A conflict is unmanageable where:
- the board member is unable or unwilling to disassociate themselves from the conflicting interest or sever that connection which is causing the conflict; and
- the value or the significance of the conflict is such that it provides a real incentive to act against the best interests of the school.
Where the conflict is unmanageable the trustee will have no choice but to exclude themselves from all board discussions and decisions on the relevant topic.
In some cases the conflict may be so pervasive or material that the trustee is unable to discharge their duties at all and therefore should resign from the board of trustees.
Not all potential conflicts of interest will be clear-cut in terms of how serious they are and how (or if) they can be managed. In considering these issues, those involved should take into account the nature and extent of the conflict and any relevant legislative provisions.
An important rule of thumb for trustees to use is `if in doubt, opt out!' When there is any doubt about whether a conflict of interests exists, or whether an outside observer could reasonably perceive that such a conflict exists, it is safer for both the Board and the trustee if the trustee declares the interest and excludes themselves while the Board discusses the matter. This is particularly important when a trustee feels passionately about an issue - if he or she declares their interest and excludes themselves from the Board there can be no subsequent allegations that the Board's decision making was tainted.
Non-compliance
Auditors will be checking for conflicts of interest as part of auditing annual accounts and reporting not only in the management letter but also to the Ministry, any conflicts that exist.
Conflicts of Interest for School Employees
In relation to potential conflicts of interests of school employees whether they are a trustee or not it will be essential for the Board to seek professional advice from the NZ School Trustees Association or any other employment adviser approved by the Board's liability insurer on how to handle any matters of concern.
It is recommended to Boards that they provide guidance to staff by way of a policy for conflicts of interest for school employees.
Examples of Conflicts of Interest
Example 1:
In Ruralton there is a high level of demand for home stay placement for international students. For the past two years School C has run a home stay placement programme for international students to schools in the area. This programme is a profitable venture for the school, making a surplus of $20,000 for the school and also attracting a large number of new enrolments of international students.
The Principal of School C, along with three local business people, decide to set up a home stay company to try and capitalize on the large number of students who require home stays. The office is set up in the business area next to one of the other secondary schools in Ruralton, School D. The Principal holds a 25% shareholding in the home stay company (worth $10,000) and is a director of its board.
In its first year the home stay company is a real success, attracting a large number of international students from throughout Ruralton and making a significant profit for the shareholders. Unfortunately the success of the programme impacts on School C, with the number of new and continuing international students enrolled in the school declining and less students using School C's home stay placement programme.
Legal Status: Outside Influence and/or Pecuniary Interest
As a shareholder in Homestays Company Limited the Principal has a pecuniary interest that conflicts with that of School C. Because both the School and the Homestay company make money by attracting international students, the School and the Homestay company are in competition. The Principal stands to gain financially if School C does not attract as many students to their home stay programme and to a lesser extent motivated to see students enroll at School D because of its proximity to the company's premises.
Manageability
The value of the Principal's holding in the Homestay company is significant enough that it provides an incentive for the Principal to act against the best interests of the School. If the Principal is unwilling to divest her/himself of the shareholding then the conflict is unmanageable.
Comment
This situation is inherently unacceptable. It is clear that the Principal will benefit financially if the Homestay company attracts students at the expense of School C. There is an incentive for the Principal to act in the best interests of the Homestay company instead of the School.
Principals should be solely concerned with the interests of the Board, without any possibility of personal gain from a private business providing a similar service to the same client group.
When a conflict of interest exists, the principal, trustee, or board, can seek advice or support from the NZ School Trustees Association or from the regional office of the Ministry of Education. In this case the Principal and the Board will also need to contact an employment/industrial adviser for assistance.
Example 2:
At E College the chair of the Board's Property Committee is the owner of a local construction company. The Board has recently hired an architect to manage the construction of a new gymnasium. The architect called for tenders to carry out the work, and the cheapest tender was for $2.4 million and was received from the Board members company.
Legal Status: Outside Influence and/or Pecuniary Interest
With such a large project and large sum of money at stake, it is clear that the Board member has an incentive to work in the best interests of his company rather than in the best interests of the College and must therefore exclude himself from any meeting of the Board while it discusses, considers, or decides, the matter. These exclusions should be noted in the minutes.
Legal Status: Financial Interest Greater that $25,000
Because the proposed contract between the Board and the Board member's construction company is for an amount greater than $25,000, the Board must apply to the Secretary for Education for approval of the contract before it is entered into (i.e. signed up).
Comment
This is an example where perception is very important. The College has hired an architect to manage its construction project, and the architect has run a competitive tender which was won by the Board members company.
