Conflict of Interest
It’s inevitable that conflicts of interest will occur. However, even the appearance of a conflict of interest amongst trustees can damage the reputation of the charities or committees they belong to. Therefore, the management of conflicting loyalties needs to be handled delicately.
The law and conflicts of interest
The law states that trustees cannot receive any benefit from their charity in return for any service they provide to the charity unless they have approval from a legal authority and the benefit from which the conflict of interest arises is transparent. "Benefit" includes any money received or any property, goods or services which have a monetary value.
Transparency is achieved by requiring explicit authorisation of the benefit, and by ensuring that any particular conflict of interest is properly and openly managed. However, trustees can be compensated for any costs that are necessary to allow the trustee to carry out his or her duty without legal authorisation. This also applies to benefits that are immaterial or available to all trustees.
How to identify a conflict of interest
There are various ways a conflict of interest can present itself, such as:
Direct financial gain or benefit to the trustee, including:
- A payment to a trustee for services provided to the charity.
- Awarding a trustee for gaining a contract to another organisation where the same trustee has an interest and will receive a financial benefit from.
- Employing a trustee in a separate post within the charity, even when the trustee has resigned in order to take up the employment.
- Indirect financial gain or benefit, such as a charity employees the spouse, partner or a member of the trustee’s household whose finances are interdependent.
- Non-financial gain, i.e. a user of the charity’s services is also a trustee.
- A conflict of loyalties, such as a trustee being appointed by the local authority, by one of the charity’s funders or where a friend of a trustee is employed by the charity.
Action taken by the Charity Commission against trustees who are found to have received unauthorised benefits will vary from each circumstance. If the arrangements be in the interests of the charity, the Charity Commission will give advice on the management of conflicts of interest and the authorisation of future benefits to trustees.
What to do once a conflict of interest has been identified
First, find out whether the trustee(s) involved will receive a material benefit from the conflict of interest and whether the benefit is authorised. This can be found in the charity’s governing document. If the governing document does provide authority, the trustee board must ensure that the authority is used appropriately, and that the necessary arrangements are in place to manage the conflict of interest.
Typically when a governing document does contain authority it’s due to the specificity of a certain situation, not a general “rule of thumb”. In this case, the charity will need to apply to the Charity Commission for the necessary authority, showing why this particular benefit is in the charity’s best interests and outline how the charity will manage this necessary conflict of interest/benefit.
When will the Charity Commission authorise a benefit arising from a conflict of interest?
If the charity can prove adequately enough that the potential benefit to a trustee is in the charity’s best interests, the trustees need to consider:
- Whether the benefit and conflict of interest will be ongoing or a one-off situation.
- The procedures which the trustees have in place to ensure that conflicts of interests are managed transparently.
- There are also special procedures for charities with an annual income of less than £10,000.
- Trustees of such charities can make payments to trustees without authority, provided that the total amount of payment to trustees in the charity’s financial year does not exceed £1,000.
How can conflicts of interest be managed effectively?
Trustees should keep aware of any current or possible conflicts of interest and advise their charity of these situations as soon as they arise to ensure openness and transparency with these issues. Charities should keep a policy of procedures on how they will deal with any conflicts which arise as a result of the work which the charity undertakes, such as:
The removal of any trustee with a conflict of interest from the decision making process.
Managing the conflict of interest once a decision has been made.
Recording details of the discussions and decisions made.
Having trustees keep an ongoing list of their other interests or duties to identify issues earlier.
Trustees should also announce their interests outside of the charity that may affect the discussion before the particular item is discussed and subsequently excuse themselves from the discussion or decision making process, unless the trustee is receiving material benefit from the conflict, in which case this will need authority. This procedure should also be made aware to prospective trustees who are new to the charity. It is a legal requirement for charitable companies, non-company charities with a gross annual income or expenditure over £100,000, and smaller charities which prepare their accounts on an accruals basis, to disclose benefits to trustees.
What are the most common situations in which conflicts of interest can occur?
There are a number of situations in which conflicts of interest commonly occur, including:
1. Direct financial gain or benefit to a trustee
The most common type of direct financial gain to a trustee is the payment of a trustee, meaning:
Any payment to a trustee for a service provided to the charity, such as painting the charity’s premises, or legal or accountancy services.
Payment for acting as a trustee.
Payment for a separate post within the charity, such as head teacher or chief executive, to someone who is also a trustee.
If the trustees wish to pay one or more trustees, even if it’s below market cost, it will need to be authorised, either by a clause in the charity’s governing document, by an Order of the Court or the Charity Commission.
