Awareness of the importance of governance
I have addressed governance issues several times in this column, and in the article “Responsibilities of those in Governance” I observed:
Governance was scarcely mentioned in the context of community organisations a generation ago, but in recent years there has been a growing awareness of the need for higher standards of governance in community organisations, not just of licensed clubs and major sporting bodies but also of smaller organisations. This may be a spin-off from the increased emphasis on governance responsibilities in the business community (the recent convictions of finance company directors may heighten this awareness), with some flow-on effects for community organisations.
Poor governance practices are common in community organisations, but I do not intend that observation to be a criticism, but rather as identifying a simple lack of skills and training.
Improving governance practice
Realistically, it is not possible to legislate for good behaviour, but some form of code of governance conduct could usefully be included in constitutions (or subsidiary policies) and in any reformed societies’ Act, and more progressive entities already provide training for those in governance.
At present common sense responsibilities such as are found in the Companies Act are not found in any legislation relating to not-for-profit organisations.
In the Law Society’s view, the model in the Companies Act is not immediately transferable to societies, but provides a useful and adaptable model for any new societies statute, and one superior to the very limited code found in, for instance, section 25 of the British Columbia Society Act 1996.
Q20 In what respects might the Companies Act obligations need to be altered if included in a new Incorporated Societies Act?
As indicated, the Law Society considers the Companies Act code a useful and adaptable model for any new societies statute, perhaps as summarised in paragraph 3.5 of the Issues Paper, but omitting from the last bullet point “taking into account (without limitation) the nature of the company, the nature of the decision, and the position of the director and the nature of the responsibilities undertaken by him or her.”
Companies Act Model?
Conflicts of interest may be based on either pecuniary or personal interests:
- A pecuniary or financial interest arises where a decision-maker may be considered to gain some direct or indirect (including potential) financial benefit from the decision to be made.
- Other personal interests may arise where a decision-maker may be considered to have some other non-financial motive for a particular decision being made; for example:
– Because a close family member might benefit from a decision, or
− Where an organisation to which the committee member or trustee belongs would gain some advantage from a particular decision or the committee member’s or trustee’s knowledge of the reasons why certain decisions are being taken.
Bias is a predisposition to make a decision in a particular way because of matters that actually do, or may, influence a decision-maker. Predetermination is a type of bias, and is indicative of a “closed mind” where the decision-maker is unable to come to an issue willing to be influenced by facts or logic to make a decision either way.
Bias may exist even if actual bias or predetermination cannot be proved, as presumptive bias is sufficient and the actual motives and good faith of the individual concerned are not relevant. Unfortunately, this is not an area where the law can be expressed in precise terms, as the factual circumstances are critical in determining whether a decision is corrupted by bias or predetermination.
Guidance for those in governance
Based broadly on the Model Standing Orders for Meetings of Local Authorities and Community Boards (NZS 9202:2003) the following is offered as a useful guide to those in governance of community organisations:
- “No members shall vote nor take part in the discussion of any matter at any meeting where they, directly or indirectly, have any pecuniary or personal interest, other than an interest in common with the public.”
A pecuniary interest includes a direct financial interest, and also an indirect financial interest through a company or family member, and the interest may be actual or potential, and the motives and good faith of the decision-makers whose decision is impugned is irrelevant (see Calvert v Dunedin City Council  2 NZLR 460 (HC)). If there is any possible pecuniary or personal interest, the best course is to declare an interest and remove yourself from involvement in the issue.
- “Every member present when any matter is raised on which they directly or indirectly have a pecuniary or personal interest, apart from any interest in common with the public, shall be under a duty to fully declare any such interest to the meeting. This disclosure and the subsequent abstention of such member from both discussion and voting on the item, is to be recorded in the minutes.”
The duty to declare an interest is imposed on the decision-maker, and the community organisation has no duty to ensure that committee members or trustees declare any interests. However, the organisation should be concerned if interested people fail to declare an interest as its decisions may be set aside if members who do declare a conflicting interest fail to declare it.
Those in governance contracting with an entity
It should be clear from the above discussion that if a decision-maker (or anyone close to him or her) proposes to contract with an entity there is a very clear conflict of interest. Not only must that conflict be declared, but the entity must be able to establish that proper processes have been followed (such as seeking competitive prices and having decisions made in a transparent manner without influence from the conflicted person).
Further, if a decision-maker (or anyone close to him or her) contracts with a charity this will, inevitably, excite the interest of auditors and the Charities Commission.
Those considering or actually governing a community organisation need to consider carefully whether to serve the organisation in governance or whether it is better to avoid conflicts of interest arising from their commercial or personal interests or related activities by declining to be involved in governance. My advice is – if there is any doubt in your mind or in others’ minds, make a choice between being or not being in governance.
There are, indeed, many unrecognised issues waiting to trap the unwary community organisation committee member or trustee.