Managing Conflicts of Interest: A Guide for Charity Boards & Directors

Introduction

Directors on charity boards often wear multiple hats, balancing their duties to the organisation with various other professional, personal, and community roles. Consequently, a conflict of interest is a common and often unavoidable occurrence in the boardroom, arising when a director’s personal interests or competing duties could influence their decisions.

While having a conflict of interest is not necessarily wrong, the effective management of these situations is crucial for maintaining good governance, protecting the organisation’s reputation, and sustaining public trust. This guide offers practical solutions and step-by-step processes to help not-for-profit boards identify, disclose, and manage conflicts of interest effectively, ensuring decisions are always made in the best interests of the charity.

Identifying Common Conflict Scenarios for Your Organisation

Financial Interests & Related Party Transactions

A financial conflict of interest arises when a director’s duty to the charity clashes with potential financial gain for themselves or their connections. These conflicts can involve non-cash benefits like discounts or hospitality.

Common financial conflict scenarios include situations where a director or their associate:

• Owns a business bidding for a contract with the charity
• Has property interests relevant to the organisation’s needs
• Holds shares in a relevant company competing with or affected by the charity
• Has connections to potential suppliers who might provide services to the organisation

These situations often involve related party transactions requiring heightened transparency and sometimes formal approval from the charity’s members.

Non-Financial Interests & Personal Relationships

Conflicts can stem from personal relationships or beliefs that might compromise a director’s impartiality. Even perceived influence can damage the charity’s reputation.

Examples include:

• Hiring relatives or friends without proper process
• Providing preferential treatment to connections
• Overseeing former colleagues in selection processes
• Having close personal relationships with key staff members

Competing Duties & Conflicts Of Loyalty

Directors serving on multiple boards or holding various professional roles may face conflicts between duties owed to different organisations, which is why it’s crucial to understand specific ACNC and ASIC duties. These conflicts occur when:

• A director serves on competing boards seeking the same funding
• A director holds a conflicting public role with oversight responsibilities
• A director possesses confidential information from another professional capacity
• A director faces competing internal interests between different organisations, they serve

A Step-by-Step Process for Managing A Conflict Of Interest

The Duty of Disclosure & Using a Register of Interests

The first and most important step in managing a conflict of interest is full and frank disclosure, a key requirement for accountability under ACNC Governance Standard 2. As a director, you have a duty to declare any actual, potential, or perceived conflicts to the board as soon as you become aware of them. This obligation is a cornerstone of good governance and is a legal requirement under frameworks such as the Corporations Act 2001 (Cth) for directors with a material personal interest, a matter that falls under commercial and business law.

To ensure transparency, charities should maintain a formal register of interests. This document serves as a central record of the personal, professional, and financial interests of each director that could potentially conflict with their duties to the organisation.

A comprehensive register of interests should include details such as:

Interest Category	Description / Details to Include
Employment History	Current and previous employment, covering both paid and voluntary roles.
Other Directorships	Directorships or committee memberships held in other organisations.
Financial Interests	Significant investments, business ownership, or beneficial interests.
Contractual Relationships	Relationships with other organisations that have contractual ties to the charity.
Close Connections	Relevant interests of close family members or friends.
Gifts & Benefits	Any non-token gifts, benefits, or hospitality that have been offered.

This register should be a living document, updated whenever a director’s circumstances change. At the beginning of each board meeting, it is good practice for directors to confirm their declared interests and to specifically highlight any conflicts that relate to items on the agenda. This culture of disclosure ensures that potential issues are brought into the open, allowing the board to address them proactively.

Deciding on the Right Management Strategy for Your Organisation

Once a director has made a disclosure, the responsibility for managing the conflict of interest shifts to the unconflicted members of the board. The director who declared the interest should not participate in the decision about how it will be managed. The board’s primary goal is to ensure that the decision-making process remains impartial and focused solely on the best interests of the charity.

The board has several strategies at its disposal, and the chosen approach will depend on the nature and severity of the conflict. Common options include:

Management Strategy	Description & Application
Record & Monitor	For minor or perceived conflicts with low risk, the board records the disclosure in the minutes and agrees to monitor the situation.
Restrict Involvement	The conflicted director participates in the discussion to provide information but must abstain from voting on the matter.
Remove from Proceedings	The director is required to leave the room for the duration of the discussion and the vote, preventing any influence on the outcome.
Recruit Independent Third Party	For complex or sensitive situations, an independent third party is appointed to oversee the process and ensure impartiality.
Relinquish or Resign	If a conflict is ongoing or significantly impairs a director’s duties, they may be asked to relinquish the interest or resign from the board.

