Is Your Charity Managing Conflicts of Interest the Right Way? Here’s What the ACNC Expects

Introduction

Effectively managing conflicts of interest is fundamental for every charity’s board or committee to maintain integrity and adhere to governance standards set by the Australian Charities and Not-for-profits Commission (ACNC). The ACNC has clear expectations for how Responsible People must address these situations, as failure to meet these requirements can jeopardise a charity’s standing and public trust.

This guide offers essential insights for your charity’s board or committee members on how to manage conflicts of interest in accordance with ACNC expectations, particularly ACNC Governance Standard 5. Understanding these obligations is crucial for Responsible People to ensure their charity complies with all requirements and foster a culture of transparency.

Understanding Australian Charities and Not-for-profits Commission Expectations for Conflicts of Interest for Your Charity Board

Defining a Conflict of Interest for Responsible People on Your Board

A conflict of interest arises when the personal interests of a Responsible Person on your board potentially clash with their fundamental duty to act in the best interests of the charity. The ACNC guidance clarifies that ‘personal interests’ extend beyond an individual’s own financial or personal gain to include:

• Interests of family members
• Interests of friends
• Interests of other organisations with which they are involved or have a stake

Furthermore, a conflict of interest can also occur when a Responsible Person has a competing duty to another entity, such as a different charity, which could make it difficult to ensure their decisions solely benefit your charity.

To determine if a conflict of interest exists, a useful approach is the ‘reasonable person test’: would an objective, well-informed individual believe that a Responsible Person might be influenced by their personal interests when making decisions for the charity? If the answer is yes, a conflict likely exists and must be addressed according to ACNC expectations.

Recognising Different Types of Conflicts of Interest Relevant to Australian Charities and Not-for-profits Commission Standards

The ACNC expects Responsible People on your charity board to identify and manage several types of conflicts of interest to maintain ACNC governance compliance. Understanding these distinctions is crucial for effective management. The primary categories include:

• Actual conflicts of interest: These occur when a Responsible Person is, in fact, being influenced by their personal interest when making a decision for the charity. For example, a board member participating in a decision to award a contract to a company they own.
• Potential conflicts of interest: This type arises when a Responsible Person has an interest that could influence their decisions, even if it is not currently doing so. For instance, if a board member sits on the board of another charity that is applying for the same grant as your charity, a potential conflict exists.
• Perceived conflicts of interest: These situations arise when an external observer could reasonably believe that a Responsible Person’s personal interests might influence their decisions, even if no actual conflict exists or the individual believes they can remain impartial. An example is a board member reviewing service quotes when one of the quotes is from a business owned by a close relative; this could create a perception of bias.

Recognising all three types—actual, potential, and perceived—is vital for your charity board to uphold transparency and meet ACNC governance standards.

The Importance of Your Charity Managing Conflicts of Interest for Australian Charities and Not-for-profits Commission Governance Compliance

Effectively managing conflicts of interest is paramount for your charity board to meet ACNC Governance Standards and maintain public trust. Failure to properly address conflicts can lead to significant negative consequences, including severe damage to your charity’s reputation, which can impact fundraising, volunteer recruitment, and overall community confidence.

The ACNC views the diligent management of conflicts of interest as a cornerstone of good ACNC governance. Poorly managed conflicts of interest can threaten the fundamental principles of good governance within your charity in several ways:

• A failure in the duty to act in the charity’s best interests: ACNC Governance Standard 5 mandates that Responsible People act honestly, fairly, and in the best interests of the charity. Unresolved conflicts can directly undermine this duty.
• Risks to transparency and accountability: Openness about decision-making processes is crucial. If conflicts are not disclosed and managed, it erodes transparency and makes it difficult for stakeholders to hold the board or committee accountable.
• Negative impacts on board dynamics: Effective teamwork among Responsible People can be compromised if there’s a suspicion that decisions are influenced by personal interests rather than the charity’s mission.

The ACNC takes breaches of ACNC Governance Standards seriously, particularly regarding the failure to disclose and manage serious conflicts of interest. Such failures can result in ACNC investigations, the use of enforcement powers, and in severe cases, the revocation of a charity’s registration.

