As a director or trustee of a charity, you must always act in the best interests of the organisation. However, at times this responsibility can conflict with a director’s personal interests. This is why charities require effective governance – to ensure that these conflicts of interest are identified, resolved or avoided altogether.
Conflicts of interest can be resolved with no serious ramifications. Poor management of conflicts of interest can damage a charity’s reputation and reduce its ability to attract donors and volunteers. Even worse, bad management of conflicts of interest can result in breaches of the law.
What is a conflict of interest?
A conflict of interest occurs when a personal interest conflicts with your responsibility to act in the best interest of your charity. ‘Personal interest’ includes not just a person’s own interests, but also the interests of family, friends and associated organisations.
The term “conflict of interest” is itself confusing: it describes a conflict of duties and interests, the duties as a director – such as to act in the best interests of the charity, or to keep charity information confidential – may conflict with the individual’s own interests in promoting the individual and his or her associates – friends, relatives, related organisations.
A problem arises when a personal interest undermines the individual’s responsibility to the charity and makes it difficult for the individual to act independently or on its behalf.
You can determine if a conflict of interest exists by using the impartial observer test. Ask yourself:
“Would someone, fully informed about the extent and nature of my personal interests, believe that I was influenced by those personal interests when making a decision on behalf of the charity?”
Charities must comply with the Australian Charities and Not-for-Profits Commission (ACNC) governance standards. Governance Standard 5 requires charities to ensure that their board members are aware of and are subject to the duty to disclose perceived or actual conflicts of interest.
Hence, it is important to consider even perceived conflicts of interest. Perceived conflicts of interest arise when a practically impartial decision appears to be biased. The Australian Charities and Not-for-Profits Commission (ACNC) Regulations do not distinguish between actual and perceived conflicts of interest; therefore all perceived conflicts of interest must be disclosed. The ACNC may take action if the charity does not meet its governance standards.
Consequences of failing to address a conflict of interest
If conflicts of interest are not managed properly this can result in:
- Reputational damage – also known as reputational risk;
- Failure of your duties to act in the best interest of the charity;
- Lack of transparency and accountability in the charity’s governance;
- Poor Board performance; and
- Failure to fulfill legal requirements to disclose actual or perceived conflicts of interest.
While conflicts of interest may be inevitable, how you manage them determines whether or not they become a serious problem for your charity.
Managing conflicts of interest
Educating your Board members on their duties and implementing a conflict of interest policy is an effective way of identifying, managing, and preventing conflicts of interest.
To appropriately respond to a conflict of interest you should:
- Identify the conflict of interest;
- Notify the Board of the conflict;
- Ask Board members to determine a suitable action and remedy; and
- Implement the Board’s chosen remedial action.
At the very least, all charities should have a Register of Interests that records the interests of board members and steps taken to manage them.
A good starting point is this guide published by ACNC:
Get in touch
You should also contact Peter McNamara for more information on how you can effectively manage conflicts of interests in your charity.