A conflict of (charitable) interest

Conflicts of interest arise in charities of all kinds. This is fully understandable as trustees' personal and professional contacts and general experience are unavoidable and may often bring significant benefits their trusteeship and the charity's work. Charity law does recognise this. The basic rule is that trustees have an overriding obligation not to put themselves in a position where their duty as a trustee conflicts with any personal interest they may have. However, where conflicts are unavoidable, they must be effectively managed in the best interests of the charity.

The Commission's Back on Track publication for 2011-12 reports that, in our high risk and serious cases 'we are still seeing too many charities that are not getting the basics right'. Dealing with conflicts of interest is one of those basics and it's an issue that arises all too often across the spectrum of our case work from regulatory cases to statutory inquiries. Of the 85 investigations we concluded in 2011-12, 16 involved serious concerns about unmanaged conflicts of interest (see Charities Back on Track 2011-12 - the annual report of our investigatory work). These cases often involve financial loss, legal challenge and serious reputational damage. They also risk undermining public confidence in charities and the integrity of trustees generally.

We are committed to ensuring that trustees comply with their legal obligations including avoiding and dealing with conflicts of interest. It is important that trustees are aware and understand these issues. With that in mind we have recently consulted on revised draft guidance on managing conflicts of interest to make sure that we are explaining the principles and the practical steps as clearly as we can for all trustees. The key element for charity trustees in properly administering charities is in identifying possible conflicts of interest at an early stage and taking appropriate action to avoid or manage them.

The duty to avoid or manage a conflict of interest applies to trustees because they are in a fiduciary position with regard to their charity and are consequently under a duty to act exclusively in the interests of their charity. The rule that they must avoid a conflict of interest applies even where trustees might feel that their interest is beneficial to the charity. The rule also applies when a conflict of interest may be one where no actual benefit to them can arise. Such a conflict may still damage the reputation of the charity. The duty to avoid conflicts of interests ensures that trustees do not allow their private interests to influence or be seen to influence a decision.

It follows from this principle that trustees must not benefit from their position at the charity, unless clearly authorised by the governing document, the commission, or general law or where a benefit may be unavoidable and can be seen as incidental to promoting the purposes of the charity.

Where conflicts cannot be avoided, they can be effectively managed by following relevant provisions in the governing document or in accordance with a conflict of interest policy that the trustees have agreed. This should include a requirement for trustees to declare interests; a conflicted trustee to remove themselves from discussion and decision making; and if they are to benefit as a result of the decision made by the other trustees, this must be properly authorised as either outlined in governing documents or, with particular benefits such as trustee remuneration, by the commission.

The consequences of not dealing with conflicts of interests can be severe. If there has been a loss to the charity the trustees may be held to account or personally liable for making good that loss. In cases where there has been no benefit to the trustee, the decision may still be challenged and transactions may be put aside as a result.

Some of the most serious cases the commission has seen involved circumstances where a conflict of interest is so pervasive that it was not appropriate for individuals with these interests to also be trustees of the charity. Other problems that arise too frequently in our case work include unauthorised remuneration or other trustee benefits and the very serious issue of loans being made to trustees or to connected companies where there exists very little or no justification in terms of an investment.

The consultation on our revised draft guidance has now closed and we hope to publish the new guidance shortly.