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Conflict of Interest

Published: 04/04/2016
Updated: 04/04/2016

Summary

As a charity trustee, you must put the interests of the charity before your own interests or those of any other person or organisation including those responsible for your appointment. Where you cannot do that, there may be a conflict of interest.

A conflict of interest exists when your duty to act in the interests of the charity conflicts with:

  • The interest of the person or organisation that appointed you as a charity trustee (an “appointment conflict”), or
  • Conflicts with your own personal or business interest in relation to that matter (a “personal conflict”).

Conflicts of interest can and do come up: it is how you manage them that is important.

In this section we explain how you as a charity trustee can prepare for potential conflicts of interest, what you could do if a conflict arises, and highlight common examples of conflicts of interest.

What is a conflict of interest?

A conflict of interest is any situation where there is a potential for a charity trustees personal or business interests (or the interests of someone they are connected with) to be different from the interests of the charity. In this situation, it may sometimes be difficult for the charity trustee to make an impartial decision. However, with proper handling charity trustees can overcome these difficulties.

There are two main types of conflict of interest: Legal duty.png

  1. Appointment conflict: This is a conflict of interest which can arise between a charity trustee and the person or organisation which appointed them.

For example:
A charity trustee appointed by a local school, church or local authority and a decision is required on a matter which affects both the charity and the other organisation. 

  1. Personal conflict: When you might not be able to do what is best for the charity because it conflicts with your own personal or business interest in relation to that matter.

For example:
When a charity is considering a contract with a business and one of the charity trustees is also a director of that business. 

In both cases, the charity trustee duties require you to act in the interests of the charity. 

Where there is an ‘appointment conflict’ the charity trustee must put the interests of the charity first. However, where another duty prevents the charity trustee from putting the interests of the charity first they must:

  • disclose the conflict to the charity and
  • not participate in any discussion or decision making on the matter. 

It is important that even where there appears to be a conflict of interest, whether it materialises or not, you take appropriate steps to manage the conflict and be seen to be acting in the best interests of the charity. 

The term ‘conflict of interest’ can cover a range of situations and may also be called a ‘conflict of roles’ or ‘conflict of duty.  

For example:

  • a charity trustee could get direct financial benefit from a decision the charity has to make
  • a charity trustee is discussing a contract or business arrangement with an organisation their family have links to
  • a charity trustee is also an employee of a company that the charity is doing business with
  • an employee, or potential employee, of the charity is connected to one of the charity trustees. 
  • being a trustee of two or more charities that are competing with each other for the same grant(s) or funding
  • being a trustee of a charity that gives out grants and a trustee of another charity applying for one of these grants
  • being a trustee of a charity that is part of a group structure and being on the board of the parent charity
  • being a trustee of a charity where you are also a service user or customer
  • a charity trustee applying for a job in the charity.  

  

Examples of what is not a conflict of interest:

  • being a charity trustee and donating funds to the charity
  • being both a volunteer and a trustee of charity. 

 

Having a conflict of interest does not necessarily mean that anyone has acted improperly. As charity trustees you all have a collective responsibility to manage conflicts of interest and to act clearly in the charity’s best interests.

There are four key steps to dealing with conflict of interest. Good Practice.png

1. Identify:

  • Have a conflict of interest policy so that all the charity trustees (and potential charity trustees) understand what could be a conflict of interest.
  • Know what the charity’s governing document says about conflicts of interest.
  • Set up a register of interests for all charity trustees and make sure it is kept up to date.
  • Have conflict of interest as a regular agenda item at the beginning of the charity trustee meetings.
  • Declare any potential conflict of interest as soon as you become aware of them.

2. Manage:

  • Have clear procedures in place that state what should happen if there is a conflict of interest and how the charity trustees will deal with it. For example, the conflicted charity trustee might withdraw from the meeting or part of the meeting.
  • If the charity has a conflict of interest policy make sure it is applied in all situations where there is a conflict or potential conflict. The policy should also distinguish between the two different types of conflict, ‘appointment conflicts’ and ‘personal conflicts’.
  • Decide if the person(s) with a conflict of interest should be involved in any discussions or decisions about the situation – if it is decided they should be involved be prepared to justify that decision.
  • Where there is a conflict, make sure that decisions are taken in the charity’s interests.
  • Make sure that your charity can still carry on its business and still form a quorum even if a number of charity trustees have to withdraw.

