Managing conflicts of interest at board level

June, 2011

Organisational governance has received much attention since the financial market crash of 2008. Good governance is fundamental to the success of any organisation and NFPs are no exception.

Introduction

Board members have a fiduciary obligation – to act in the best interests of the organisation that they serve – in an ethical manner. Board members must:

It is the collective duty of the board to ensure that the organisation is fit for purpose and provides strategic direction to attain its goals.1 NFPs face the challenge of balancing the needs and rights of its many stakeholders with the needs of the organisation’s strategic objectives.

What can be done to ensure good governance? It starts with the ethics and principles of each board director. If the board behaves ethically and lawfully, then this sets a high bar for the rest of the organisation and has a fundamental influence on dealings with all stakeholders. Procedures must be put in place to reinforce ethical conduct through good governance for board members and staff.

Some aspects of good governance, such as the management of a conflict of interest, are based on the circumstances and can involve a subjective assessment. Where the aspect of governance, such as managing a conflict of interest, is difficult to define, then it is best if there is a procedure in place for examining the potential conflict whenever it arises.

How do you identify a conflict of interest?

The most fundamental duty of any Board member is to act in the best interests of the organisation. Board members must be able to say that the board decisions were made fairly and impartially. A conflict of interest is where a board member puts his/her personal interests ahead of the interests of the organisation.

An example of a conflict of interest is where a board member’s duties to the organisation clash with duties elsewhere (family, employment, business relationships etc).2 The type of conflicts of interest that are easiest to identify are those that involve financial gain for the board member or his family, such as the sale of property to a family member at below market rates, or the awarding of a contract to the board member or his family members.

Indirect financial benefits can also arise such as: awarding an employment contract to a spouse; or making a grant to a board member’s disabled child. Other conflicts can arise where decisions are made in a particular way to benefit a friend, or the decisions involve a conflict of loyalties. Conflicts of interest inevitably arise because board members are members of the community and have numerous family, social and business relationships.

What is the impact of a breach of duty?

Conflicts cannot always be avoided but they must be identified and action must be taken to ensure that the conflict situation is mitigated effectively. If a conflict of interest does arise and is not prevented, it can have a very damaging impact on public confidence in the board and the organisation. This can result in an adverse impact on fundraising, volunteering levels, government grants and general community confidence. The law may only protect a board member who breaches the duties of office if the breach was due to an honest mistake.3 If a breach occurs and the board member knows it is a breach, then the board member will be held personally liable and ordered to rectify the loss or damage caused.

Corporations Act 2001 breaches

Board directors of NFPs that are companies limited by guarantee are subject to the provisions of the Corporations Act 2001. Directors are required to declare any conflict of interest when the organisation enters into contracts, and failure will result in a fine.

Strategies for avoiding conflict of interest

The board should adopt policies and procedures that address:

The policy should include how the board members should disclose their personal and financial interests and how they should deal with gifts made to them in the course of their role on the board. It should also include under what circumstances relatives or friends of the board members can be hired or considered for contracts etc.

It is a good idea to make the policies and procedures and certain decisions (especially with regard to tendering and entering into contracts for services and equipment) publicly available and open and transparent to the wider stakeholders.

Some boards require all directors to make an annual declaration about the respective business dealings and boards memberships of themselves and their immediate family members. It also promotes the public perception of the organisation as a transparent and open one, if the make up of the board reflects the diversity of the community which it serves.

Legal advice

Where a board is concerned that there may be a risk of a real or perceived conflict of interest, then legal advice should be sought to assess the situation and provide advice on how to avoid the conflict. If decisions are made by the board that involve a conflict of interest, then there is the possibility that the decisions will be legally challenged, resulting in personal liability of the board members.

When a conflict of interest arises, what then?

The board should be notified as soon as a potential or real conflict of interest is identified. Information should be provided about the nature of the conflict and how it can be dealt with. At the investigation stage the board should not publish papers that discuss the matter and all discussions should be held on a formal and objective basis.

The board member who is implicated in the potential or real conflict of interest should declare their interest and leave the room during the entire discussion of the matter and should not return until invited by the other board members. The minutes of the meeting should record why the board member left the room and at what time they returned to join the meeting. If legal advice is that the conflict cannot be resolved, then the board member must resign from the board.

The management of conflict of interest within a board can be an emotionally difficult and confronting experience for all involved and undermine the good relations and workings of the board. It is always best if such situations can be avoided at the outset by prompt notice whenever a board member suspects that a conflict of interest issue may arise.

What conflict of interest policies can the board adopt?

It is a good idea for boards to adopt a conflict of interest policy. Such a policy should include:

The Our Community website provides facts sheets that include the following sample:

Sample Conflict of Interest Policy:

A Board member should avoid any conflict arising between their personal interests (or the interests of any other related person or body) and their duties to the organisation.
A Board member must not take advantage of their position on the Board to gain, directly or indirectly, a personal benefit, or a benefit for any associated person (their wife, say, or a commercial organisation).

A Board member shall not make use of inside information.

The personal interests of a Board member, and those of associated persons, must not be allowed to take precedence over those of the organisation generally.
A Board member should seek to avoid conflicts of interest wherever possible. Full and prior disclosure of any conflict, or potential conflict, or the appearance of potential conflict, must be made to the Board. Once the conflict has been declared to the Board, the Board must decide whether the Board member should:

Where possible, the Board should develop guidelines on what kinds of appearance of conflict call for what level of care.

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