Your Charity Board’s Obligations for Managing Conflicts of Interest Under Australian Charities and Not-for-profits Commission Governance Standard 5

Key Duties of Responsible People in Your Charity for Disclosing & Handling Conflicts

Under ACNC Governance Standard 5, Responsible People on your charity board or committee have specific duties crucial for effectively managing conflicts of interest. These obligations are fundamental to maintaining good ACNC governance and ensuring the charity operates with integrity.

The ACNC expects that your charity must take reasonable steps to ensure its Responsible People understand and carry out these core duties relevant to managing conflicts of interest:

• Acting honestly and fairly in the best interests of the charity and for its charitable purposes: This primary duty requires board or committee members to prioritise the charity’s welfare above their own personal interests or the interests of their family, friends, or other associated organisations. A failure to properly handle a conflict of interest can easily lead to a breach of this duty.
• Not misusing their position or information: Responsible People must not use their role or confidential information gained through their position to gain an advantage for themselves or someone else, or to cause detriment to the charity. This includes information that is not in the public domain or could be detrimental to the charity if disclosed.
• Disclosing any actual or perceived conflict of interest: This is a critical duty. Responsible People must inform the charity about any situations where their personal interests could, or could appear to, clash with their duties to the charity. This disclosure should typically be made in writing and recorded, often in a register of interests.
• Acting with reasonable care and diligence: This duty underpins all actions of Responsible People, including how they approach the identification, disclosure, and management of conflicts of interest.
• Ensuring that the financial affairs of the charity are managed responsibly: While broader, this duty connects to conflicts of interest, especially those involving financial benefits.
• Not allowing the charity to operate while it is insolvent: This duty also forms part of the overall responsibilities of Responsible People.

ACNC Governance Standard 5 makes it clear that these duties require Responsible People to actively put the charity’s interests first. If a board or committee member is unsure whether a situation constitutes a conflict or warrants disclosure, the ACNC advises erring on the side of caution and raising it with fellow Responsible People.

The Australian Charities and Not-for-profits Commission’s Approach to Charities Failing to Adequately Manage Conflicts of Interest

The ACNC takes the management of conflicts of interest by charities very seriously, as it is a cornerstone of good ACNC governance and maintaining public trust. Failure to comply with ACNC Governance Standard 5, particularly in relation to disclosing and managing conflicts of interest, can lead to significant consequences for a charity.

The ACNC focuses on charities that have seriously or deliberately breached the ACNC Governance Standards. If a charity fails to adequately manage conflicts of interest, the ACNC may take several actions, depending on the severity and nature of the breach:

• Issuing warnings or directions: The ACNC can use its enforcement powers to formally warn a charity or direct it to take specific actions to rectify the non-compliance.
• Conducting investigations: The ACNC has investigated charities where Responsible People obtained private benefits due to poorly managed conflicts of interest or related party transactions. Such investigations examine whether the charity’s governance is deficient.
• Revocation of charity registration: In serious cases of mismanagement of conflicts of interest, where it indicates a significant failure in governance, the ACNC has the power to revoke a charity’s registration. Losing registration means the charity would lose access to Commonwealth charity tax concessions and other benefits.

The ACNC has highlighted instances where inadequate management of conflicts of interest and related party transactions has led to Responsible People obtaining private benefits. While these situations may not always constitute fraud warranting law enforcement involvement, they indicate deficient ACNC governance, which can ultimately threaten the charity’s status. Therefore, it is vital for every charity board or committee to understand and diligently apply the principles of ACNC Governance Standard 5 to avoid such repercussions.

A Practical Process for Your Charity Board to Manage Conflicts of Interest According to Australian Charities and Not-for-profits Commission Guidelines

How Your Charity Board Can Identify Potential & Actual Conflicts of Interest

To effectively identify a conflict of interest, Responsible People on your charity board or committee must first have a thorough understanding of:

• The charity’s specific charitable purpose, as detailed in its governing document and reflected in its ACNC charity subtype
• Their own personal interests, which extend beyond individual concerns to include the interests of family, friends, and other organisations they are involved with

These personal interests can encompass current and past employment or volunteer roles, trusteeships, directorships, business ownership, and memberships in other organisations.