Regardless of the process used for awarding contracts, an outside observer is likely to be concerned to see a major construction project being won by any board member. Because of this perception the Board member must be very careful to declare his conflict of interest and exclude himself from any discussion, consideration or decision making by the Board or the Property Committee as soon as the project is proposed.
The Board must be very careful to ensure that the process is transparent, and it goes through all the necessary steps to gain approval for the contract from the Secretary for Education before entering into any contract.
In this case it may be useful for the Board to seek professional advice from the NZ School Trustees Association, or from the regional office of the Ministry of Education.
Example 3:
Ms. Jones is the owner of a local construction company. Her children attend E College and her defacto partner, Mr. Smith, is on the College Board and is the chair of the Board's Property Committee.
Mr. Smith has no financial interest in Ms. Jones' construction company, either directly or through relationship property law.
The Board has recently hired an architect to project manage the construction of a new gymnasium. The architect called for tenders to carry out the work, and the cheapest tender was for $2.4 million and was received from Ms. Jones' company.
Legal Status: Outside Influence and/or Pecuniary Interest
Mr. Smith's relationship with Ms. Jones could reasonably be regarded as likely to influence him in this matter. Therefore he should exclude himself from any meeting of the Board while it discusses, considers, or decides, the matter (these exclusions should be noted in the minutes). Since Mr. Smith has no financial direct interest in the contract between the College and the construction company he does not have a pecuniary interest in the matter.
Legal Status: Financial Interest Greater that $25,000
Because Mr. Smith does not have a direct financial interest in the construction company, the Education Act requirement for approval of contracts greater than $25,000 between a Board and a Trustee does not apply
Comment
Although Mr. Smith does not have a direct financial interest in the proposed contract, it is clear that whatever benefits Ms. Jones will benefit him indirectly. Also, the Board and Property Committee must be able to critically appraise the performance of the company that builds the College gymnasium. A close relationship between a Board member and the owner of the construction company is likely to inhibit or prevent that critical appraisal.
In this situation Mr. Smith is required to declare his interest in the contract and exclude himself from any meeting of the Board while it discusses, considers, or decides, the matter. These exclusions should be noted in the minutes. Mr. Smith should also stand down from the Property Committee for the duration of the contract as it would be important for the Committee's Chairperson to act with full authority on a major contract.
In this case it may be useful for the board to seek professional advice for the NZ School Trustees Association, or from the regional office of the Ministry of Education.
Example 4:
Mrs. Black, a Board member at A High School, owns one of the two stationery stores in town. Throughout the year the High School purchases its stationery and printing supplies from Mrs. Black's store. None of the purchases are for more than $1,000 worth of goods, but through the course of the year the total value of purchases reaches $32,000. The School does not have a formalised preferred supplier relationship with the store, and because of the low value of each individual transaction it has not used a tender process to select the best supplier.
Legal Status: Outside Influence and/or Pecuniary Interest
A High School's day-to-day purchasing decisions are made by the Office Manager, and Mrs. Black is not in a position to influence those decisions. However, with $32,000 coming into Mrs. Black's store from the School, Mrs. Black does have some incentive to promote her store's interests ahead of the School.
Legal Status: Financial Interest Greater that $25,000
Because the total value of transactions between A High School and Mrs. Black exceeds $25,000 during the year, the Education Act requires the Board to now apply to the Secretary for Education for approval of the relationship between the Board and Mrs. Black. If approval is not granted then Mrs. Black becomes ineligible to be a member of the Board of Trustees and will lose her place on the Board.
Comment
This is a situation where perception is as important as fact. Mrs. Black may not really be in a position where her activities as a Board member could be compromised by her financial interest in the store. However, an outside observer would be rightly concerned to see $32,000 of stationery and printing supplies being purchased from a Board member's store without any process to ensure that the School was receiving the best possible deal. It is possible that this outside observer could make an accusation of corruption against the Board and Mrs. Black. This would hurt both the School and Mrs. Black's reputation, and could also hurt Mrs. Black financially if community members boycott her store.
In this situation Mrs. Black must declare her interest and exclude herself from any meeting of the Board while it discusses, considers, or decides, the matter. These exclusions should be noted in the minutes.
The value of the transactions between the School and Mrs. Black's store have exceeded the $25,000 limit set down in the Education Act. The Board was unaware that a number of small transactions could result in it breaching the financial interest of trustees' restrictions in the Education Act. However, it is now in the situation where it must apply for retrospective approval of those transactions. If the approval is not granted then Mrs. Black will be unable to remain on the Board.
The Board should also review its procedures for contracting and purchasing to ensure fairness and equity, and to ensure that a similar situation does not recur in the future. It may wish to set guidelines for establishing formal preferred supplier relationships.