3. Record:

  • Keep a written record of the situation and what the charity did about it, including:
    • Recording who the conflict affected.
    • Recording when the conflict was identified and declared.
    • Recording what was discussed and decided.
    • Recording who withdrew from the decisions and how the remaining charity trustees made a decision in the best interests of the charity.
    • Maintaining the charity’s register of interests.

4. Learn:

  • Learn from the experience, make improvements to the charity’s policy and procedures and where necessary seek professional advice.
  • Where conflicts of interest arise frequently and a number of charity trustees must withdraw from discussion, the charity should consider whether the make up of the Board is preventing the effective management of the charity.
  • Make sure the charity’s governing document has the power to remove charity trustees who are in serious or persistent breach of the 2005 Act.

If members from a linked organisation dominate the make-up of your Board of charity trustees this can lead to a risk of recurrent conflict of interest. How you manage this risk is very important. 

What should be included in a conflict of interest policy? Good Practice.png

 A conflict of interest policy should set out:

  • What a conflict of interest is and the conflicts that are likely to be relevant to your charity.
  • The distinction between a “personal” conflict and an “appointment” conflict.
  • When and how the charity trustees should declare a potential conflict of interest.
  • What the charity’s governing document says (if anything) about conflicts of interest.
  • When a conflicted charity trustee should withdraw from decision making and the procedures for making decisions in those circumstances.

SCIOs must have procedures for dealing with any conflict of interest within their SCIO constitution. 

See the sources of help, advice and best practice section for links to example conflict of interest policies.

When a charity trustee is aware of a conflict of interest and they feel unable to put the interests of the charity first, they must withdraw from the discussion or decision concerned.

It may also be appropriate for charity trustees to withdraw from discussions in other circumstances of conflict of interest. Where they do not, they should be able to demonstrate that they have acted in the interests of the charity.

The charity trustees should make sure there is a record of who took part in the discussions and decisions. Where there is a conflict and the conflicted charity trustee still takes part, how this is in the best interests of the charity needs to be explained.

For example:
A board made up mainly of service users is asked to vote on an increase to the fees that service users pay to the charity. It is not practical for all the service user trustees to withdraw as there wouldn’t be enough trustees to form a quorum and make a valid decision.

The trustees need to put their own interests to one side and choose what is best for the charity. A clear record should be taken of the decision and why it was made.

However, if there is only one service user on the board then it might be felt that they should withdraw, which would be easier for the person concerned and does not affect the quorum.

What should you do if another charity trustee has a conflict of interest? Legal duty.png

All charity trustees must act in line with the duty to protect the interests of the charity. This means that you and the other charity trustees must take collective responsibility to make sure that a breach of charity trustee duties is corrected and not repeated.

If you know another charity trustee is conflicted, and it is not declared, it is your duty to speak up.

If there is serious or persistent breach of duty by an individual, the other charity trustees should look at whether the governing document has the power to remove the charity trustee.

As charity trustees you must try to make sure that any breach of duty regarding conflict of interest is corrected and not repeated. Where there is a serious or persistent breach the charity trustee should be removed, providing the governing document allows. If the other charity trustees fail to do so, this could be considered mismanagement or misconduct in the administration of the charity.

As regulator, we are required to identify and investigate any apparent misconduct and, where appropriate can take protective action. See our Inquiry Policy for more details. Our response will be proportionate; where a charity trustee has acted honestly and reasonably.

If you fail to comply with these duties then this is misconduct and we do have powers to take action against charity trustees, where appropriate. Our response will be proportionate depending on the situation.

Where a charity trustee has acted reasonably and honestly it is unlikely to be treated as misconduct.

Find out more about what we can and cannot do and what to expect if we have a concern about your charity.

 


For case studies and advice please see our Good Governance pages

 Here we set out the specific sections of charity law in Scotland relevant to each part of the guidance.  

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