Documenting the Process in Your Board Minutes

Careful documentation is the final and essential step in properly managing a conflict of interest. The board meeting minutes provide the official and permanent record that a conflict was declared and handled with due care, demonstrating the board’s commitment to good governance. This record is crucial for maintaining transparency with members, stakeholders, and regulators.

When a conflict of interest is managed, the minutes must be detailed and precise. This documentation protects the organisation from reputational damage and shows that the directors have fulfilled their duties.

The minutes should accurately record the following key details:

Detail to Record in Minutes	Description
Director’s Declaration	The full declaration made by the director, outlining the nature of their material personal interest.
Director’s Departure	The time that the conflicted director left the meeting before the discussion began.
Board’s Deliberation	A record of the board’s deliberation and its decision on how to manage the conflict.
Resolution Passed	The specific resolution passed by the unconflicted directors regarding the matter.
Director’s Return	The time that the conflicted director returned to the room after the matter was concluded.

Proactive Governance to Prevent & Manage Conflicts

Developing a Clear Conflict Of Interest Policy

A cornerstone of proactive governance is establishing a formal, clear conflict of interest policy. This document serves as an essential roadmap for all directors and responsible persons, providing a consistent framework for managing conflicts of interest before they escalate.

An effective policy removes ambiguity and ensures that everyone in the organisation understands their obligations. A comprehensive conflict of interest policy should clearly outline several key components to be effective.

A robust policy should include:

Policy Component	Key Elements to Include
Clear Definition	An explanation of what constitutes a conflict of interest, including actual, potential, and perceived conflicts, with relevant examples.
Scope of Policy	A specification of who the policy applies to, such as board members, Responsible People, staff, and volunteers.
Disclosure Procedures	Detailed process for disclosure: when and how a conflict should be declared (preferably in writing) and to whom it should be reported.
Management Process	An explanation of the steps the board will take to manage a declared conflict to ensure impartial decision-making.
Consequences	A statement on the potential consequences of failing to disclose a conflict, which could range from a warning to removal from a position.

Furthermore, the policy should address how the organisation will handle related party transactions. This ensures that any financial dealings between the charity and its directors or their connections are managed with the highest level of transparency and integrity.

Fostering a Culture of Transparency & Disclosure

While a policy provides the necessary framework, its effectiveness depends on a boardroom culture that actively encourages transparency. Creating an environment where directors feel comfortable and supported in declaring potential conflicts is crucial for managing conflict effectively.

The board must lead by example, setting a “tone at the top” that prioritises honesty and accountability. Fostering this culture involves embedding specific practices into the board’s regular operations. These actions transform the policy from a document into a lived practice within the organisation.

Key steps to promote a culture of disclosure include:

Action	Implementation Method
Make Disclosure a Routine	Start every board meeting with a call for declarations of interest to make the process a normal and expected part of governance.
Provide Induction & Training	Educate new directors on the conflict of interest policy during their orientation and provide ongoing training for the entire board.
Encourage Open Discussion	The chair should facilitate a supportive, non-judgmental atmosphere where directors can openly discuss potential conflicts and seek guidance.
Maintain a Register	Consistently use and regularly review a formal register of interests to demonstrate a serious commitment to disclosure and proactive issue identification.

Conclusion

Conflicts of interest are an inevitable part of the boardroom for charity directors wearing multiple hats. The ability to identify various conflict scenarios is essential for good governance, including:

• Financial conflicts
• Personal conflicts
• Competing duty scenarios

By following a clear process, organisations can protect their reputation and uphold public trust. This process involves:

• Disclosure of potential conflicts
• Implementation of suitable management strategies
• Fostering a culture of transparency through robust policies

For specialised guidance on developing robust policies and managing conflicts of interest within your boardroom, contact the not-for-profit lawyers at LawBridge. Our team provides trusted expertise to help your organisation navigate these challenges, ensuring you maintain good governance and protect your reputation.

Frequently Asked Questions