Furthermore, a clear comprehension of the duties outlined in ACNC Governance Standard 5 is essential for all Responsible People. This standard obliges them to act in the charity’s best interests and disclose conflicts.

A useful method for identifying a conflict is the ‘reasonable person test‘: would an ordinary person, with full knowledge of your personal interests, would believe you might be influenced when making decisions for the charity. If there’s a perception, even by an outsider, that a conflict could exist, it warrants careful management.

Conflicts can be categorised as:

• Actual, where influence is actively occurring
• Potential, where influence could occur
• Perceived, where it might appear to an outsider that influence is possible

The Disclosure Protocol Responsible People & Your Charity Board Must Comply With

Under ACNC Governance Standard 5, all Responsible People have a fundamental duty to disclose any actual, potential, or perceived conflict of interest to the charity as soon as it is identified. This disclosure should ideally be made in writing and formally recorded, most commonly within a dedicated register of interests.

It is good practice for board or committee members to declare any relevant personal interests upon their appointment to the board or committee. If a Responsible Person is uncertain whether a particular interest constitutes a conflict, the ACNC advises erring on the side of caution and disclosing it to fellow board members. This allows for an impartial assessment of the situation.

Any conflicts of interest raised or discussed during board meetings, along with the disclosure itself, should be meticulously recorded in the meeting minutes. A charity’s conflicts of interest policy must clearly outline the procedure for disclosure, specifying:

• When and how disclosures should be made
• To whom they should be directed

This approach fosters a culture of transparency within the organisation.

Deciding on & Implementing Appropriate Management Actions for Declared Conflicts in Your Charity

Once a conflict of interest has been identified and disclosed by a Responsible Person, the responsibility for determining how to manage it is shared between the conflicted individual and the other board or committee members. However, the ultimate decision on the appropriate management actions rests with the non-conflicted Responsible People, ensuring that decisions are made impartially and in the best interests of the charity.

The conflicted board or committee member should generally not participate in discussions or decisions regarding how their own conflict will be handled. The typical process involves the conflicted Responsible Person notifying the charity of their conflict, after which the remaining board or committee members determine the necessary steps. The charity’s conflicts of interest policy should guide this process.

Common actions to address a conflict include requiring the conflicted board or committee member to:

• Abstain from voting on the matter related to the conflict
• Refrain from participating in any board or committee discussions concerning the matter
• Physically leave the room during discussions and voting on the specific issue

When deciding on the appropriate course of action, the board or committee should consider the nature of the conflict, whether it could realistically impair the individual’s ability to act impartially, and any potential damage to the charity’s reputation.

All decisions regarding the management of a conflict must be approved by a majority of non-conflicted board or committee members present and voting. In situations where a conflict is particularly serious or ongoing, the conflicted Responsible Person might need to consider resigning from their position to protect the charity’s interests.

Essential Record Keeping for Conflicts of Interest & Management Steps Your Charity Must Undertake

Thorough record-keeping is a critical component of managing conflicts of interest in compliance with ACNC expectations. Whenever a conflict of interest is disclosed and discussed at a board or committee meeting, the details of the conflict and the steps taken to manage it must be accurately recorded in the meeting minutes. This creates a vital paper trail demonstrating that the charity is addressing conflicts responsibly.

In addition to meeting minutes, charities are strongly encouraged by the ACNC to maintain a formal register of interests. This register should document key information for each Responsible Person, including:

• Their name and date of appointment
• A record of their relevant interests, such as employment, directorships in other companies, significant relationships, or other organisational memberships
• The nature of any declared conflict of interest and its relation to the charity’s activities
• The date the conflict was disclosed
• The specific steps taken by the board or committee to manage the conflict

This register of interests serves as a central repository for all conflict-related information and helps demonstrate to the ACNC and stakeholders that the charity has robust processes in place. The register must be kept up-to-date, with new interests declared promptly and existing entries reviewed regularly. If a related party transaction gives rise to a conflict of interest, this should also be noted in the register of interests.

