The Members' Interests Act (MIA) is up for overhaul, and not before time. Nobody likes it, or thinks it is particularly effective in the current environment. While everything else about local government has been modernised at least once in the past two decades, this Act has remained rooted in the 1960s in both its language and its concepts. It has given the Office of the Auditor General headaches in recent years.

DIA has released a Discussion Paper and submissions close 18 November. The Discussion Paper is clear and deserves to be read by those who may be subject to the MIA or involved with its application. This is a wider audience than local councils and their committees and community boards (or local boards in Auckland) because MIA also applies to a diverse range of other public bodies.

The MIA is prescriptive, not principle based, although obvious principles such as avoidance of bias and conflicts, and abuse of public office underlie the rigid rules.

Broadly, there are 2 main rules:

The "contracting rule" says that members (including spouses and partners) cannot be involved in contracts with the local authority paying more then a total of $25,000 pa. The penalty is automatic disqualification from office for the member, and a small fine if convicted.The Auditor General can grant pre-approvals, subsequent approvals in special cases, and reasonable ignorance is an excuse. There are various other specific exemptions and deemed conflicts covering several pages of the statute book.

The "discussion and voting rule" prohibits discussing or voting on matters in which members have a monetary interest (direct or indirect) unless the interest is "in common with the public" (eg setting residential rates). The penalty on conviction again is a small fine and disqualification from office. As with the "contracting rule", only the Auditor General can initiate a prosecution. Again, there are many exemptions including one for discussing and voting on paid appointments; so members can vote on their own appointments to CCO Boards. The prohibited interests are only pecuniary, so, for example, there is no impact on members who might be thought to be conflicted by reason of their membership of sports or cultural bodies being funded by the local authority.

There is not a lot of support for the current regime; but no serious suggestion that it should be repealed without a replacement. What should replace it?

What about other regimes?

Parliament

Since 2005, MPs must make an initial declaration of pecuniary interests, including their substantial debtors and creditors, and annual returns that include overseas travel (and who paid for it), gifts, debts paid by others, and payments received for activities in which the MP is involved (this could include directorships and employment or self employment as there is no requirement for MPs to be full time). There is a register and a registrar; returns must go to the Auditor General; and a summary is published on the web and available for inspection.

Financial interests not on the register have to be declared before an MP participates in a relevant item of business. The Speaker has the final say on whether an MP has a financial interest. Breach of the disclosure rules is contempt; but having disclosed appropriately, there is no restriction on an MP debating and voting on a matter.

There are special rules for MPs who are Cabinet Ministers. These are in the Cabinet Manual. There are no stated penalties for breach, but the wrath of the PM of the day can be expected.

Crown Entities

Sections 62 to 72 of the Crown Entities Act 2004 creates a special regime for their members. Members (directors usually) must disclose interests (not just financial) in an interests register for the entity, and to the chairperson (or Minister if there is no chair or the chair is interested). Disclosure is of the nature and extent of the interest, and its monetary value if quantifiable.

An interested member cannot participate in discussion or vote on the matter. (Note the different position discussed below for companies generally).

Breach of disclosure rules, or improper participation or voting, must be disclosed by the Board to the Minister. It does not invalidate a decision but may be grounds for judicial review ( as is the case for local authorities).

The Chair can allow a member to participate and vote; but this is by prior written notice, so there must have been proper disclosure. Inadvertent oversights cannot be forgiven later by the Chair. There is no direct penalty for an offending member, but removal from office would be a real possibility.

Companies generally

Directors are appointed by shareholders, but once in office are required to act in the interests of the Company, not shareholders: a fact that upsets some shareholders when the interests do not coincide.

However, a director of a holding company can act in the interests of that company (in which he or she may likely be engaged as a paid director, or employed as an executive) even if not in the best interests of the subsidiary.

Under section 139 Companies Act 1993, the disclosure test for directors is that they must disclose potential "material financial benefits" from a transaction and whether they have a "material financial interest" or are otherwise directly or indirectly materially interested in the transaction. Materiality relates to the position of the director, not the size of the company or the materiality of the transaction to the company.

Interests must be disclosed to the Board and entered in the interests register; as to nature and extent, and value if quantifiable.

Transactions between a director and the company in the ordinary course of business and on usual terms need not be disclosed.

General notices of disclosure are sufficient, and the matter does not have to be raised at each transaction.

If proper disclosure has not occurred, the director commits an offence, and the company itself can avoid (unwind) any transaction within 3 months after disclosure to shareholders (not the Board) if the transaction did not give fair value to the company. So there is a powerful incentive on directors of companies that are not tightly held to ensure they get disclosure right.

Having made full disclosure, an interested director can proceed to discuss and vote on the transaction (the opposite of the position for Crown entities).

A company's constitution can have other rules, usually more relaxed, and that can be entirely appropriate for tightly held companies running family businesses, for example.

NZX Listed Companies

There are special rules covering material transactions with related parties, including directors. There are also reporting requirements for benefits obtained by directors.

CCOs

There are no specific rules for CCOs. However, most will be companies and so the general companies rules will apply. There is nothing to prevent shareholding councils applying stricter rules through the constitution of the CCO; for example, applying rules similar to those for Crown entities. Of course, this would have to be done carefully because of the prospect of the council wanting to enter into transactions with the CCO and finding that its member directors are disqualified.

Conclusion

The rules for companies are not likely to be of great assistance in this reform. Companies vary so greatly, from small closely held family businesses where directors are the only shareholders, to complex multi-national corporate structures. In the first class of case, disclosure is irrelevant or inappropriate, and in other cases, disclosure to shareholders is often only an after the event requirement.

That is not to say that there should not be full disclosure reporting by local authorities; but the most helpful guidelines are more likely to be found in the Parliamentary and Crown entity processes.

The MIA only deals with pecuniary interests, which tend to be easier to identify and address. If they exist and are not addressed, trouble inevitably follows. However, even in this area there is plenty of scope for contention about the remoteness of indirect interests and whether or not they are "in common with the public".

What is generally more difficult is where there are allegations of pre-determination based on previously expressed views or stated affiliations; whether to causes or to organisations (for example sporting or cultural organisations). Members often respond by saying that they were elected on that basis, and the public should expect them to favour the particular cause no matter what.

There is no doubt that any provisions that have the effect of disqualifying elected members from exercising their governance responsibilities raise important issues for democracy.

While the test for apparent bias has been settled by our Supreme Court in the Saxmere case, its application to local authority situations inevitably depends on the circumstances. This means that whether or not there is a problem depends on the nature of the decision, and the context in which it is being made, as well as the full facts which give rise to the member's interest or predetermination. This is obviously a difficult subject matter to try to regulate.

Whatever councils, officers, and ratepayers think, it is important that the issues are considered and all views are aired.

If you would like assistance with making a submission to DIA on its Discussion Document, please contact one of our team. Remember, submissions close 18 November.