BSR: Conflicts of Interest: Call for Ethical Leadership

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Agency Costs

The agency problem is the conflict of interest that arises when the agent prioritizes his interests ahead of the principal’s interests. When a principal hires an agent, the principal expects the agent to act on its behalf. In other words, the principal trusts the agent to fully represent its interests. The principal gives all its information to the agent and in turn, the agent receives information on behalf of the principal. It is a relationship of trust, where the principal expects the agent to act in good faith to further its interests.

However, the agent may decide to pursue its personal interests neglecting the principal’s. It is in such instances when it is said that there are “agency costs”. It’s an agency problem. The agency problem is well illustrated by the Shona proverb which says “Mbira yakashaya muswe nekutumira”. Mbira is a rock-rabbit. The saying literally means that the rock-rabbit does not have a tail because it relied on others to collect one for it. 

The saying comes from the myth that when the creator was handing out tails, the rock-rabbit decided to entrust other animals to collect a tail on its behalf. They never brought one and so the rock-rabbit ended up without a tail. The proverb neatly encapsulates the agency problem. The one that you trust to do the job for you will look after their interests, never yours. 

A core problem at the heart of the agency problem is conflicts of interest: the agent places its interests ahead of the interests of the principal. While the issue of conflicts of interest has received extensive coverage in respect of companies, it is increasingly getting more attention in the public sector where public officers are the agents of the government and state-owned entities, which are the principals. A conflict of interest occurs when a public officer allows his private interests to improperly influence the way that he executes his public duties. In this regard, conflicts of interest are at the heart of corruption in the public sector.       

Ethical Leadership

One of the issues that exercised the minds of the framers of the Constitution was how the highest law in the country could create a framework to promote more ethical and responsible leadership. There was plenty of data from the outreach process showing that citizens were keen for their leaders to govern the country with integrity and in the public interest and not to use their vantage positions in the state to further their personal interests. A key task, therefore, was to reduce this broad desire for good governance into constitutional duties and responsibilities.

There was nothing specific on these issues in the old Constitution. Therefore, we had to look to other sources such as foreign constitutions and other fields of law. The law dealing with the governance of companies presented a well from which principles regarding conflicts of interest could be gathered and tailored to cater to this area of public governance. Company law has always provided for duties of directors, which include the duty to avoid conflicts of interest. The basic rules are that a director of a company must promote the interests of the company and avoid situations that lead to a conflict between his interests and the interests of the company.

The reasons for these duties are self-evident. A director is a human agent who is responsible for providing strategic leadership and direction to the company. His position allows him unfettered access to information regarding the company’s affairs, control of the company’s assets, and opportunities that are offered to the company. There is a great temptation for such a person to make use of the information or the assets of the company to promote his interests at the expense of the company. Such a person might easily divert for his personal use the opportunities that are made available to the company. To prevent this, the law of companies has evolved to impose both common law and fiduciary duties on directors of the company. A fiduciary is a person who occupies a position of trust concerning another person. Such a person is required to act in good faith.

We thought these principles could be transposed to the field of public governance. After all, Ministers and senior civil servants occupy vantage positions concerning the state which they serve. Like the company, the state is a legal construct that does not have a physical existence of its own. The law grants the state ownership of assets, and it incurs liabilities in its name. However, since it does not have a physical body to perform its functions, just like a company, it relies on human agents. For the company, these human agents are the directors and managers. For the State, the human agents are the Ministers and senior civil servants. Since, as we have already observed, company law imposes fiduciary duties on directors, it would make sense for the constitution to also impose these fiduciary duties on Ministers and senior civil servants.

Ministers’ Fiduciary Duties

The central issue is that a person must act in good faith during the time that he or she holds office as a Minister. This duty of good faith manifests in several ways under section 106 of the Constitution. I know this too well. After all, as I will explain, I pushed hard for these provisions because I believed we need to build a more ethical leadership and I thought they needed to be constitutionalized. 

Duty to avoid other paid work

Section 106(2)(a) of the Constitution provides that a Minister may not “directly or indirectly, hold any other public office or undertake any other paid work”. The object of this provision is to prevent Ministers from performing private work for which he or she is paid during his or her tenure of office. This is to eliminate the risk of a Minister prioritizing private work over his or her public duties. It also minimizes the risk of a Minister promoting the interests of his or her private employer ahead of the government’s interests.

