act improperly, but whether there’s a perception that they might act improperly. So conflicts are often about what the reasonable person might think was a possibility. So often what you’re managing is not a real conflict, but the risk of some adverse public perception that could arise from those overlapping interests.

So, there are different kinds of conflicts of interest. Financial and non-financial are the two main categories.

Financial interest obviously is one where there’s some money involved. So, you have a reasonable expectation of either gain or loss of money as a result of a particular decision. It doesn’t always involve money actually changing hands – it could be an increase in land value, an increase in share value, or the turnover of a business.

Why is that distinction between financial and non-financial important? Financial interests are often treated more strictly. So, in statute law, in legislation, financial conflicts are often the main focus, and, in common law, the presence of a financial conflict is automatically assumed to disqualify somebody from participating in a decision.

Strangely enough, financial interests are, as a result, are a bit easier to identify and decide how to manage. Non-financial conflicts of interest can arise in a number of ways, and obviously they’re the ones that aren’t about money.

One of the ways they can arise is in relation to your personal relationships, and I’ve talked a little bit about some of my examples. So, when you’re thinking about personal relationships, what are the ones that you do need to consider? Sometimes the legalisation will tell you. So, under the Crown Entities Act, conflicts of interest will relate to your spouse, your de facto partner or civil union partner, and it also includes your children or your parents.

Usually, we say someone who lives with you would be somebody that you would be presumed to have that close personal relationship with, and any decisions that impacted on them would result in a conflict.

And then, when you’re thinking about further afield of friends and family, it depends on the closeness of the relationship. It depends on the decision or the activity that you’re involved in, and how it might impact on those people. And, unlike the financial conflicts of interest, there are no clear rules here. It is a matter of judgement. So, that’s why I say they’re sometimes not as straightforward as the financial ones.

Non-financial conflicts of interest can also arise from a conflict of roles. So, this can be a number of different things – so, people who hold another public office, or are a member of a club, or an association. Sometimes that’s deliberate. So, sometimes people are appointed to a second entity, specifically to represent the first entity, and that’s okay. Often that’s because they’re either representing their entity, or they’re bringing specialised knowledge to the role that they’ve been appointed to.

But, there still needs to be some care taken, because as an individual, say on the board of an entity, there’s a legal duty that you have to act in the best interests of that entity. So, if you’re on more than one, you need to be very careful that that legal duty to one does not conflict with the other.

And then, conflicts of interest can also arise from predetermination. This is a tricky one too, and another one that involves judgement.

So, people are entitled to hold their own personal views. People have previous roles from which they bring knowledge and experience, and that’s a good thing, and even elected officials are often elected on the basis of the public position or view that they’ve put forward on a particular issue. But, in law, if they are involved in a decision, they can be challenged as being biased. So, the question then is whether the belief or the behaviour that you have brought with you is sufficient that it indicates that you’ve got a fixed view or a closed mind and you’re not making a decision openly when it comes to that point. So, like the other examples that I’ve used, there’s a real matter of judgement there about whether you’re in that situation or not.

So, how do we manage them? What are the rules? Unfortunately, there aren’t any, or, in fact, there are no universal rules. It depends on the situation, and that’s because there are so many situations and there is no one rule that will help. So, every public entity’s circumstances are likely to be different.

The examples that I used in relation to myself. At the Office of the Auditor-General we’re pretty strict on independence, and that’s because we’re auditing other entities, or we’re inquiring into them. So, we need to make sure that we are independent in the work that we do, so we have some pretty strict rules and we manage our independence register very carefully.

There are statutory rules too, of course, and for most of you who are from a Crown entity there is a part of the Crown Entities Act that sets out how Crown entities are required to deal with conflicts of interest.

And there are some common law rules as well. As I said before, when we are in the public sector making decisions, the decision-making process that we follow has to be procedurally fair, otherwise we open ourselves up to legal challenge.

There are often other rules that sit in your organisation. So, there might be something in your founding document. There might be something in your code of conduct, and there are often clauses in people’s employment contracts as well, so that’s another place to go to find out what the rules are.

When you’re thinking about how your organisation might best manage conflicts of interest though, there are some ways to go about putting together policies and procedures. So, when you’re doing that, the most important thing is to think about your entity’s particular circumstances. So, what’s the nature of the structure of your organisation, the functions and the activities that it undertakes?

Peter was talking before lunch about procurement. So, does your entity undertake a lot of contracting, or grants allocation, or public consultation, or even quasi-judicial or regulatory decision-making? Those are things that you need to think about, in the context of them, when you’re putting together your policies and processes for managing conflicts.

