Created: June 10, 2015 at 12:37 PM | Updated: June 19, 2020 | By Charities Services
A conflict of interest is any situation in which an officer’s personal interest or loyalties could affect the ability to make a decision in the best interest of the charity.
It is common for conflicts of interest to occur in charities of all types and sizes, particularly where officers are related by blood, marriage or domestic partnership. If not well managed, a conflict of interest could lead to decisions which are not in the best interests of the charity, create disputes, or damage a charity’s reputation. Even a perceived conflict of interest can damage a charity’s reputation.
All officers of registered charities have a duty to act in the best interests of their charity. Officers are the trustees, members of the board or governing body, or all the people in a position to exercise significant influence over management or administration. Trustees and directors of companies in particular have a higher level of legal responsibility and personal liability, which makes it even more important to effectively manage conflicts of interest.
A conflict of interest can arise when:
This includes any situation where it could be perceived that an officer’s personal interest or loyalties could affect their decision making.
Conflicts of interest commonly arise in situations where:
There are a few steps you can take to make sure conflicts of interest don’t affect the decision making.
Develop an interests register.
Declare any interests at the beginning of each meeting.
Ensure the officer with the conflict does not participate in the discussion or decision-making process.
Record details of the discussions and decisions made in the minutes and a conflict register.
Significant transactions with a conflict of interest should be reported in the end of year financial statements as a related party transaction. This is a requirement of the new reporting standards for registered charities.
When a conflict of interest is serious, it may be best to resolve the conflict by:
Check to see if your charity has a conflict of interest clause in its rules (governing document, deed or constitution) and/or policies. It is good practice to have a conflict of interest clause in the rules and a conflict of interest policy, as they provide guidance to officers about how to identity and disclose conflicts of interest. You can use the example conflict of interest policy to help your charity develop a policy.
Deidre is a member of a charity’s governing group. There is a vacancy at the charity for an administrator and Deidre’s son has expressed an interest in applying for the position.
Deidre has an interest in her son getting the job he wants, but must also act in the best interest of the charity. Therefore, there is a conflict of interest.
Deidre should advise the board of the situation, and should not be involved in the decisions regarding filling the position.
Nikau is a trustee of a small charity set up to help kids with reading. Nikau is also the owner of a children’s bookstore, which donates some books to the charity and gives discounted rates on other books.
Payments and donations between the charity and the bookstore will create a conflict of interest as Nikau has an interest in both.
Nikau should make sure other trustees are aware that he owns the book store, and should not be involved in any decisions to purchase books from his store. The charity will also need to record the transactions and donations between the charity and book store as a related party transaction in their end of year financial reporting.
A brother and sister have set up a charity and are the only officers. They will be undertaking a significant amount of work and intend to pay themselves a salary.
The brother has an interest in getting paid and an interest in his sister getting paid. However, he must also act in the best interest of the charity. This creates a conflict of interest.
The brother and sister must not be involved in the decision making about any payments to themselves or to each other. Independent officers should be appointed to make the decision about salaries and the salaries must be market value or lower.
The purpose of this conflict of interest policy is to ensure:
These procedures will be followed to ensure decisions are made in the best interest of the charity.
Many charities will have a clause regarding conflict of interest in their governing document. This will often include what is considered a conflict of interest and how a conflict of interest should be managed.
We consider best practice is that your rules state:
“A conflict of interest exists for an officer if the officer’s interests or duty in a particular matter conflicts, or might conflict, with his or her duty to the charitable entity.”
“When a conflict of interest exists for an officer, that officer must declare the nature of the conflict or the potential conflict. The officer must not take part in deliberations or proceedings including decision-making in relation to the conflict of interest. The officer must not be counted in the quorum required for decision-making on the matter for which he or she has the conflict of interest.”
Charities Services have developed a guide called How To use a conflict of interest register. This guide includes a template for recording conflicts of interest.