Conflicts of interest: what are they and how can a charity manage them?

Conflicts of interest are a key priority for the Charity Commission.

Conflicts of interest can affect charities of all shapes and sizes. They can make it difficult for a conflicted trustee to act in their charity’s best interests, and may leave decisions made by conflicted trustee(s) open to challenge. If not properly regulated, conflicts of interest can potentially damage a charity’s reputation with its stakeholders, beneficiaries and the general public. Charity trustees must be able to identify conflicts of interest and take steps to prevent them from influencing their decision-making.

What is a conflict of interest?

Conflicts of interest arise when the personal interests or loyalties of a trustee(s) could, or could be seen to, prevent them making a decision that is in the best interests of the charity. These conflicts may be financial, relational, or professional, and include both actual and perceived conflicts. A perception of a conflict can damage a charity’s reputation just as much as an actual conflict.

How are conflicts of interest regulated for charity trustees?

The framework for regulating conflicts of interest includes:

• charity law: trustees must act in the best interests of the charity and avoid any conflict between this duty and any personal interest they may have;

• company law: directors of charitable companies must avoid situations where they have, or could have, a direct or indirect interest that conflicts, or may potentially conflict, with the interests of the charity;

• governing document: the charity’s governing document may provide an express provision to allow for certain conflicts or a framework for how such conflicts must be managed; and

• fiduciary duty: case law has established that the members of a charitable company owe a fiduciary duty to act in the best interests of the charity (amongst other fiduciary duties).

What must trustees do to avoid conflicts of interest?

The possibility of a conflict of interest arising doesn’t mean trustees should avoid other personal or professional interests, nor should it discourage individuals from becoming a trustee. A trustee’s personal and professional connections often bring valuable insight and benefit to a charity.

 Trustees must manage their conflicting interests by:

• acting only in the best interests of the charity;

• identifying and declaring any conflicts of interest;

• following the charity’s governing document and legal requirements to manage the conflict;

• withdrawing from decision-making where a conflict exists, especially if it involves personal benefit;

• recording conflicts in a conflicts register on appointment as a trustee or as they arise throughout the trusteeship and having conflicts as a standing item on the agenda of trustee meetings; and

• recording in the minutes of the relevant meeting how the conflict has been managed.

Trustees must not:

• allow personal interests to influence decisions;

• accept benefits from the charity without proper legal authority;

• fail to disclose conflicts, even if they believe the conflict is minor or manageable; or

• continue in post if a conflict becomes unmanageable.

The consequences of not acting properly when a conflict arises

Failure to properly manage conflicts of interest can lead to:

• legal consequences: a decision may be challenged, and subsequently invalidated. If there is a breach of duty resulting in a loss to the charity, it is possible that trustees may be required to compensate the charity for any losses;

• regulatory consequences: the Charity Commission may intervene and require the trustees to take action to remedy the situation and ensure that it does not recur; and

• reputational consequences: beneficiary, donor and public trust in the charity may be eroded, affecting funding, partnerships, and stakeholder confidence.

Drawing up a conflicts of interest policy

To help identify, prevent and record conflicts of interest, charities should have a conflicts of interest policy. The policy should be regularly reviewed and updated, and should:

• define conflicts of interest;

• explain that trustees have a personal responsibility to declare conflicts of interest;

• confirm what the charity’s governing document says about conflicts of interest;

• include guidance on the procedures to follow;

• set out how and by whom the policy will be monitored and enforced; and

• be widely communicated and understood within the charity.

Summary

Conflicts of interest continue to be an issue for charity trustees, arising either from personal interests, external social factors or both. However, there are clear steps that charity trustees can and should take to manage conflicts of interest and safeguard the best interests of the charity.

Additional detail is available in the Charity Commission guidance: Conflicts of interest: a guide for charity trustees (CC29).

If you would like to discuss any aspect of this article further, please contact the Charities and Social Economy team on 0113 244 6100.

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The information in this article is necessarily of a general nature.  The law stated is correct at the date (stated above) this article was first posted to our website.

Specific advice should be sought for specific situations. If you have any queries or need any legal advice please feel free to contact Wrigleys Solicitors.