In this case it may be useful for the board to seek professional advice for the NZ School Trustees Association, or from the regional office of the ministry of Education.
Example 5:
Mr. Brown is an electrician and a member of the Board at P Primary School. Using its 5YP funding the School is building a new block of classrooms. The Board hired an architect to manage the construction project, and the architect used an open tender process to select Bob's Builders as the prime contractor. Because of the high quality of Mr. Brown's work, Bob's Builders always sub-contracts Mr. Brown as their electrician. In this case Mr. Brown has been sub-contracted to provide $30,000 of electrical work.
Legal Status: Outside Influence and/or Pecuniary Interest
With $30,000 at stake, Mr. Brown does have an incentive to put his own interests ahead of the School.
Legal Status: Financial Interest Greater that $25,000
Although Mr. Brown does not have a contract with the School, he will be earning $30,000 as a sub-contractor working for the School. The Education Act defines this as a financial interest to which the $25,000 limit applies and the Board must apply to the Secretary for Education for approval of the contract
Comment
In this case the Board has followed a fair and transparent process to identify and select the best contractors. However, Mr. Brown could be accused of impropriety by using his position on the Board to ensure a successful bid as a sub-contractor... i.e. "You only selected Mr. Brown as the sub-contractor to make sure you won the tender".
The Education Act requires the Board to apply to the Secretary for Education to have Mr. Brown's role as sub-contractor approved. This helps to ensure there is no possibility that Mr. Brown has used his influence as a Board member for his own financial gain. Mr. Brown is also required to declare his interest and exclude himself from from any meeting of the Board while it discusses, considers, or decides, the matter. These exclusions should be noted in the minutes.
If either the Board or Mr. Brown need advice about this situation they should contact from the NZ School Trustees Association, or from the regional office of the Ministry of Education.
Example 6:
St B School is an integrated school, and Ms. Green is the Proprietor's appointee on the Board. Ms. Green's role on the Board is a complex one because Ms Green as the proprietor's appointee could be reasonably regarded as likely to be influenced by the proprietor as well as working in the best interests of St B's. Often these two sets of interests are different, and sometimes they conflict. It should be remembered that different points of view between Board members are certainly not bad, and robust discussion of these differences is a good thing.
The Board of St B School is making decisions which may affect the value of the proprietor's land and assets. A proposal has been put forward for the Board to buy a prefab classroom and put it on the school site which is the proprietor's property. However, the proprietor would prefer if the Board to contributed to the building of a new classroom on their property. If a new classroom is built this would benefit the proprietor as it, rather than the Board would own the building.
Legal Status: Outside Influence and/or Pecuniary Interest
Ms. Green does not personally have a pecuniary interest in the work. However, because of her role as the Proprietor's appointee she has an outside interest that may influence her decision making in this matter.
Legal Status: Financial Interest Greater that $25,000
Although the work being discussed by the Board is for $50,000, in terms of the Education Act Ms. Green does not have a financial interest in that work.
Comment
Ms Green treads a fine line in meeting her responsibilities to both St B's and the proprietor. While she may be expected to promote the proprietor's views to the Board especially on matters relating to the school special character, she must not act in a way which is contrary to the best interests of the school.
Ms Green may not be motivated to vote according to how the decision would affect the proprietor. However, this is a situation where perception is as important as fact and an outside observer would be concerned to see a person appointed by the proprietor voting on this issue.
Ms Green may be seen as being in the position of feeling obliged to vote specifically according to the proprietor's views at the Board table.
In this specific case, Ms. Green's interest could reasonably be regarded as likely to influence her while carrying out her duties and responsibilities as a trustee. Therefore she should declare her interest and exclude herself from any meeting of the Board while it discusses, considers, or decides, the matter. These exclusions should be noted in the minutes. In addition, the appointee should consider whether it would be appropriate for her to be given any information by the Board on the matter.
In a possibly complex situation like this it is recommended that Ms. Green, the Board and the Proprietor all seek advice from the NZ School Trustees Association and Association of Proprietors of Integrated schools.
Advice and Support
If you have questions or need assistance about this circular to your local Ministry of Education Financial Advisor, or your school auditor. Their contact details are listed below.