2. Sale of land to a trustee
Any sale or lease of land to a trustee, or to someone closely connected to a trustee, will always need to be authorised by the Charity Commission.
3. Use of trustee’s property by the charity
Although the use of a trustee’s land for little or no payment may be in the charity’s interests, if the charity puts any buildings on the land or makes improvements to an existing property, any buildings or improvements to the property might be returnable to the trustee. Similarly, a trustee may loan money to the charity at a favourable rate of interest, or at no interest, without any security, but it should be formally documented.
4. Indirect financial gain or benefit to a trustee
The most common situation in which a trustee will receive an indirect financial benefit from the charity is when a close relative, such as a spouse or partner, is employed in a paid position by the charity. If the trustee is wholly or partially dependent upon the financial support of his or her spouse or partner, the payment could be said to directly benefit the trustee. These types of payments whether or not it directly benefits the trustee, needs to approved by an authority within the charity’s governing documents or apply to the Charity Commission.
5. Non-financial gain
Many charities involve users in the effort to improve services, including appointing users as trustees of the charity. Defining what is a “personal interest” to user trustees, but the key is the size and nature of the proposed transaction in relation to the number of people who will benefit. There may also be circumstances where user trustees will be asked to make a decision which will indirectly affects them or a relative, such as the level of fee to be charged for a service provided by the charity. It is considered to indirectly affect a trustee if:
The result is in the user trustee, or relative, receiving the benefit will also be more generally available to other users outside the trustee body.
It’s a general policy or practice decision affecting the service in which the user trustee or relative, along with other users, participates.
User trustees can take part in such decisions, but should declare their interest at the outset.
6. Nominative or representative trustees
Trustees appointed by another organisation, such as by a local authority, i.e. nominative or representative trustees, have exactly the same duties and responsibilities as other trustees. However, they must act independently of the organisation which appointed them and act only in the best interests of the charity. If there are ever any situations where a nominative or representative trustee has a conflict of interest with the organisation that appointed them, the law states that the best interests of the charity overrides all other considerations. It is a good idea to fully train a nominated or representative trustee in their responsibilities as trustees and that the appointing body is also made aware of these responsibilities.
7. Ex-Officio trustees
An ex-officio trustee is a trustee who is in that position by virtue of their office. Normally this relates to positions such as the Vicar of a parish or the Mayor of a town. Ex-officio trustees have exactly the same responsibilities as other trustees to act in the best interests of the charity.
8. Local authorities as trustees
Charities, such as playing fields, are sometimes managed by the local authority as sole trustee, or by members of the local authority, as trustees. It is especially important when they are dealing with a charity business that they understand they must only consider the best interests of the charity and not those of the local authority.
What are the consequences of an unmanaged conflict of interest?
There can be a number of consequences arising from an unmanaged conflict of interest. If a trustee has received a benefit from the charity which is not authorised by the charity’s governing document or by the Court or the Charity Commission, it may be in breach of trust, which could be challenged by the Charity Commission or by another interested party, such as a beneficiary of the charity. If a trustee is also being employed in a separate post within the charity or a trustee is being paid for a service provided to the charity, the conflict of interest may result in a liability to repay their salary and/or other related benefits. It should not be assumed that such conflict can be resolved merely by the trustee resigning, before or after taking up the post. The only instance where authority may not be needed is when the trustees can show that there is no conflict of interest, which is confined to:
Having no significant involvement with the trustees’ decision or the recruitment process in creating or retaining the post.
A trustee resigning as a trustee in order to apply for the employed post in a fair and open competition in advance.
When a trustee has received an unauthorised benefit or a trustee doesn’t personally benefit but does not act in the best interests of the charity, the transaction may not be valid and the trustee could be liable to pay back the value of the benefit to the charity.
Should a trustee deliberately placed their own interests ahead of those of the charity in order to gain significant benefit at the expense of the charity, the Charity Commission will open an inquiry and, if appropriate, refer the matter to the police.
In addition to the legal consequences of an unmanaged conflict of interest, trustees also need to be aware of the effect that an unmanaged conflict can have on the charity’s reputation. This could affect the charity’s fundraising, the confidence of staff, volunteers and beneficiaries of the charity and in some cases devote time and money to publicly defend themselves.
What to do when an unauthorised trustee benefit has been realised
If it should come to a trustee’s attention that there is an unauthorised trustee benefit, report the incident to the Charity Commission accompanied by an explanation of why the breach of trust occurred, how the trustees would prevent a similar situation occurring in the future and what benefits, if any, the charity received from the situation.
For more information, please contact the Charity Commission:
Telephone: 0845 3000 218