Navigating the tightrope: Managing conflicts of interest in not-for-profits

Boards, both in the for-profit and non-profit sectors, face the challenge of managing conflicts of interest. A conflict of interest occurs when a director has multiple interests that could impact their ability to fulfil their responsibilities impartially. Not managing conflicts of interest effectively can pose a risk to an organisation’s operations, reputation and financial performance, leading to a loss of trust and credibility among stakeholders and the wider public.

The dangers of not managing conflicts of interest well in not-for-profits

Not-for-profit boards, in particular, are vulnerable to conflicts of interest. This is because directors or officers who have other interests that can service the not-for-profit, often provide free or discounted services to the organisation that are separate to their governance role. It is vital to manage these conflicts of interest effectively to maintain the organisation’s reputation and trust with the community.

The new Incorporated Societies Act 2022 sets out a comprehensive sets of disclosure rules for when conflicts of interest arise for societies and the consequences of being interested in a matter. The rules are focused on any financial benefits that the member may receive. However, it is important to note that conflicts of interest from a best practice governance perspective, is much broader. It is interested in whether a director’s judgement will be influenced by the arrangement including how the arrangement may be perceived by others.

One example is where a director or officer owns a company that provides free services to the not-for-profit organisation, such as financial advisory services. In this situation the director or officer has a financial interest in the financial advisory organisation and could potentially benefit from providing free or discounted services to the organisation, whether that be through financial compensation or a boosting of their professional reputation. This could create a conflict of interest if the director or officer is involved in board decisions that could impact their own business or if their business is given preferential treatment over other similar businesses. 

Whenever providing services to a not-for-profit in a capacity that is beyond the governance role, there needs to be awareness that a director or officer may become unclear about their roles and responsibilities as a board member which could lead to confusion for others and potential ethical breaches.

Managing conflicts of interest

A key tool for managing conflicts of interest is having policies and procedures in place before a difficult situation arises.

The IoD’s Four Pillars of Governance Best Practice, along with IoD’s Conflicts of Interest Practice Guide outline best practices for managing conflicts of interest. The IoD’s Code of Practice for Directors also provides further guidance in this area. The code highlights that directors should avoid conflicts of interest so far as possible. Where a conflict or potential conflict arises, they must disclose it and adhere scrupulously to the procedures provided by law and by the constitution of the company for recording and dealing with conflicts.

Checklist for managing conflicts of interest

Where conflicts of interest are non-avoidable, directors or officers should consider the following checklist:

1. Identify potential conflicts of interest and disclose them.
2. Declare the conflict of interest to the board and record it in the organisation’s interest register.
3. Develop a plan to manage the conflict of interest, having regard to the law, the organisation’s constitution and any policies. This may include options such as recusal from decision-making, disclosing the conflict to the board and potentially members, or seeking independent advice. 
4. Monitor the conflict of interest to ensure that it does not interfere with the organisation’s operations, reputation or performance.
5. Regularly review the organisation’s policies and procedures for managing conflicts of interest and make any necessary updates.

It is important that the board minutes reflect the board’s agreed plan to manage the conflict of interest. This can help to protect the organisation in the event of any future disputes. If there is a challenge to the board’s decision-making or conduct, having a clear and comprehensive record of how they addressed the conflict of interest can be invaluable in demonstrating that the board acted appropriately.

Managing conflicts of interest is a critical responsibility for boards. By using these guidelines, directors can ensure that conflicts of interest are managed effectively, enabling the organisation to operate with transparency, integrity and accountability. Ultimately effective conflict of interest management is essential for maintaining the trust of stakeholders and the broader community.