Duty to avoid conduct that is inconsistent with Ministerial Office

Section 106(2)(b) prohibits Ministers from “act[ing] in any way that is inconsistent with their office or expose themselves to any situation involving the risk of a conflict between their official responsibilities and private interests”. This is a classic restatement of the “no conflicts rule”. There are two critical prohibitions in this provision. A Minister may not act in any way that is inconsistent with his ministerial office. The second is that a Minister may not expose himself to any situation which involves the risk of a conflict between his official duties and his personal interests. It is important to put some more flesh on the bones.

Acting in a way that is inconsistent with ministerial office is a broad statement. One must consider what is normatively expected of a Minister when he or she performs his official duties and on the other hand the conduct of the Minister in practice. If the conduct of the Minister is out of sync with the normative standard, that may be regarded as a breach of this duty. [Example]

The duty to not expose oneself to a situation that involves the risk of a conflict of interests is also broad. There is no requirement here that there should be a conflict. The mere existence of a risk of a conflict is enough to trigger a breach of this provision. The purpose of this is to prevent Ministers from landing themselves in situations where there might be a conflict of interest. This means a Minister must weigh every situation carefully, and if there is a risk of a conflict of interest, he must avoid getting into that situation.

The duty to prevent conflicts of interest also lies with the President as the appointing authority. Sometimes Ministers are placed into situations that give rise to risks of conflicts of interests when the President appoints them to take charge of areas in which they have personal interests. A good example is when President Mugabe appointed Supa Mandiwanzira as Deputy Minister of Information, Publicity, and Broadcasting Services in 2013. Mandiwanzira was the principal shareholder of a company that owns ZiFM Stereo, one of the private radio license-holders. 

While there is no evidence that Mandiwanzira advanced his personal interests at the expense of his official interests, there is no doubt that the appointment did place Mandiwanzira in a situation that involved the risk of a conflict between his official responsibilities and his private interests. President Mugabe was wrong to make that appointment because it created risks of conflicts of interest. As already pointed out, the duty is not infringed because there is an actual conflict, but because where there was a risk that a conflict may arise. The perception of conflict is enough to trigger an infringement.

Another example where there was actual conflict was when David Parirenyatwa was paid US$100,000 by Premier Medical Aid Society in 2014 when he was the Minister of Health and Child Welfare. The amount was allegedly US$77,000 more than his medical practice was owed by the medical insurer which caters mainly to civil servants. Parirenyatwa was running a medical practice while he was the Minister of Health and Child Welfare which also had effective control of PSMAS. This situation naturally gave rise to risks of conflicts of interest. 

As the controversy over the payment raged, Parirenyatwa paid back the money, maintaining that it was not an overpayment but an advance from the medical insurer which is supposedly “normal” in the medical field. His explanation notwithstanding, the central problem, in this case, was that the Minister was in a situation that involved risks of conflicts of interest, the very mischief that section 106(2)(b) was designed to prevent. The fact that he was paid by an entity that was under his charge created a conflict of interest and his defenses were not enough to assuage the concerns. It should never have happened. Needless to say, he had to repay to defeat those concerns.

Duty to avoid abusing position, information, or opportunities

The position of a Minister provides broad access to information and opportunities regarding government business. This information and opportunities that become available while exercising ministerial duties can be tempting to a person who seeks personal enrichment either directly or through third parties. They can either use the information and opportunities to enrich themselves or they might pass it on to friends and associates to benefit them. They will then get kickbacks in return, which might be disguised as “personal gifts”.

The Constitution has provisions that are designed to prevent this abuse of ministerial positions or information that a person comes across during his tenure as a Minister. Section 106(2)(c) states that a Minister may not use his position, or any information entrusted to him, to enrich himself or improperly benefit any other person. Whether or not a Minister has abused his position or information entrusted to him to benefit himself or another person is a question of fact that depends on the evidence available. 

While the above provisions apply to Ministers, the framers of the Constitution also extended similar obligations to all public officers. This includes permanent secretaries, who are effectively the chief executive officers of ministries, and all other persons who hold paid office within the state. The idea was that these fiduciary duties should apply at all levels of public officers, not just at the ministerial level. I will now set out the provisions as they relate to public officers before applying them to recent events.

Public Officers and Public Trust

Section 196 of the Constitution provides that authority that is assigned to every public officer is a public trust. This confirms that every public officer is a fiduciary who is expected to always act in good faith when he or she exercises their functions. The provision requires that authority must be exercised in a manner that is consistent with the “purposes and objectives of this Constitution” and “demonstrates respect for the people and a readiness to serve them rather than rule them”. Finally, the authority must be exercised in a way that promotes public confidence in the public office.