Developing & Implementing an Effective Conflicts of Interest Policy for Your Charity

Core Components Your Charity Must Incorporate into Its Australian Charities and Not-for-profits Commission Compliant Conflicts of Interest Policy

A conflicts of interest policy is essential for your charity to meet ACNC governance standards and ensure Responsible People uphold their duties. The ACNC recommends that such a policy clearly outlines how your charity will address and respond to conflicts of interest, aiding Responsible People in fulfilling their obligations under ACNC Governance Standard 5.

A comprehensive conflicts of interest policy should include several key elements:

• Policy Scope: This section must clearly define who the policy applies to. At a minimum, it will cover your charity’s Responsible People (board or committee members), but consideration should be given to extending it to staff and volunteers.
• Definition of Conflicts of Interest: Your policy needs to explain what constitutes a conflict of interest. This should cover:
  • Actual, potential, and perceived conflicts
  • Financial and non-financial conflicts
  • How related party transactions can give rise to conflicts
• Disclosure Policy and Procedure: The policy must detail when and how a conflict of interest should be disclosed by Responsible People. It should specify that:
  • Disclosures are best made in writing
  • To whom they should be directed (e.g., the rest of the board or committee)
  • How they will be recorded, typically in a register of interests
• Confidentiality of Disclosures: It is important to set out the level of confidentiality associated with any disclosure to support your board or committee members in coming forward. This section should detail who will have access to the disclosed information.
• Management of Declared Conflicts: The policy must outline the process for managing identified conflicts. This includes:
  • Specifying that the conflicted individual should generally not participate in discussions or vote on the matter
  • Clarifying that non-conflicted board or committee members are responsible for deciding on the management actions
• Identifying and Addressing Failures to Disclose: Your policy should outline the procedure if a Responsible Person fails to disclose a conflict of interest.
• Consequences of Failing to Disclose: Clear consequences for failure to disclose a conflict of interest must be stated. These can range from a warning to more serious actions, such as a Responsible Person being asked to stand down from their position.
• Board Responsibility: The policy should articulate the board or committee’s responsibility for:
  • Establishing a system for identifying, disclosing, and managing conflicts of interest
  • Monitoring compliance with the policy
  • Reviewing the policy regularly, usually annually

By incorporating these core components, your charity can create a conflicts of interest policy that provides clear guidance to Responsible People and demonstrates a commitment to good ACNC governance.

How Your Charity Can Adapt the Australian Charities and Not-for-profits Commission Conflicts of Interest Policy Template for Its Needs

The ACNC provides a template conflicts of interest policy that your charity can use as a valuable starting point. However, it is crucial to understand that this template is a guide only and your charity must adapt it to suit its specific needs, size, and circumstances to ensure it is effective and helps meet ACNC governance standards.

When adapting the ACNC template, your charity board or committee should consider the following aspects to tailor the conflicts of interest policy:

• Organisational Structure and Complexity: The policy should reflect your charity’s specific operational context. For instance, a small, volunteer-run charity might have simpler procedures than a large charity with multiple programs and paid staff.
• Specific Types of Conflicts: Consider the kinds of conflicts of interest that are most likely to arise in your particular charity. You can include examples relevant to your activities to make the policy more practical for your Responsible People.
• Designated Roles: Clearly identify who is responsible for specific actions outlined in the policy, such as who maintains the register of interests or to whom disclosures should be made.
• Disclosure Mechanisms: While the ACNC template suggests written disclosures, your charity might refine this to specify particular forms or digital systems, especially if you have established processes.
• Integration with Other Policies: Ensure the conflicts of interest policy aligns with other governance documents your charity may have, such as a code of conduct or policies on related party transactions.
• Review and Updates: The adapted policy should include a clause about regular review (e.g., annually) to ensure it remains relevant and effective as your charity evolves.

Small charities, in particular, can benefit significantly from using the ACNC template as a foundation, as it provides a structured approach to managing conflicts of interest. By thoughtfully customising the template, your charity can develop a practical and ACNC-compliant conflicts of interest policy that supports your Responsible People in upholding their duties and maintaining public trust.

