Conflicts of Interest, Bias and Predetermination in Societies and Charities – Recognising and Managing
The issues
Problems relating to conflicts of interest, bias and predetermination arise in not-for-profits, not just in local authorities, statutory boards, and commercial entities. People are usually elected or appointed to decision-making positions for one or more of the following reasons:
- They are believed to have expertise in the area where decisions are to be made, or
- They hold cogent or well-known or vote-catching positions about some or all of the subjects on which decisions will be made, or
- They are, simply, popular with voters.
Such people may be expected to have opinions on the issues they consider, and they have the right and duty to advance those opinions in the interests of the organisation they govern. Democracy would be the poorer if they were not, on occasions, strong advocates for their opinions. As such, they are fully entitled to express their opinions in debate, not only around a decision-making table but also elsewhere. As a matter of principle, however, there should be no doubt about the purity of decision-making, and someone who is to take part in decision-making should avoid becoming subject to allegations of conflicts of interest, bias or predetermination.
“Conflicts of interest”:
- Extend beyond financial conflicts, and can arise in many other more subtle and indirect ways, especially through friendships and family relationships, and
- May arise because of pecuniary or personal interests.
“Bias” is a type of conflict of interest:
- In the legal sense bias describes a situation where a decision-maker may not have approached an issue with an open mind, or may have predetermined the issue,
- Such bias may be presumed because of the real possibility of bias, or may be clear from the behaviour of a decision-maker, and
- The actual motives and good faith of the decision-maker are not relevant.
“Predetermination” describes situations where the decision-maker has a “closed mind” and is unable to come to an issue willing to be influenced by facts or logic to make a decision either way.
In general, a decision-maker with any personal or financial interest greater than other decision-makers in matters being considered by an organisation may be deemed to be biased or to have pre-determined the issue the decision-maker should “declare an interest,” and should not participate in debate or decision-making. It is preferable that “interested” people should not take part in discussion prior to any decision, but there can be occasions where such people have essential information which needs to be made available to the actual decision-makers.
Constitutional conflicts of interest
Some conflict of interest issues arise because of the structure of an organisation and of its governing body. Such problems more commonly arise within trusts than societies:
- The right of a founder, settlor or external agency to appoint, dismiss and replace those in governance carries with it the risk that the right may be exercised for improper purposes, especially if the holder of the power is also a trustee. The very existence of the right may (but should not) inhibit the free and proper exercise of the responsibilities of a trustee. Any threat to exercise the right to “hire” or “fire” should send warning shivers up the spine of all trustees.
- While it is common to confer on trustees the power to appoint, dismiss and replace fellow trustees there is a risk that trustees will be chosen (and retained) more for their perceived preference to maintain the status quo than for their ability to govern effectively.
- Having trustees (or society officers and committee members) appointed without some term placed on their appointment means they are not obliged to consider, periodically, whether they should remain in governance, and this can result in a complacent stagnancy in an entity.
- In some entities some of those in governance may be appointed by interest groups or external parties, and as a result such appointees need to be aware that conflicts of interest may be presumed to arise where the entity has dealings with such an interest group or external party.
Conflicts of interest in governance and management
In Government we have what is known as a separation of powers; between Parliament, the public service, and the Courts. The reality in most smaller community societies and charitable trusts is that much of what happens is organised and managed by those who also govern. However, political scientists and lawyers are (or used to be) familiar with the concept of the separation of constitutional powers, and the principle has equal applicability to societies and trusts. Accordingly, there should also be some separation of powers in not-for-profits:
- Members of a family should not be able to dominate a governance group as there can be conflicts of interest between the interests of members of the family and the wider interests of the entity,
- If those who “govern” also “manage” then the roles can be too readily confused, to the detriment of both good governance and good management, and
- Where those who govern are also paid employees of, or contractors to, the entity then the risks are even higher as individuals can then, effectively, be employing or engaging themselves and determining their own performance indicators, remuneration and perks.
Such a confusion of roles is likely to excite some interest from auditors and Charities Services on any monitoring or investigative enquiry.
Conflicts of interest, bias and predetermination in meetings
Regrettably, many people believe that a conflict of interest is only a financial conflict issue (perhaps because the Local Government Official Information and Meetings Act 1987 only addresses such conflicts). Conflicts of interest can arise in many other more subtle and indirect ways, especially through familial relationships and friendships. Astute trustees, committee members, and (particularly) chairpeople need to be aware of the need to identify, declare and minute conflicts of interest, and to have those with such conflicts removed from debate and decision-making.
The identification of conflicts of interest was once more commonly confined to local authorities, statutory boards, and commercial entities. However, the declaration of conflicts of interest is now commonly an early agenda item in the meetings of not-for-profit entities. Astute trustees, committee members, and (particularly) chairpeople need to be aware of the need in meetings to:
- Identify, declare and minute conflicts of interest, and to have those with such conflicts removed from debate and decision-making,
- Identify and deal with potential bias and predetermination issues.
More and more organisations are maintaining a formal “Conflicts of Interest Register,” and the proposed new Incorporated Societies Act will require societies to maintain a formal “Interests Register,” and will preclude “interested” committee members from voting or taking part in committee decision-making (although they will be counted in the quorum and may be able to take part in discussions if the committee agrees).
Is there a “gold standard?”
The circumstances met in the drafting of documents and in the governance and management of organisations are many and varied, and there is no “gold standard” or model template of advice. However, those drafting constitutions and advising organisations need to be conscious in all they do of the potential for conflict of interest issues to arise in the entity. Those who govern and manage entities also need to recognise that failure to identify and deal properly with conflicts of interest can create distressing and potentially expensive problems for the organisation and those in governance and management.
The importance of dealing correctly with conflicts of interest, bias and predetermination
The basic legal rules relating to conflicts of interest, bias and predetermination are based on the principles of natural justice. The obligations of natural justice “… need not be met in any particular formal way. This is an area of broad principle, not precise rules, turning on the nature of the power being exercised and all the circumstances” (Royal Australasian College of Surgeons v Phipps [1999] 3 NZLR 1 (CA) at 16, while noting that the order of the Court of Appeal was varied by the Privy Council ([2000] 2 NZLR 513), but this statement of principle was effectively approved). Among the principles of natural justice are two of particular relevance to decision-makers:
- No-one should be a judge in his or her own cause. This maxim originally applied to judges and arbitrators, but now extends to other situations where decisions have to be made.
- Decision-makers must approach every issue with an open mind, having regard to the principle that justice should not only be done but be seen to be done. As one New Zealand Judge observed, “What is fair in a given situation must depend on the circumstances. The application of the rules against bias must be tempered with realism.” (CREEDNZ Inc v Governor-General [1981] 1 NZLR 172 (CA) at 194).
Societies and charities (and those who chair their meetings) have an obligation to ensure that conflicts of interest, bias and predetermination are properly managed if challenges to decisions are to be avoided. If conflicts of interest, bias and predetermination are not properly managed the consequences can be serious:
- Members of a society or beneficiaries of a charitable trust may seek to have decisions overturned,
- Auditors may be concerned if these issues are not correctly identified and managed,
- If the organisation is a charity, complaints may be made to and investigated by Charities Services,
- External funding may be lost,
- Expensive and damaging Court proceedings may result and decisions may be set aside, and
- The reputation of the organisation and of the individuals involved may be seriously damaged.
For specific advice about conflict of interest issues in societies or charities, please contact Mark at mark@nfplaw.co.nz.