In each of the articles we have discussed how these duties, together with the others listed below, make up one of the Australian Charities and Not-for-profits Commission (ACNC) five governance standards for charities. The particular standard states that board members or other responsible persons owe a fiduciary duty to their charities. This is one of the highest standards of care imposed and means that board members must be loyal to their charity and act in good faith.
In the final month we will look at their duty not to allow a charity to operate while insolvent.
The topic for this month is the duty of board members to disclose and manage conflicts of interest.
When do conflicts of interest occur?
Conflicts of interest occur when a board member’s duty to act in the best interests of their charity is or may be in conflict with the opportunity or potential to get a personal benefit (or a benefit for a person or organisation the board member has a relationship with).
A practical example
Take the example of a board member on a School Council. Should they decide to personally contract with the school to provide a service or to supply goods, they would have a conflict of interest. In that situation, the board member wants to do the best by him or herself but at the same time has a duty to also act in the best interests of the school. For this reason, the law generally prohibits payments to board members or their relatives for goods and services unless the terms are not more favourable than could be obtained from a third party.
What should board members do?
If board members have a conflict of interest, or even if they perceive that they might have a conflict, they should:
Notably, conflicts of interest are common and do not have to be a serious problem. However, it is important to manage conflicts of interest properly to avoid damaging a charity’s reputation and, in serious cases, even breaking the law.
A good way for board members to gauge whether they need to disclose and manage a conflict of interest is for them to ask themselves,
‘would an independent observer be sure that I was only acting in the best interests of my charity? Or might they think I was acting in some way for my own interest?’
"would an independent observer be sure that I was only acting in the best interests of my charity? Or might they think I was acting in some way for my own interest?"
It is worth repeating that the perception that a conflict of interest exists, even if there is no actual conflict, requires board members to take steps to ensure that they do not breach their duty.
Doing so will help board members to uphold their fiduciary duty, and in turn, ensure that their charity complies with this ACNC governance standard. The February 2016 edition of Not-for-Profit Law Notes will contain our final article in this series. We will be dealing with the duty of board members not to allow a charity to operate while insolvent. If you would like further information please contact.