Governance

How to deal with trustee conflicts of interests

02 January 2019

The Charity Commission continues to publish concerns around the use of charity funds and whether they were used in the best interests of the charity. One of the key concerns often raised, is whether a trustee took a decision with the best interest of the charity in mind, or whether their decision making was compromised by a conflict of interest…  

Trustees’ personal and professional connections can bring benefits to the work of a charity – often forming part of the reason why an individual was asked to join the trustee body. But those same reasons can give rise to conflicts of interest.

Conflicts of interest can arise with; individual trustees; key management personnel; or, as a result of their close connection with a third party. Commonly referred to as a 'related party'.

Related parties – trustees need to think much wider than themselves and their own connections

A connected person, or ‘related party’ is someone whom you are related or closely connected to where personal and or business interests may cross-over. Therefore, trustees (and Key Management Personnel - KMP) should consider relationships between themselves; their close family members (think parents, siblings, spouses and children); and those entities which they (the trustee, KMP or their close family) control or in which they have significant interest, either directly or indirectly.

What is expected of trustees?

At a glance, trustees have a legal duty to act only in the best interest of the charity. Hence they must not put themselves in a position where their duties as trustee may conflict with any personal interest they (or their related party connections) have. Of course in reality many trustees may end up with a conflict. The key is to be aware of any conflict and manage it effectively.

The legal requirements

To manage a conflict, trustees should use the following summarised steps:

1. Identify conflicts of interest.
- Each trustee has an individual personal responsibility to declare conflicts of interest which affects them.
- The charity should have a strong system in place so that they are able to identify conflicts of interest.

2. Prevent the conflict of interest from affecting the decision. This might include;
- Not pursuing a course of action.
- Proceeding in a different way so that the conflict of interest does not arise.
- In certain circumstances, not appointing a particular trustee, or securing a trustee resignation may be appropriate.

3. Record the conflict of interest.
- Trustees should formally record any conflicts of interest and how they were handled.
- Trustees must also (where accruals accounts are being prepared) disclose any trustee benefits in the charity’s accounts.

Further practical guidance on each of the three steps above is given below;

  1. Identifying conflicts of interest can be the hardest part

Conflicts of interest usually arise where either:

  • There is a potential financial or measureable benefit directly to a trustee, or indirectly through a connected person; or
  • A trustee’s duty to the charity may compete with a duty or loyalty they owe to another organisation or person.

Can trustees benefit from their charity? The obvious answer here is no – BUT, trustees CAN benefit from their charity where there is an explicit authority in place before any decision conferring trustee benefit is made. Of course, any payments made to trustees MUST still be to the benefit of the charity and be a suitable use of charitable funds.

  1. Preventing the conflict from affecting the decision making

Having identified a conflict of interest, trustees must then only act in the charity’s best interest. This means that trustees must consider the issue of the conflict so that any potential effect on decision making is eliminated. In practical terms this means that the conflicted trustee must;

  • Declare the conflict to the wider board.
  • The wider trustees must then consider removing the conflict of interest.
  • The trustees must follow their charity’s governing document and the law.
  • Where the trustee benefit is authorised in advance, the affected trustee must be absent from any part of any meeting where the issue is discussed. [Note the trustee affected should not vote or be counted in deciding whether a meeting is quorate.]
  1. Recording the conflict of interest

The Charity Commission expects the charity’s written records to document any conflicts of interest AND how the trustees have dealt with them. The usual way is to record the trustees’ decisions in the minutes of their meetings and where there is a conflict the written decision should record;

  • The nature of the conflict;
  • Which trustee or trustees were affected;
  • Whether any conflicts of interest were declared in advance;
  • An outline of the discussion;
  • Whether anyone withdrew from the discussion; and,
  • How the trustees took the decision in the best interest of the charity.

For further guidance the Charity Commission has published CC29 – Conflicts of interest, which can be found at https://www.gov.uk/government/publications/conflicts-of-interest-a-guide-for-charity-trustees-cc29

 

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Simon Brown

Charity Partner at MHA Tait Walker 

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