Understand your legal obligations when dealing with conflicts of interestOriginally published: January 2017
In the U.K., trustees have a legal duty to act in the best interests of their nonprofits under s175 of the Companies Act 2006. This means that trustees shouldn't benefit from the nonprofit, particularly financially, and shouldn't be influenced by their wider interests when making decisions affecting the nonprofit.
Conflicts of interest are common in nonprofits, however, and it doesn't mean that your trustees have done anything wrong.
The Charity Commission advises careful identification, management and recording when it comes to conflicts of interest. Doing so will help you make solid decisions and maintain your nonprofit's reputation — and prevent the fallout of making unauthorized payments to trustees.
Preventing a conflict of interest
Ideally your governing document includes guidance on how to identify, manage and record conflicts of interest. It's also best practice to have a written conflict of interest policy, which sets out how trustees can identify and declare conflicts of interest — ultimately helping prospective trustees identify possible conflicts before they're appointed. Such a policy will allow the board to manage conflicts effectively when they inevitably arise and will support trustees in acting in the nonprofit's best interests.
The conflict of interest policy should clearly address:
- How conflicts will be identified
- How conflicts will be managed
- How trustees may be paid
- Conflicts of loyalties
Other elements will be determined by the nature of your nonprofit and its governance structure. Consider this template from the Institute of Chartered Secretaries and Administrators, which you can adapt for your own nonprofit.
Identifying a conflict of interest
A best practice is to establish a standard agenda item at the beginning of each board meeting for trustees to declare any potential conflicts of interest, which can then be discussed. Note that you're legally required to declare a conflict of interest as soon as you're aware of any possibility of it influencing your decisions.
Examples of conflicts of interest include awarding a contract to a company with which the trustee is involved (a direct financial interest) and employing a trustee's family member (an indirect financial interest). Personal conflicts and conflicts of loyalty are also possible.
It's also good practice to keep a register of interests, which should be reviewed and updated at least once a year and whenever new trustees are appointed.
Dealing with a conflict of interest
Once a conflict of interest has been identified, look to your governing document for guidance on how to deal with it. If your governing document is silent on the topic, make sure that the conflict is declared and then consider whether the conflicted trustee should withdraw from discussions and voting on the matter.
The Charity Commission must authorize a decision in advance if:
- It's going to involve any benefit to a trustee that hasn't already been authorized
- The conflict of interest is serious but there's no alternative way forward that will remove it
- Most or all of your trustees share the conflict of interest
If it's a fairly serious conflict, it may mean deciding to remove the conflict in one of these ways:
- Not pursuing a course of action
- Proceeding with the issue in a different way so that a conflict of interest doesn't arise
- Not appointing a particular trustee
- Securing a trustee resignation
If the conflict is less serious, take appropriate steps to manage the conflict. This could simply mean that the trustee who has the conflict of interest doesn't take part in any related discussions or decisions.
Recording a conflict of interest
The Charity Commission recommends keeping a written record of each conflict of interest and how you dealt with it in the minutes of your board meetings. Record it by explaining:
- The nature of the conflict
- The name(s) of the affected trustee(s)
- Whether the conflict was declared in advance
- Key points and outline of the discussion
- Whether anyone withdrew from the discussion
- How you reached a decision in your nonprofit's best interests
Looking for U.S.-specific guidance? Read about conflicts of interest in the U.S.