The charity and not-for-profit sector is a close-knit community and this can unintentionally give rise to conflicts of interest as trustees accept multiple appointments or inadvertently mix their charitable work with their business interests. But conflicts of interest are one of the least understood risks of governance and failure to recognise and deal with them properly can cause serious problems.
Example Case Study
For example, say John Smith is involved in a charity that provided training and support to disabled people. One of its income streams is a second-hand goods shop manned by paid staff, some of whom were themselves disabled. A decision had been taken to employ the disabled son of one of the trustees. The appointment was noticed by a customer who thought that her disabled daughter should also be offered employment. Rumours of nepotism spread rapidly through the local community and some customers began to boycott the shop.
In this example, on examining the minutes of the trustees’ meeting at which the decision was taken revealed that notwithstanding, or perhaps because of, the obvious close relationship, it was not mentioned. Furthermore, the trustee concerned did not even absent himself from the meeting. So the charity in this situation would have no means of defending its decision. While it is not impossible to recover from this mistake, it would certainly require much work and assurance to restore the trust of many stakeholders and uphold the name of the organisation.
Not always obvious
According to the Australian Charity and Not-for-profits Commission’s (ACNC) guidance, “a conflict of interest occurs when a person’s personal interests conflict with their responsibility to act in the best interests of the charity. A conflict of interest may be actual, potential or perceived and may be financial or non-financial.” It should be noted that a trustee is under a legal obligation to act only in the best interests of the charity.
Conflicts of interest are not all as glaringly obvious as the one described above. Broadly they fall into four categories:
- Direct financial gain or benefit to the trustee. An example is a trustee whose company sells products or services to the charity, resulting in him or her receiving income from the profits.
- Indirect financial gain or benefit to the trustee. The example described above is typical of an indirect benefit derived by a trustee.
- Non-financial gain or benefit to the trustee. For example, a trustee or connected person receives a service from the charity at no cost when others must pay for the service.
- Conflict of loyalty. This is where a trustee has obligations to more than one organisation and a ‘duality of interest’ arises. There would be a problem if both organisations were competing for the same funding source. The trustee could not be seen to be promoting the interests of one organisation in preference to the other.
Conflicts need to be identified and avoided. They can lead to a climate of distrust which undermines effectiveness and performance; decisions and actions that are not in the best interests of the charity; and reputational damage which impairs fundraising and charitable activities.
Surprisingly, the best policy is usually not to eliminate conflicts by avoiding the appointment of individuals who might occasionally be conflicted. This could preclude useful and well-connected people from service to the charity. Instead, charities should put systems in place to identify and manage conflicts before they arise. The governing document should include provisions for dealing with conflicts of interest and a Conflicts of Interest Policy should be in place. Well-organised charities will have an Interests Register which they review frequently.
Conflicts of interest should always be addressed when prospective trustees are considered for appointment and candidates should be required to declare any interests. Existing trustees should be reminded at least annually of their duty to recognise and declare any interest that may cause a conflict.
Where a conflict is identified, the nature of the benefit or conflict of loyalty should be recorded and the trustee concerned must withdraw from the decision-making process or, in serious cases, resign from the board. Minutes of meetings should diligently record the accompanying discussions and the steps taken. Reference should always be made as to why the decision taken was in the best interests of the charity.
As a last resort, when a conflict cannot be resolved, it is possible to seek authorisation from the Charity and Not-for-profit Commission to support a particular course of action.
As always, matters such as conflicts of interest are most easily dealt with in anticipation, by putting into place the appropriate safeguards and by training those involved to apply them. The ACNC has published detailed guidance on this subject, including resources that your charity can use. If you would like further advice on this subject or any other aspect of managing a charity, please contact one of our Charity and Not-for-Profit Sector Team.
Alternatively, you can read more about the services we provide to charities here.
Darren Laarhoven: D.Laarhoven@uhyhnseq.com.au
Reece Jory: R.Jory@uhyhnseq.com.au
Article adapted from original by Roland Givans.