Duty bound

Trustees of charities incorporated as companies should, if they have not already done so, take a closer look at the Companies Act 2006. For the first time in such legislation, the Act includes a number of statutory duties for company directors. Where a charity is a company, usually a company limited by guarantee, its trustees will also be directors under the Act and, therefore, will be subject to these rules. Failure to have regard to these duties could result in serious problems for both the trustees and the charity.

Section 175 of the Act imposes a duty on directors to avoid conflicts of interest. Trustees, meanwhile, are under a duty to act in the best interests of their beneficiaries. All incorporated charities will therefore need to review their internal policies to ensure they are compliant with this provision. Additionally, the governing documents of charities '“ the memorandum and articles of association '“ will need to be changed.

Unprepared

At the moment, very few charities are prepared for these changes. While complying with the duty in s.175 appears straightforward at first glance, there are several issues to consider including what a conflict of interest is, where it can arise indirectly, and what to do if a conflict is unavoidable.

Conflicts can arise where trustees are making decisions for their charity and have, at the same time, separate personal interests in the decision or a separate duty to act in the best interests of a different set of beneficiaries. For example, if a trustee is also trustee to a different charity or is also a director of the charity's trading subsidiary.

It is important that trustees understand that conflicts can also arise indirectly, for example where it is not the trustee who may benefit from a decision but a 'connected person' such as a spouse. Also, trustees should realise that they must avoid situations that may bring about the perception of a conflict '“ even if in reality there is no actual conflict.

If a conflict of interest is not addressed appropriately the consequences may be serious and may include the decision or actions of the trustee being set aside and/or the trustee incurring personal liability for his actions. It is unlikely that this personal liability will be covered by the charity's trustee indemnity insurance, or that the charity will be allowed to indemnify affected trustees out of its assets.

Taking preventive steps

Reviewing governance document should be the first step to take. Charities need to ensure these documents are appropriately worded to handle potential conflicts, and that conflicts of interest policies are suitably updated.

Training trustees should be the next concern. All trustees need to understand the importance of avoiding conflicts of interest and, where necessary, should be trained and updated on policies and procedures. They should make sure that they understand how and where conflicts may arise and how those conflicts should be dealt with.

Sometimes conflicts can be dealt with simply by the affected trustee leaving the room during a meeting; however, there may be situations where conflicts are unavoidable. For example, where a trustee of charity A is also a trustee of charity B, and, as a result of being a trustee of charity A, he becomes aware of an opportunity that would also be important for charity B, he then faces a conflict as to whether to use this knowledge to assist charity B.

The Companies Act 2006 provides a mechanism for dealing with this situation by allowing the trustees to authorise such a conflict. However, this is only permitted if there is a provision in the charity's articles of association allowing them to do so. It is therefore vital that charities change their articles immediately to ensure that they contain such a provision. Without it, the only way to authorise such an unavoidable conflict would be to call a general meeting and pass a members' resolution every time such a situation arose. If the conflict is not authorised then the trustee may well be in breach of his duty and incur personal liability for his actions.

Changing the charity's articles of association to add the conflicts of interest provision is a relatively simple and inexpensive process, and charities should take appropriate steps now to ensure that they are adequately protected.

Act now

The new rules brought in by the Companies Act 2006 are already in force and many charities have not made sufficient provision for them either in their governance documents or their conflicts of interest policies. Without making these important changes trustees may find themselves faced with unavoidable conflicts and no mechanism to resolve them, leading to serious consequences for the charity and the trustees personally.

Charities must operate in a culture of openness and transparency. Some may feel confident enough to implement the changes themselves, other may need to seek advice as to how best to implement these changes and others that have been brought in by the Act '“ in either case, charities should not delay.