Many of you will be familiar with the inquiry that the States Services Commission did last year into allegations around some former CERA employees who did not manage some conflicts particularly well. And, one of things that inquiry said, was that, “A government entity like CERA, who was established for only a short period of time, and was established specifically to operate in a commercial operating context, probably should have thought a bit differently about how they went about managing conflicts of interest.” So, they didn’t fail to do it completely, but perhaps they might have done it a bit differently and had some stricter criteria for managing them.

So, when you’re putting together a policy, one of the useful things to include in there is some high-level principles about what your organisation’s commitment is to addressing conflicts of interest. It’s also useful to put in there some rules for the most obvious actions. So, I talked about the stand-down period that we have at the OAG. A gifts policy is another good example, or if there is a ban on owning shares in businesses that your organisation deals with frequently.

Induction is another important one. So, think about what information you provide to new staff when they come onboard, and that was another thing that CERA, were criticised for not doing well.

And, also, think about a mechanism for managing conflicts of interest, on an ongoing basis. So, it’s not a one-off conversation with a new staff member. It’s not an interest register that you fill in once, but how often does your organisation go back and ask people to review and make sure their information is updated? Like I say, it’s only been a couple of months since my child’s changed schools, and it’s a reminder today that I need to go in and update our register.

And, then I think when you’re thinking about a policy, don’t set it all down in stone, so there is a lot of judgement that’s required here. So, in your policy, leave room for making a judgement in a particular circumstance, about whether something is a conflict, and how to deal with it.

On that note, what do you do; how do you deal with a conflict when one arises? I’ve kind of broken one of those PowerPoint rules here, by putting too many words on one slide, but I’ve done it to prove a point. Which is there isn’t one way to deal with a conflict of interest, there’s a myriad of different things you can do.

First thing you need to do is make sure that you’re complying with any legal requirements. Second thing you need to think about is whether there are any rules in your organisation’s policies or processes, and then if there are neither of those, then it’s about exercising judgement – weigh up the significance of the conflict. Sometimes it will be indirect enough, or insignificant enough, that it’s enough to just write it down and record that there is an interest or a conflict, and that you’ve assessed it and there’s nothing you need to do about it.

Sometimes you’ll be at the other end of the spectrum and a conflict will be so significant and so pervasive, that you can’t find a way to manage that conflict and still have an individual in a particular role. So, on occasions, somebody might need to either divest themselves of an interest outside of work, or step away from a role that they’re in, but that’s pretty uncommon. There’s usually a way that you can find to manage a conflict.

The most typical options are the three in the middle – if you can see the small type – where you’re withdrawing or excluding someone from being involved in some work or on a particular matter.

So, either stepping out of a discussion or a decision-making process, like I described with the work that we did on the Police issue, or excluding someone from a committee or a working group, or reassigning tasks or duties to another person. Again, I had the example of something from DIA, where I asked somebody else to manage the work.  

Situations aren’t usually clear cut. There might be a range of options that would be suitable in your particular circumstance, and that’s the judgement that is required in such situations. The trick with them is to take advice. So, if you need some legal advice, then that’s a good thing to do. Keep a written assessment or a written record of what you’ve done, what advice you’ve received, what you’ve weighed up, what decision you’ve come to and the reasons for it, and always err on the side of caution.

This is the point where I make a little confession. So, all of the stuff that I have just said to you, I have taken from a good practice guide that the Office of the Auditor-General has put out. It’s kind of old now. We put it out in 2007 and we do need to revise it, but actually when you look at it, all of the information and advice in it is still really useful and current. So, it’s about how to manage conflicts of interest specifically in the public sector, and worth a read. It’s on our website too, so you can go there and have a look.

So, just quickly in summary. Conflicts of interest are not a problem in themselves. They are particularly significant in the public sector. There’s no set of universal rules, and judgement is often required.

It’s not just about money changing hands. It can involve the increase in value of land, or shares, or property, and they can be non-financial as well, and often the non-financial ones are harder to manage.

Perception is important, and conflicts need to be managed well, or carefully. If they’re not, the consequences can be significant. Both for the individual involved, and also for the organisation. And as I said before, for the public sector and the trust and confidence in the public sector, more generally.

Last, and not least, always err on the side of caution. In our good practice guide, we say: “If in doubt, stay out.”

Title: For more information and to download presentations, visit: www.auditnz.govt.nz

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