The importance of knowing your related parties in order to recognise and manage potential conflicts is an often repeated theme following Charity Commission investigations.
The Charity Commission has issued many forms of guidance to support trustees and senior management in carrying out their duties in the best interests of the charity. Both accessible, quick reference guides, such as the introductory video or 5 minute guides, and more detailed information are available below:
- CC29 Conflicts of interest: a guide for charity trustees
- Managing conflicts of interest in a charity (Article)
- Managing conflicts of interest in a charity (YouTube)
However, this remains an area that is often a cause for Charity Commission investigation and one which can be reputationally damaging not only to the charity involved but to the reputation of the sector.
Recent Charity Commission investigations have highlighted:
- Unauthorised trustee benefit from reduced/no rent paid on residential accommodation
- Cheques paid by a trustee to a family member without a second signatory or clear oversight
- Payments made in breach of financial limits to related parties
- Payments made to repay a loan to a related party of a trustee where there were few supporting historical records for the original loan
- Payments made to a trustee of personal expenditure
- Employment rights accruing to a related party of a trustee due to extensive periods of voluntary work undertaken
- Use of a charity as a vehicle for the expression of an individual trustee’s party-political views
Conflicts of interest can take many forms. They may be financial but can also derive from using a charity to promote a personal point of view. Given that many trustees get involved with a charity due to their passion for a cause, or perhaps because of their knowledge in a particular field from employment or a close personal experience, with personal or professional connections that can benefit the charity; it is not surprising that conflicts arise. The art of good governance is to identify the conflicts, actual or potential, and manage them. The particular challenges around beneficiaries acting as trustees are highlighted in CC24 Users on board – Beneficiaries who become trustees.
What are conflicts of interest?
Conflict of interest: a conflict of interest is any situation in which a trustee’s personal interests or loyalties could, or could be seen to, prevent them from making a decision only in the best interests of the charity.
Conflicts derive from real or perceived benefits or divided loyalties.
Conflicts may therefore be perceived to arise by other charity stakeholders even where trustees are confident that they have acted in the best interests of the charity and therefore transparency and disclosure are key elements of managing conflicts.
For example, a trustee may provide a service to the charity, such as building work, or consultancy which is considered reasonably priced by other trustees but appears to be in the self-interest of the trustee involved.
Trustee benefit: this means any instance where money, or other property, goods or services, which have a monetary value, are received by a trustee from the charity.
The law says that trustees cannot receive a benefit from their charity, whether directly or indirectly, unless they have an adequate legal authority to do so. The potential for a trustee to benefit from the charity also creates a conflict of interest which the trustees need to address effectively. The term trustee benefit does not include any payments to trustees which are for their proper out of pocket expenses.
Conflicts and benefits are not only relevant to trustees but should also be considered for relationships with charitable subsidiaries and with key/senior management and persons connected to trustees and key management.
Connected person: in broad terms this means family, relatives or business partners of a trustee, as well as businesses in which a trustee has an interest through ownership or influence.
The term includes a trustee’s spouse or unmarried or civil partner, children, siblings, grandchildren and grandparents, as well as businesses where a trustee or family member holds at least one-fifth of the shareholding or voting rights.
The conflict management process
Identify the conflict
The process for managing conflicts starts with recognising them. It is important that trustees are open and transparent in their dealings with a charity.
A conflict may arise from a direct interest of a trustee or an indirect interest through an individual or company related to a trustee.
The safest policy for a trustee is always to declare an interest, or possible interest, if in doubt.
It is good practice to have a register of interests, an annual declaration, and ask for declarations to be made at the start of each meeting so there should be ample opportunity for trustees and key management to physically or metaphorically raise a hand and make clear the conflict.
Remove the conflict
Depending on how serious the trustees consider the potential conflict to be, they may decide to remove it, by:
- Not following a course of action
- Proceeding in a different way to avoid the conflict
- Not appointing a trustee or securing a trustee resignation.
If trustees wish to proceed, despite the conflict, they must prevent the conflict from interfering, or being perceived to interfere, with their decision-making in the best interests of the charity.
Manage the conflict
Managing the conflict will mean ensuring that any affected trustees are excluded from the discussion and the decision-making and not allowed to influence the trustee board in any way.
The conflict and actions taken must be documented as must any decision.
A decision to the benefit of the conflicted trustee must be clearly documented with explanation as to why the remaining trustees considered that action to be in the best interests of the charity.
- the decision to award a grant payment to an organisation in which the trustee has an interest should be made in the absence of the related trustee; clearly documented; and made based on the same criteria as any other grant award; or
- the decision to award a service contract to a trustee or a company or individual related to a trustee should follow the same contract process as any other service award: the discussion and judgment take place without input from the related trustee, other than that granted to all other prospective suppliers; should be documented properly; and trustees should consider what they would do if the service provided is not satisfactory.
Trustees should note that, in addition, if a connected person is to be paid or employed by the charity, any connected trustees must not be involved in the decision and Charity Commission permission should be sought.
Record the conflict
The conflict, action taken and decision should be minuted, and those charities preparing accruals accounts should disclose the transaction in their financial statements.
The steps are relatively simple, but they require charity trustees to be alert for conflicts and for perceived conflicts. Where trustees’ actions or failings present a serious risk to the charity, the Charity Commission is likely to regard this as mismanagement or misconduct and take remedial action.
Please contact us if you are unsure if you would like further information on any of the points raised above.