Conflicts of interest in the not-for-profit context are crucial to manage. The ACNC Standards make it clear that conflicts of interests for a charity need to be carefully managed. In this Insight, we explore conflicts of interest: what they are and how to manage them
The ACNC’s Conduct Standards – particularly Standard 5 – outlines that responsible persons including directors or board members have a legal duty to ensure the charity adequately manages conflicts of interest.
The Standard also stipulates a number of other duties, including but not limited to the duty:
- to not misuse their position or information gained as a responsible person,
- to act in good faith in the best interests of the charity; and
- to act with reasonable care and due diligence.
These are all duties which require responsible persons to put their mind to the interests of the organisation, and to place the charity’s interests above their own personal interests.
What is a conflict of interest?
The ACNC stipulates that “a conflict of interest occurs when a person’s personal interests conflict with their responsibility to act in the best interests of the charity.”
There are three recognised types of conflicts of interest:
You are being influenced by a conflicting interest
You could be influenced by a conflicting interest
You could appear to be influenced by a conflicting interest
It is important to understand that conflicts of interest are almost inevitable in any charitable organisation and they can be a real challenge for small volunteer run charities. People often become involved because of their association with someone already involved in the charity. When there’s a challenge to address, it’s human nature to reach out for assistance to the people you know, to the people in your inner circle who share your values, to help you get the job done.
So what are the ground rules? Generally, it is not appropriate for a charity’s responsible persons, staff or volunteers to benefit in any way from the actions or decisions a charity makes. This would also include a benefit to their family members, friends, close associates or related entities.
Conflicts of interest are a key risk that charities need to look out for and treat appropriately. What will set your organisation apart from others is how you manage and respond to a situation where a conflict of interest arises.
Conflict of Interests with Directors/Officeholders
Directors and officeholders are required to disclose personal interests to ensure that possible conflicts can quickly be identified and resolved or prevented in advance. It is particularly important for the directors of an organisation to turn their mind to these issues, as poor management of these conflicts can readily lead to long-term compliance issues.
As a matter of precaution, organisations should have procedures in place to ensure their organisation is protected from these issues. By way of example, this could this include:
- The provision of a Declaration or Register of Interests, which should be completed by each responsible person at the commencement of their involvement with the organisation. This will encourage transparency and accountability amongst all parties from the outset;
- The provision of a robust Conflicts of Interest policy, which should be provided to all responsible persons for their own knowledge and understanding;
- Ensuring that responsible persons have an adequate understanding of their role and responsibilities in accordance with the duties; and
- Developing any other prevention techniques and management procedures to identify and control and contain any possible situations of conflict.
In saying this, the organisation is also expected to foster an environment and/or culture where reporting these conflicts is simple, available and not burdensome on the responsible persons. The mechanism for reporting should be well-known and understood by all members in anticipation of any issues which may arise. This will usually be outlined in the Conflicts of Interest policy.
In situations where a conflict has been disclosed, a charity should be mindful of the steps they should take to prevent a situation and to ensure that such conflicts are appropriately handled.
How should you respond when you believe a fellow director has a conflict of interest?
- Identify the conflict of interest. Is there really a conflict between the director’s interests and the interests of your charity? Check your charity’s conflict of interest policy for what constitutes of a conflict of interest. If you have a perception there may be a conflict, it is probably at least worth discussing – other directors may have the same concern and need for clarity.
- It is the responsibility of the director with the conflict to disclose the conflict. Your charity’s policy should require that they do so at the first available opportunity upon becoming aware of the conflict. This will generally be at the next meeting of the directors. However, sometimes the matter is so sensitive it may need to be addressed beforehand because a conflict may mean that a director should not have access to information and documents in advance of the directors making a determination about a matter. Disclosure is usually done through the Chair at first, and the Chair should provide guidance to the other directors and the staff of the organisation for managing the conflict.
- Once declared, the conflict should be recorded in the Declarations of interests register and the Board’s decision of how the conflict is to be managed and address should be noted in the minutes.
- In addressing the conflict, the directors need to ensure they are placing the interests of the Charity ahead of the interests of the director with the conflict. As a general rule, if a director or any of their associates stands to benefit either directly or indirectly from an action or decision, they shouldn’t be participating in any aspect of the action or decision.
- If the conflict is likely to be ongoing and cannot effectively be managed – the director may need to consider stepping aside to avoid the conflict. The most important thing is preserving the charity’s reputation and integrity. Even the slightest perception of conflict of interest can have significant adverse impacts on a charity’s reputation – donors may withdraw – beneficiaries may not want to accept goods and services ‘tainted’ by conflicts of interest.
- If your fellow director won’t disclose the conflict, you may have a problem. Use your judgment and approach your Chair in confidence.
Conflicts of interest aren’t easy for the uninitiated. They are best dealt with by setting the ground rules from the start, having robust policies in place requiring directors to disclose conflicts at the start of their tenure, on an ad hoc basis if new conflicts arise, and annually when review the policy. Training your people to identify conflicts and apply your processes is no longer optional. You should regularly review your conflicts of interest policies and procedures and run induction and refresher training for your directors and senior staff.
We’re here to help and offer a sounding board for your concerns. We can tailor a program to review your documents and train your key people to manage conflicts of interests and other director’s duties, giving you peace of mind.
If you would like to get in touch with the NFP Team at Birchgrove Legal, please do not hesitate to contact (02) 9018 1067 and we will be happy to discuss these matters further with you and your organisation.