If a public officer acts in a way that undermines the office that he holds, such conduct would not be regarded as promoting public confidence in his office. Therefore, if a public officer who oversees the public healthcare system shuns public hospitals, such conduct may be regarded as undermining public confidence not only in the public healthcare system but also in his office. Likewise, a public officer who oversees the charge of the treasury but speaks in a manner that might be regarded as disparaging the local currency might be regarded as undermining confidence not only in the local currency but the office that he holds.

The “No Conflicts” Rule

The No Conflicts Rule which we have already discussed concerning Ministers also applies to all other public officers. Section 196(2) of the Constitution provides that “Public officers must conduct themselves, in public and private life, so as to avoid any conflict between their personal interests and their public or official duties, and to abstain from any conduct that demeans their office”.

Although this no-conflict rule is like the no conflicts rule applicable to Ministers, it has important distinguishing features. First, it specifically applies to the private life of a public officer. Conduct that happens in private life can also lead to conflicts of interest and must therefore be avoided. This means a public officer cannot plead in defense that it’s conduct that happened in his private life.

Secondly, unlike the no conflicts rule for ministers, the no conflicts rule for public officers is mandatory. Public officers “must” avoid conduct that results in conflicts of interest whether in public or private life.        

Third, public officers must avoid conduct that “demeans” their public office. The scope of this provision is broad because it covers conduct in both public and private life. Conduct that “demeans” public office can be anything that is likely to reduce the standing of the public office in the estimation of a reasonable person. Would public drunkenness and brawling by a senior civil servant be regarded as demeaning his public office? Probably, although this might be seen as an aberration unless it is a habit. Would an incident of domestic violence by a senior public officer fall into this category of demeaning his public office? Most probably. Irresponsible statements made in private might also be regarded as demeaning the public office.

Public Funds and Public Property

The Constitution has other important provisions which are designed to protect both public funds and public property.

For instance, section 308(2) provides that every person who is responsible for the expenditure of public funds must safeguard those funds and ensure that they are spent only on legally authorized purposes and in legally authorized amounts[1]. This provision is relevant to Permanent Secretaries in ministries because they are the chief accounting officers. They are the officers with the power to authorize payments. Here, their duty to avoid conflicts of interest assumes critical significance. A person who authorizes payments of public funds must avoid any situation that raises the risk of conflicts of interest.

Where a public officer is closely connected with contractors that are doing business with the government this gives rise to concerns of conflicts of interest. It does not matter that there is no impropriety in the conduct of the public officer because as we have already observed, the no conflicts rule applies strictly so that the mere possibility of a risk of conflicts of interest is enough to trigger a breach.

This week there was quite a brouhaha when a video clip was posted on social media depicting controversial business tycoon Kuda Tagwirei announcing a lavish set of gifts to his friend George Guvamatanga, who is the Permanent Secretary for Finance. Tagwirei has earned a notorious reputation for scandalous dealings with the government. He has been placed under targeted sanctions by the US. He has built a multi-million-dollar business on the back of government contractual relationships including the notoriously corrupt Command Agriculture program in which a parliamentary committee found that US$3 billion was unaccounted for. As Secretary for Finance, Guvamatanga oversees the treasury purse, which includes authorizations of payments of public funds. This scenario presents an important teaching moment regarding the no conflicts rule and how it ought to operate. 

It should be clear from the afore-mentioned constitutional rules regarding conflicts of interest that the fact that the event was a private function and therefore that this was the Finance Secretary’s private life is irrelevant. Section 196(2) covers the conduct of public officers both “in public and private life”. Therefore, what happens in the private life of a public officer is subject to scrutiny for purposes of the no conflicts rule. The fact that conduct in private life is covered might surprise many who are not familiar with the Constitution, and for these people, one lesson is that if you sign up to life as a public officer, you ought to know that there is no separation between public and private life. What you do in your private life is subject to review and scrutiny for purposes of the no conflicts rule.

Secondly, considering that there is deep personal proximity between Guvamatanga and Tagwirei, there are risks of conflicts of interest where the government represented by Guvamatanga and Tagwirei’s companies are doing business together. This is because for the Guvamatanga there are two sets of interests: first, the interests of the government in his capacity as Finance Secretary, and second, personal interests arising from his personal relationship with Tagwirei. What the no conflicts rule seeks to prevent is the risk that a person in Guvamatanga’s position might prioritize the interests of his friend over the interests of the government.

