If you run a charity you should be aware of the importance of your trustees avoiding conflicts of interest. But what does that really mean and why is it so important? For small charities in particular, some of which have no staff and are run entirely by trustees, it is vital to understand what this means and how to remain compliant. However, this is an issue that affects all charities.
What is a conflict of interest?
Charity trustees should be independent and their decisions should best enable the charity to carry out its purpose. A key part of this is avoiding conflicts of interest. This is when they put themselves in a position in which their duty to the charity conflicts with their personal interest or loyalty to another person or organisation.
Examples of a conflict of interest would include a trustee profiting from a contract won by his or her business or a trustee’s family member applying for a job in the charity.
It is important to understand that trustees should not receive any benefit from the charity, unless it is properly authorised and is clearly in the charity’s interests. This includes anyone who is financially connected to the trustee, such as a spouse, partner, dependent child or business partner. In other words, the trustee does not have to benefit financially in order for it to be a conflict of interest.
The Charity Commission has some excellent guidance on how charities should approach this issue.
Documenting trustees’ interests
All charities should have a register of related parties which should be updated regularly. Some charities require this to be reviewed and updated at each trustee meeting.
It is every charity trustee’s responsibility to record, in writing, his or her interests. This should include business and financial interests, as well as any other interests relating to themselves and their immediate family, such as political affiliations or involvement with other charities.
Handling a conflict of interests
It is inevitable that, at some point, a conflict of interest will occur among trustees. This is unavoidable, but the important thing is that the charity then follows the correct procedures. Here, documentation is key.
The first step is for the trustee to recognise and declare the conflict of interest. This is likely to be easier if he or she already has a list of interests. The trustee and charity management should then ensure that the conflict of interest does not impact on any decision making. The charity should record the conflict of interest in the meeting minutes, along with an explanation of how it was dealt with. This should be carried out with no involvement from the relevant trustee.
Trustees should not be involved in any decisions in which it may be perceived that they may have a conflict of interest. If issues relating to the conflict are being covered in a meeting, it should be clearly documented within the minutes that they left the meeting and had no involvement with the discussions. It should also be clearly noted when they re-joined the meeting.
Is a conflict of interest ever acceptable?
Although it is unusual, there are some occasions when the charity and remaining trustees can demonstrate that the conflict involves no material benefit and poses a low risk to the best interests of the charity. In this case, they may then permit the affected trustee to continue to be involved in the decision making. All of this must be fully documented.
More serious conflicts may need to be referred to the Charity Commission to obtain their permission for the trustee to continue. This includes situations in which trustees are being paid for providing a specific service to the charity, in addition to their non-executive role.
When things go wrong
When conflicts of interest are not addressed, charities risk their reputation and even their existence.
The Charity Commission has highlighted a number of cases in which charities have encountered serious problems as a result of one or more of their trustees not being independent.
A relatively recent Charity Commission investigation related to the appointment of a trustee as a manager of one of a charity’s properties. The trustee’s mother was also the Chair of Trustees. This clear conflict of interest was not documented in any minutes. The key issue here was the lack of documentation. This is just one among many examples when things have gone wrong for charities.
This is an issue that all charities will have to tackle at some point. The key is to identify, address and document any potential conflicts, dealing with them if necessary. This means being open, following the correct procedures and seeking expert advice when needed. Here at Thomas Westcott, our Charities and Not for Profit Team is regularly consulted about such issues and are able to provide the independent, external guidance that is needed.
When faced with any potential conflict of interest, the charity trustees and management should consider how it may be viewed externally. After all, reputation is key to all charities.
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