Conflict of interest of a director in the Not-for-profit sector

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Having worked with and served as a director and Chair for Not-for-profit boards in a range of sectors including charities, professional associations and sporting clubs and organisations for over 30 years, I am still amazed of the lack of knowledge some directors display as to what constitutes a conflict of interest and how to identify it.

The Australian Charities and Not-for-profits Commission (ACNC) has a very comprehensive guide which can be found here: Managing conflicts of interest guide Australian Charities and Not-for-profits Commission.

There is no doubt that most directors in this sector have the best intentions of the organisation at the heart of everything they do, but sometimes their judgment can become clouded when weighing up their own interests.

What is a conflict of interest?

The ACNC guide states that a conflict of interest occurs, “when your personal interests’ conflict with your responsibility to act in the best interests of your charity

There are three types of conflict of interest:

Actual – where you are being influenced by a conflicting interest

Potential – where you could be influenced by a conflicting interest

Perceived – where you could appear to be influenced by a conflicting interest

The consequence of not managing a conflict of interest can be significant for an organisation and can include:

  • Reputational damage – which can lead to a reduction of funding and donations, a reduction in the ability to encourage volunteers and staff and often a blow to the public confidence in the organisation
  • Legal and regulatory consequences – Not-for-profits are governed by a range of legislation including the Australian Charities and Not-for-profits Commission Act 2012, Corporations Act 2001, Income Assessment Act 1997 as well as various state based legislation to name a few. Breaches of these can incur significant penalties both for the individual and the organisation
  • Governance related issues – This can result in poor board and employee performance, failure to ensure accountability and to act honestly which will affect transparency as to how the organisation presents itself.

Every Not-for-profit has at its core the objects, which are sometimes referred to as the charitable purpose of the organisation. Those objects should not be comprised or conflict with your duty as a director and your personal interests. 

As a director you have a fiduciary duty to the organisation to act in good faith and in the best interests of the organisation.

How do identify a conflict of interest?

It is not always obvious that a director has a conflict of interest.

Every director when considering how their interests may conflict with the organisation should:

  1. Ensure that your own financial interests are identified and not put above the organisations
  2. Identify and understand all your personal relationship to ensure a friend, relative etc does not benefit from your position as a director
  3. Consider where and when a conflict of interst may arise
  4. Make sure you are aware of anything that can be a conflict and be proactive in acknowledging it
  5. Disclose it

If there is either an actual, potential or perceived conflict of interst – DISCLOSE IT – It is the best policy.

My advice is to ensure that your organisation has a clearly defined and settled conflict of policy register which is distributed and available to not only all directors, but also employees and accessible for any third party.

How do I manage a conflict of interest?

There are four simple steps to managing a conflict of interest:

  1. Identify it
  2. Notify the Board
  3. Let the other board members determine the appropriate action
  4. Accept the decision of the board unless you genuinely believe it is wrong

During these steps, the board my well ask you to provide details and answer questions noting the conflict or they may determine it is in your best interest not to be involved in the deliberations at all.

It is important that all parties act truthfully, honestly, transparently and display the highest level of integrity. 

Often boards can feel overwhelmed with dealing with these issues and it is important where there is any level of apprehension or uncertainty you obtain expert independent legal advice.

How can FC Lawyers help?

We have acted and advised boards both large and small in the private and Not-for profit sector for over 30 years.

Our lawyers are not only experts in these governance and corporate related issues but are active directors and chairs of boards in a range of organisations both in the profit and Not-for-profit sector.

Contact us to discuss how our team can assist you.

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