Maintaining a Register of Interests & Cultivating a Culture of Disclosure Within Your Charity

What Information Your Charity Must Include in Its Register of Interests for Responsible People

A register of interests is a crucial document for your charity, helping to ensure that any actual, potential, or perceived conflicts of interest involving Responsible People are managed appropriately and transparently. The ACNC recommends that this register records specific details to demonstrate that your board or committee is taking proper steps to manage conflicts of interest.

Your charity’s register of interests should typically include the following for each Responsible Person:

• Responsible Person’s Name and Appointment Date: Clearly identify the individual and when their term began, providing context for their involvement.
• Record of Interests: This section should detail various personal and professional connections, including:
  • Current and previous paid employment or volunteer roles
  • Current and former trusteeships or directorships in other organisations
  • Membership in other organisations
  • Relevant interests of family members or close friends, encompassing both financial and non-financial personal interests
• Relationship of Interests to Charity Activities: Describe how any declared interest might relate to your charity’s current operations or proposed future activities.
• Date of Disclosure: Record the date when the Responsible Person formally disclosed the interest to the charity.
• Steps Taken to Manage the Conflict: Detail the specific actions the board or committee took to address the conflict, ensuring decisions were made in the charity’s best interests.

Furthermore, if a related party transaction gives rise to a conflict of interest, this should also be noted in the register of interests. Your charity’s conflicts of interest policy should outline how the register of interests is used and maintained, specifying who is responsible for keeping it up-to-date.

Promoting Transparency & Openness About Conflicts of Interest Among Your Responsible People

Fostering a culture where Responsible People feel comfortable and obligated to disclose conflicts of interest is fundamental to good ACNC governance. Your charity’s attitude towards disclosure plays a significant role in effectively managing conflicts of interest; it should be viewed as a routine and necessary part of a board or committee member’s duties.

To cultivate this environment of transparency and openness, your charity can implement several strategies:

• Provide Clear Information and Policies: Ensure all new Responsible People receive a copy of your charity’s conflicts of interest policy upon appointment and understand its contents. Access to materials like ACNC guidance on managing conflicts of interest should also be readily available.
• Offer Training and Education: Provide opportunities for Responsible People to undertake training on identifying and managing conflicts of interest. Regular refresher training can reinforce understanding and compliance with ACNC governance standards.
• Set Clear Expectations for Recording Conflicts: Clearly communicate that all actual, potential, or perceived conflicts of interest must be recorded in the charity’s register of interests. This reinforces accountability among board or committee members.
• Ensure Easy Access to the Register: Responsible People should have straightforward access to the register of interests. This allows them to record new interests, review their existing declarations, and see the interests of other board or committee members, which can help identify potential conflicts that may not be immediately obvious to the conflicted individual.
• Make Conflicts a Regular Board Agenda Item: Include conflicts of interest as a standing item on board or committee meeting agendas. Reviewing the register before each meeting and discussing any new or relevant conflicts helps to normalise the process and reminds Responsible People of their ongoing disclosure duties. Any conflicts raised during meetings, and the steps taken to manage them, must be recorded in the meeting minutes and the register of interests.

By actively promoting these practices, your charity encourages open discussion about conflicts of interest in a supportive manner, which is essential for meeting ACNC expectations and maintaining public trust.

Conclusion

Effectively managing conflicts of interest is crucial for your charity’s Responsible People to uphold ACNC Governance Standards and maintain public trust. This involves understanding what constitutes a conflict, adhering to the duties outlined in ACNC Governance Standard 5, implementing a comprehensive conflicts of interest policy, diligently maintaining a register of interests, and fostering a culture of disclosure within your board or committee.

If your charity board or committee requires assistance in developing or refining its approach to managing conflicts of interest to ensure ACNC compliance, contact LawBridge today. Our experts in not-for-profit legal services can provide trusted expertise and tailored solutions to help your organisation meet its ACNC governance obligations effectively.

Frequently Asked Questions for Charity Boards About Managing Australian Charities and Not-for-profits Commission Conflicts of Interest