Christine Routledge
Northern Region Financial Adviser
Private Bag 47-911
Ponsonby
Auckland
Phone: 09 374 5440
Fax: 09 374 5401
Email: Christine.routledge@minedu.govt.nz
Ann Clarke
Central North Region Financial Adviser
P O Box 147
Napier
Phone: 06 833 6734
Fax: 06 833 6731
Email: Ann.clarke@minedu.govt.nz
Kathryn Lynskey
Central South Region Financial Adviser
1st Floor
65 Waterloo Road
Lower Hutt
Phone: 04 463 8682
Fax: 04 463 8698
Email: Kathryn.Lynskey@minedu.govt.nz
Steve Papps
Southern Region Financial Adviser
PO Box 2522
Christchurch
Phone: 03 378 7777
Fax: 03 378 7308
Email: Stephen.papps@minedu.govt.nz
ISSUED BY
Raewyn Glover
Senior Financial Advisor
National Office
45 - 47 Pipitea Street, Thorndon
P O Box 1666, Wellington, New Zealand
Phone: 0-4-463 8000
Fax: 0-4-463 8001
www.minedu.govt.nz
Appendix 1 - Education Act, Schedule 6
Clause 8 - 11 (A)
(8) Subject to subclause (11) of this clause, a trustee who has a pecuniary interest in any matter or any interest that may reasonably be regarded as likely to influence a trustee in carrying out his or her duties and responsibilities as a trustee shall be excluded from any meeting of the Board while it discusses, considers, considers anything relating to, or decides, the matter.
(9) Subject to subclause (11) of this clause, a trustee who is a member of the Board staff shall be excluded from any meeting of the Board while it discusses, considers, considers anything relating to, or decides, any matter relating to the trustee's employment by the Board, or to the course of action to be taken following the hearing of a complaint against the trustee (being a complaint against the trustee in the trustee's capacity as a member of the Board staff).
(10) Subject to subclause (11) of this clause, a trustee who is a student enrolled at the school or institution shall be excluded from any meeting of the Board while it discusses, considers, considers anything relating to, or decides, any matter relating to the trustee as an individual student.
(11) A trustee may attend any meeting of the Board to give evidence, make submissions, or answer questions.
(11A) A meeting of the board may be held-
(a) by more than half the trustees then holding office being assembled together at the time and place appointed for the meeting; or
(b) by means of audio, audio and visual, or electronic communication provided that-
(i) all of the trustees who wish to participate in the meeting have access to the technology needed to participate in the meeting; and
(ii) a quorum of members can simultaneously communicate with each other throughout the meeting.
Appendix 2 - Education Act, S 103A
Financial interests that disqualify persons from being trustees
(1) In this section,-
contract, in relation to a Board,-
(a) means a contract made by any person directly with the Board; and
(b) includes any relationship with the Board that is intended to constitute a contract but is not an enforceable contract; but
(c) does not include any contract for the employment of any person as an officer or employee of the Board
company means a company incorporated under the Companies Act 1993 or any former Companies Act or a society incorporated under the Industrial and Provident Societies Act 1908 or any former Industrial and Provident Societies Act
subcontract, in relation to any contract made by a Board,-
(a) means a subcontract made with the contractor under that contract, or with another subcontractor, to do any work or perform any service or supply any goods or do any other act to which the head contract relates; and
(b) includes any subsidiary transaction relating to any such contract or subcontract.
(2) A person is not capable of being a trustee of a Board or a member of a committee of a Board, if the total of all payments made or to be made by or on behalf of the Board in respect of all contracts made by it in which that person is concerned or interested exceeds in any financial year-
(a) the amount determined for the purpose by the Secretary, in consultation with the Auditor-General, by notice in the Gazette; or
(b) in the absence of an amount determined under paragraph (a), $25,000.
(3) For the purposes of subsection (2), a trustee or a member of a committee of a Board is deemed to be concerned or interested in a contract made by a Board with a company, if-
(a) the trustee owns, whether directly or through a nominee, 10% or more of the issued capital of the company or of any other company controlling that company; or
(b) the trustee is the managing director or the general manager (by whatever names they are called) of the company.
(4) For the purposes of this section, a company is deemed to control another company if it owns 50% or more of the issued capital of that other company or is able to control the exercise of 50% or more of the total voting powers exercisable by all the members of that other company.
(5) Despite anything in this section,-
(a) a person is not disqualified under this section if the Secretary approves the contract at the request of the Board, whether or not the contract is already entered into; and
(b) the Secretary may, by notice in the Gazette, issue guidelines setting out the basis on which applications for approval under paragraph (a) will be considered.
1 Education Act 1989, Schedule 6, clauses 8 -11A. Attached as appendix 1.
2 Education Act 1989, Schedule 6, clause 8
3 Education Act 1989, section 103A. Attached as appendix 2 and also circular 2002/1 - Financial Interests of School Trustees on www.minedu.govt.nz/goto/circulars
4 Where the trustee owns 10 percent of the shares in that company (or another company which controls it).
5 Where the trustee is the managing director or general manager (whatever they are called) of the company.