Conflict of interest
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.
When do conflicts of interest arise?
A conflict of interest can arise when:
- an officer could benefit financially or otherwise from the charity, either directly or indirectly through someone they are connected to, or
- when an officer’s duty to the charity competes with a duty or loyalty they have to another organisation or person.
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:
- the governing groups’ decision could lead to employment for an officer or a member of their family
- an officer stands to gain financially from business dealings, programmes or services provided to the charity, or
- information provided to the governing group in confidence might give an advantage to an officer's business.
How do we manage conflicts of interest?
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:
- not pursuing the course of action
- proceeding in a different way so that the conflict of interest does not arise
- appointing further independent officers (if this is applicable), or
- not appointing a particular officer or requesting the officer to resign from the position.
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.
Examples of conflict of interest
Employing a member of family
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.
Receiving donations and making payments to a trustee’s business
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.
Paying officers a salary when officers are related
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:
- decisions made are in the best interest of the charity when contemplating entering into a transaction, contract or arrangement that might benefit the private or personal interests of members of the governing group
- the governing group acts at all times in the best interest of the charity
- officers do not directly or indirectly receive and profit from his or her position
- any financial interest is disclosed, and
- officers do not use their position to obtain information to achieve financial benefit for themselves or another close family member, friend, or for another organisation. Family includes anyone related by blood, marriage or domestic partnership.
These procedures will be followed to ensure decisions are made in the best interest of the charity.
- An interest register will be regularly maintained and monitored where officers will register any perceived, current or potential interests. The interest register will include information about:
- the officer affected
- the type of conflict of interest, and
- how it will be ensured that decisions are made in the charity’s best interest.
- At the beginning of every governing group meeting, conflicts of interest will be declared that relate to the agenda items for discussion.
- When there is a conflict of interest, the affected officer will not take part in the discussion or decision making.
- The minutes of meetings will record all disclosures and declarations of conflict of interest. This should include:
- the type of conflict of interest
- the officer affected
- whether the conflict of interest was declared in advance (new conflicts of interest will be added to the interest register)
- a summary of the discussion, and
- how it was ensured that decisions were made in the charity’s best interest, including anyone that withdrew from the discussion and decision making.
- An ongoing interest register will record this information, and any related party transactions will be recorded in the Performance Statement at the end of the year.
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:
- That the officer with the conflict can’t vote on that particular decision;
- The officer will exclude themselves from that discussion in a meeting; and
- That the officer doesn’t get counted for a quorum.
“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.