25. Conflict of Interest

What is meant by conflict of interest?

Conflict of interest describes the situation when an individual is presented with a dilemma between making a decision in their own best interests and a decision in the best interests of the organisation that they are acting for.


Conflicts of interest like this can arise all the time and it may not be possible to eliminate the situation without losing people from the committee who can otherwise make a worthwhile contribution.

Can you give me examples?

Example 1: A user who is on the committee may find themselves deciding on whether to raise fees for a particular service. It may be in the organisations best interests to raise the price, but it would be in their own best interests not to raise the price.


Example 2: A member of the management committee sits on two organisations both of which may bid for the same local contract. The committee member could use the information gained from the first organisation to benefit the second organisation (or vice versa).

Is this the same as ‘Conflict of Loyalty’?

Although in the second example above it could be said that the individual committee member may not be benefiting, there is still a conflict over who’s best interests come first. So sometimes this sort of situation is referred to as a ‘conflict of loyalties’.

How do we deal with conflicts of interest in general?

In general the solution is to put in place a conflict of interest policy and procedures. The usual approach is to maintain a list of the committees declared interests, require committee members to declare interests at relevant points in the committee meeting and then distance them from the decision making, either excluding them from the vote, or sometimes from the discussion and decision making altogether. What is required varies slightly depending on your organisation’s legal structure.

How does an unincorporated association deal with conflict of interest?

Unincorporated associations have the most freedom of action as there aren’t generally any specific requirements to avoid conflicts of interest, and no body regulating them (though public confidence in a community group may be dented if conflicts of interest aren’t seen to be dealt with). A suitable procedure can be set out in a simple conflict of interest policy/statement (this will impress any funders as well). The important thing is to recognise when a conflict occurs and have a system of dealing with it. The commonest approach is to ask the person who has the conflict of interest to not take part in the discussion or vote on that particular issue, or even to leave the room altogether for that agenda item. Finally, remember to record in the minutes what steps were taken as an important part of dealing with conflicts of interest is not just to do the right thing, but to be seen to do the right thing. To your reputation the appearance of conflict of interest can be just as damaging as actual conflict of interest.

How does a registered charity deal with conflict of interest?

The basic principle is the same – but the Charity Commission emphasises the distinction between conflicts of interest that arise concerning a personal financial gain to a trustee and conflicts of interest that do not involve any material gain to a trustee. In general all conflicts of interest involving a personal gain to a trustee require authorisation from the Commission unless expressly authorised in the constitution or previous authorisation has already been given. Conflicts of interest that do not involve material gain can generally be managed internally by the organisations’ conflict of interest policy.

Can you give me examples of conflicts of interest that need to be authorised by the Charity Commission?

Conflicts of interest involving personal financial gain both directly and indirectly require Charity Commission consent.

Examples of conflict of interest involving Financial gain:

Directly:
~ Payments to a trustee for providing a service
~ Awarding a contract to an organisation or firm that a trustee has an interest in
~ Employing a trustee in the organisation (Note that resigning as a trustee to take up a post is not sufficient in the Charity Commission’s eyes as the conflict arises at the point the post is created. Always seek Charity Commission guidance.)
~ Transactions between a trustee and the charity involving land or property
~ Payments as a director of a subsidiary trading company

Indirectly

~ A trustee who is closely related to an employee of the charity

Can you give me examples of conflicts of interest that do not need to be authorised by the Charity Commission?

Conflicts of interest that do not involve direct or indirect personal financial gain can be managed internally through a conflict of interest policy.
Examples of conflict of interest that do not involve personal financial gain:
~ Trustees who are also Users (the benefit must be incidental and not exclusively for User-Trustees)
~ Conflicts of Loyalties – such as trustees on the committee of two organisations simultaneously – note that this includes the common scenario of an organisation and its trading subsidiary sharing the same directors/trustees.

How does a Company deal with conflicts of interest?

In the case of companies limited by guarantee the legal position has recently changed and from the 1st October companies should follow more stringent rules as set out in the Companies Act 2006. Unfortunately these rules are complex and overlap with Charity Law. And many of the details seem unclear and may remain so until case law clarifies some of the points. Companies should be particularly careful around transactions and those that may now require member approval. Assuming you are a Charity as well you should seek Charity Commission guidance. Non-charitable Companies should seek guidance from Companies House. The Charity Commission has published a summary of the changes from the Companies Act 2006 as well as a Question and Answer page.

What about Trustees/Directors who are related or close friends with staff?

For companies the situation is now clear. If a committee member is a close friend of a staff member then this must be declared as a conflict of loyalty, but can usually be dealt with using the organisation’s own conflict of interest policies and procedures. If a committee member is related to a member of staff then this is considered a financial gain and must be authorised by the Charity Commission in the case of Charitable Companies. The new Companies Act 2006 clarifies that this includes ‘any child, parent, grandchild, grandparent, brother, sister, spouse or civil partner of the Director or any person living with the Director as his or her partner’. For unincorporated charities the Charity Commission test is somewhat different and only includes spouses, partners and relatives where they share a household, and income and expenses (‘joint purse’)are shared.

How do we draw up a conflict of interest policy in general?

When drafting your conflict of interest policy/statement it is worth considering each of these points;
1. A brief statement confirming that the committee wishes to avoid or manage conflicts of interest.
2. An explanation and/or examples of conflict of interest
3. A statement encouraging all committee members to be vigilant and point out any potential conflicts of interest.


4. The steps you will take i.e. ask the individual to not vote/take part in discussion/leave the room.
5. How/where you will record what steps were taken.
Click here for sample conflict of interest policies.
Finally, you should keep a “register of committee members’ interests”. This is basically just a list of each committee members potential conflicts of interest, such as being on the committee of another local organisation for instance. This might put them in a conflict of interest situation if both organisations were competing for the same local grant. Having a register also shows you are being proactive. Click here for an example.

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A Word About Words

This site is aimed at those who govern (control) small organisations - whether they are charities, companies, both or neither. Those who govern them may be called a variety of names. We have chosen to use mainly 'management committee' and occasionally 'committee member' or 'trustee'. more...
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