The report into conflicts of interest and other matters at the Hawke’s Bay District Health Board has lessons on governance that are relevant not only in the public health sector but also to the wider corporate environment.
While DHBs operate under a statutory framework that includes specific regulation of key governance issues, including the duties of Board members and disclosure obligations, there are strong parallels with the role of Board members in both the public and private sector.
In this update we look at the Hawke’s Bay report and its implications for governance in the corporate sector.
Key Hawke’s Bay findings
To recap, an independent panel was appointed by the Director-General of Health to review the Hawke’s Bay District Health Board’s (HBDHB) handling of conflicts of interest after concerns were raised about tender processes for community healthcare and a pilot training programme. Among the panel's findings were inadequacies of disclosure by a Board member of his involvement, prior to appointment to the Board, in the development of an RFP for a tender in which his company was a bidder and concerns about the adequacy of the management of the interest of another Board member in relation to the Board's review of its community pharmacy funding activities.
The panel found HBDHB and Board members did not adequately handle conflicts of interest even though the Board actively encouraged disclosures by its members. In handling any conflicts, the panel noted that disclosure itself is not enough - in most cases (in the absence of a statutory waiver) the conflicted Board member should not participate in Board deliberations on the relevant matter.
The panel also commented that there were direct communications between Board members and management on operational matters and that this was generally not appropriate or consistent with good practice. These issues may have been compounded by the Board’s governance manual failing to address conflicts of interest in a comprehensive manner as well as having minimal induction and training for Board members, the panel said.
Conflicts of interest in the private sector
Companies operating in the private sector are also subject to detailed compliance obligations regarding the disclosure and management of conflicts of interest. The Companies Act 1993 requires that:
The Companies Act also contains detailed provisions governing the circumstances in which a company can avoid a transaction in which a director is “interested” and also provides that an interested director may attend and vote at a Board meeting of directors at which a matter relating to a transaction in which he or she is interested arises - unless the constitution provides otherwise.
For listed companies, in addition to the detailed protections built around the concept of Related Party Transactions, the NZX Listing Rules add a further layer of obligations by:
Across the public divide
In the Hawke’s Bay case are key points of direct relevance in the corporate sector around maintaining an interests register and disclosure. These cover the timing and content of disclosures, the range of circumstances in which a conflict should be disclosed and the need for vigilance on the part of a Board in determining the extent of a conflict or potential conflict. There is also mention of the need to consider each disclosure and (where appropriate) make further enquiry to determine the full extent of the conflict and its impact on Board activities.
The nature and size of New Zealand business means that, even in the listed company arena, the likelihood of conflicts of interest arising out of routine transactions are such that the management tools discussed by the panel are equally relevant in the private sector. In particular, there is a very real risk that the specialist expertise that even the most experienced director brings to the Board table may ultimately be outweighed by the need for the company to obtain comfort that transactions are undertaken on arms length terms and for it to be seen to have arrived at decisions independently. These discussions are much more clear-cut in a listed company environment, when the NZX Listing Rules require interested directors to disclose and abstain.
Lessons derived from the panel’s report are worthy of further examination by most companies in which the Board represents the interests of a wider group of stakeholders than just owner/operators, including:
What lies ahead
After the smoke clears from the ensuing debate between those involved as to the ultimate responsibility for many of the Hawke’s Bay Board’s difficulties, the key messages from the panel’s report may become clearer.
At the core is that the overlay between legal duties, ethical considerations and best practice is such that a Board must ensure that it lays down an adequate framework and continues to monitor its functions against appropriate standards and procedures for sound corporate governance.
Perhaps the likelihood of a difficult trading environment for a range of sectors of the economy only serve to remind us that the proper functioning of a Board is more likely to leave it better positioned to work well with management to address the challenges that lie ahead.
* For more details about the Hawke’s Bay report and its key implications for DHBs and other Crown Entities click here.