Third Dimension – Why All Charities Should Revisit Conflicts of Interest

February, 2017

By John Vaughan-Williams, Lawyer

If your organisation is registered with the ACNC as a charity, then it is required to comply with the ACNC’s five Governance Standards, contained in the Australian Charities and Not-for-profits Commission Regulation 2013 (Cth).

Some of the governance standards pertain to individual directors’ conduct and suitability, whereas others relate to the conduct of the charity as a whole. Failing to comply with the governance standards can lead to a range of penalties, for both a charity and its directors, one of the most severe being deregistration of a charity.

Application to Companies

If your charity is a public company limited by guarantee, your organisation is subject to the Corporations Act 2001 (Cth) (Corporations Act). However, several provisions of the Corporations Act are “switched off” for charities, meaning that they are not binding on charities.

Included in the provisions that are switched off are most of the provisions on directors’ duties. The intention of the governance standards is to replace directors’ duties, and to offer similar regulation in a way that is more tailored to the charitable sector.

Application to Associations

The governance standards came into effect on 1 July 2013, but there has been a transitional exception to this requirement for incorporated associations which are charities, which will end on 1 July 2017.

The transitional exception is that, if a charity is an incorporated association, and:

   (a) the appropriate associations legislation sets out duties for its responsible persons; and
   (b) the charity (and its responsible persons) comply with such duties,

then that charity will be taken to comply with governance standard five (duties of responsible persons), even if the responsibilities in the associations legislation imposes less stringent requirements than the governance standards.

This means that if an association has relied on this exception to date, it should ensure that it becomes familiar with the governance standards, which will equally apply to incorporated associations as of 1 July 2017.

From 1 July 2017 onwards, an association will be required to comply with both governance standard five and the relevant associations legislation. The governance standards are drafted with the intention that it is not impossible to fulfil the requirements of both the governance standards and the relevant associations legislation.

Conflicts of Interest

There is much law surrounding the handling of conflicts of interest for companies, with the primary statutory source of law being the Corporations Act, in particular section 195 – restrictions on voting (which is not switched off for charities). The directors’ duties also relate to conflicts of interest in a broader sense, in that failing to properly disclose a conflict of interest may also be a breach of directors’ duties.

Some State associations legislation contain provisions pertaining to conflicts of interest, but these provisions vary across jurisdictions, and are usually not as thorough as the provisions of the Corporations Act or the governance standards.

The governance standards also impose requirements on charities regarding conflicts of interest, and it is therefore important that charities are on top of how conflicts of interest will be treated uniquely under the governance standards.

Generally, a conflict of interest is an interest of a director with a third party which prevents that director from exercising his or her fiduciary duty to act in the best interests of the organisation. The conflicting interest does not necessarily need to be monetary, and could include personal and/or family relationships, as well as involvement on other boards.

With respect to directors, the governance standard that closely relates to conflicts of interest is governance standard five – duties of responsible persons (which includes directors, and other individuals who have a position of responsibility over the charity as a whole).

There are several duties of responsible persons contained in governance standard 5, but the ones most relevant to conflicts of interest are the following:

   (a) Act honestly in the best interests of the charity and for its purposes;
   (b) Not misuse the position of a responsible person;
   (c) Not misuse information obtained in performing duties; and
   (d) Disclose any actual or perceived conflict of interest.

There are two primary differences between the requirements of the Corporations Act and the requirements of the governances standards, which charities should ensure they understand.

Perceived Conflicts of Interest

The relevant provisions of the Corporations Act relate to actual material personal interests, and do not specifically mention perceived conflicts of interest. This could have the effect of broadening the application of the governance standards when compared with the Corporations Act.

This means that even if a director’s interest in a third party does not actually create a conflict with his or her fiduciary duties, the director may still be required to disclose the interest to the board or committee if it could be reasonably perceived by the public to create a conflict.

Duties of Board as a Whole

Under the Corporations Act, the provisions regarding conflicts of interest primarily relate to the conflicted director, although there are also implicit requirements on the other directors under the provisions dealing with the directors’ duties.

However, governance standard five is framed in a way that explicitly requires the board or committee to make sure that its responsible persons uphold their duties. This places a somewhat higher responsibility on responsible persons regarding the management of conflicts of interest.

Recommendations

In order to ensure that the board satisfies its obligations surrounding conflicted directors, there are several steps that can be taken, from both a procedural and an operational perspective.

Procedurally, all charities should put in place a conflicts of interest policy. The policy should set out in more detail what is deemed by the charity to be an actual or perceived conflict of interest, including reasonable examples. The policy should also clearly spell out how the charity will handle conflicts of interest which are not properly disclosed.

While having a policy in place will not necessarily cover the charity against any and all claims, it will help the charity to demonstrate that it has taken steps to require its responsible persons to comply with the governance standards. The policy should also be regularly reviewed to ensure that it is up-to-date.

If a charity finds out that a conflict of interest was not properly disclosed, it is important for the purposes of governance standard five that the charity takes steps to address it, whether or not this is contained in a policy.

The ACNC does not sets out any particular steps that should be taken, but minimum steps could be to document the conflict in board minutes as soon as the board or committee becomes aware of the conflict, and to warn the responsible person in question. If the board or committee decides that a resolution should not have been passed due to an undisclosed conflict, then the board or committee should take steps (if possible) to reverse the impact of that resolution.

Summary

It is not always clear cut, for the purposes of any law, whether or not a conflict of interest has occurred. The governance standards have only been in effect since 2013, and there is little published case law on them. This means that it can be even more uncertain at times as to what steps a charity should take regarding conflicts of interest to ensure compliance with governance standard five.

If you are unsure whether a conflict of interest has occurred, and whether your charity has dealt with it properly, we recommend seeking legal advice.

Contact Mills Oakley

Vera Visevic | Partner
T: +61 2 8289 5812
E: vvisevic@millsoakley.com.au

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