Let me hasten to add that this does not mean that there were actual conflicts of interest in this case or that Guvamatanga prioritized personal interests over official duties. He may be an honourable man who does not permit his friend’s interests to trump his principal’s interests. But at the same time, it is important to recall that the no conflicts rule is not confined to actual conflicts. Instead, even mere perceptions matter because they affect confidence in public officers and institutions. The mere existence of a risk of conflicts of interest is enough to activate the provision. The law is designed in this way to prevent anything that might affect public confidence in the public officer and the office that he or she holds. In the circumstances and with the benefit of hindsight, even if nothing untoward happened, the best course of action would have been for Secretary Guvamatanga to have recused himself from any situations where his friend’s businesses are involved concerning the government. That, in any event, should be the guiding principle in the future, given that Tagwirei and his companies will continue to do business with the government.  

The Question of Gifts

Although gifts are part of everyday life, both the law and ethical codes of conduct treat gifts with caution in the context of corporate and public governance. The reason is that it is very easy to repackage kickbacks as gifts. That is why some organizations prohibit the receipt of gifts. When they are received, the recipient must hand in the gifts to the organization. This is also why some organizations place caps on the value of gifts that may be received by staff. This is to prevent a situation where a gift far exceeds the earnings of the employee and might unduly influence them in the performance of their duties. 

Although most organizations allow gifts, they require recipients to make declarations whenever they receive them. In such cases, the gift is entered into a register of gifts. It does not matter how small the gift might be, the requirement for declaration is designed to promote transparency and to reduce the potential for improper influence. There are precedents where ministers have lost their jobs after failing to declare favours that they have received. In 1998, Peter Mandelson, the then British Secretary for Trade and Industry resigned following the scandal of a loan that he had not declared. Mandelson was a close confidant of Prime Minister Tony Blair. He wanted to buy a home in London. He received a personal loan from a millionaire friend, Geoffrey Robinson, who was also the Paymaster-General but he had not declared it in the parliamentary register. After the scandal broke out, both Mandelson and Robinson resigned from their senior government roles.

In South Africa, Parliament has a register of members’ interests where MPs are required to register not only their financial interests but also those of their spouses, dependents, and permanent companions each year. Although a small part is confidential, most of the declared information is open to the public. Both large and small gifts are declared in the register of interests. For example, Ruth Thandie Modise declared a bottle of Champagne received from the French Ambassador and a bottle of Pinotage from the Russian Ambassador. Michael Waters declared a British Airways Gold card, while Thomas Ravenscroft declared box tickets for a rugby match at Newlands worth R500 received from Brightrock. You can see the full register of interests here.

Being a Public Officer

The role of a public officer is very different from being a chief executive officer in a private company operating in a capitalist context. A CEO in a private company only has to report to shareholders, but even then he has to be respectful to the shareholders. The shareholders in the public sector are ordinary citizens. Many of them are poor people. A man coming from the private sector has to go through a sea change in his mentality. Serving the people is not volunteerism, no matter how wealthy they might be. One has to be sensitive to the challenges of public service. Humility is key. The expectations are different. You cannot be arrogant. You cannot be haughty. 

Conclusion

Good leadership is anchored by integrity. As stated in an OECD Toolkit on Managing Conflicts of Interest in the Public Sector, “conflicts of interest in the public sector are particularly important because, if they are not recognized and controlled appropriately, they can undermine the fundamental integrity of officials, decisions, agencies, and governments”. It is important therefore to identify and solve the conflict of interest situations because it promotes trust and confidence in public institutions. One of the universally accepted approaches to the problem of conflicts of interest is the declaration of interests. It is based on the belief that when a person makes a prior declaration of interests, he is generating light and transparency, both of which are necessary for minimizing the risk of improper conduct. Corruption is more likely to happen in an atmosphere of darkness. There must be:

· Declaration of interests before transactions. Where transactions have already been done, there must also be a declaration of interests

· Declaration of gifts whatever their size. All gifts received by public officers must be entered into a public register which is open for inspection. Keeping the register of gifts a secret defeats the purpose.

· A cap on all gifts. While gifts may be permitted, they must not exceed a certain level worked out based on the recipient’s wage.

· Recusal from decision-making where a gift-giver or person concerning whom there may be conflicts of interest is involved. Where a gift is given following a decision, the gift must both be declared and returned to the giver or it must be surrendered to the state.

· An annual declaration of assets which is also open to the public inspection and review

· Finally, an Ethics Tsar or Committee whose role is to make decisions where a person has received a gift and is unsure of what to do. The Committee must also have the mandate to carry out reviews and spot checks concerning interests in public sector transactions and gifts offered to public officers.

[1] Furthermore, section 308(3) states that “it is the duty of every person who has custody or control of the public property to safeguard the property and ensure that it is not lost, destroyed, damaged, misapplied or misused”. This provision applies to a wider range of public officers across the government.